New tax laws on automatic exchange of information will impose extra reporting requirements on some charities that have income from investments and that have beneficiaries, shareholders or lenders outside the UK. Charities with most of their income from donations, and those with all operations, investors and beneficiaries in the UK, will not need to report, and will classify themselves as active Non-Financial Entities.
Charities are sometimes excused from complex legislative requirements aimed at corporate entities, but this cannot always apply. The International Tax Compliance Regulations are primarily to capture information from the banking and financial sectors, but the way they are drafted will include certain charities. The introduction of the CRS will have an effect on only some charities, but for these it could be a significant cost in terms of time and effort.
Which charities are affected?
Charities, whether operating as trusts, companies or unincorporated entities, need to classify themselves as Financial Institutions or Non-Financial Entities. NFEs have no reporting obligations under the CRS.
There are several types of Financial Institution, but the relevant one for charities is the “Investment Entity” and a charity will fall into this category if it derives at least half of its income from financial assets (broadly, stocks, shares and similar) and these are managed in whole or in part by a financial institution.
A charity that manages its own investments, including investing in unit trusts, will not fall into this category, but one that uses a fund manager will. So charities that benefit from endowments will need to look carefully at how these amounts are managed, since if more than half the income is from financial assets and even a small part of it is managed by a fund manager, this will be enough to classify it as a Financial Institution and put it in the scope of the CRS.
What does a charity identified as a Financial Institution need to do?
First, a charity needs to identify its “Account Holders”. These are defined as those with a debt or equity interest, which is straightforward for a charitable company, having the usual meaning, but for a charity that is set up as a trust, an equity interest is held by anyone who is a settlor or beneficiary. A beneficiary includes anyone with a right to receive a mandatory distribution or anyone who, in the particular reporting period, received a discretionary distribution.
This means, among other things, that a charitable trust making grants to individuals will have to identify those individuals as Account Holders in the year that they receive the grants.
Once the charity has identified its Account Holders, it needs to perform due diligence checks on each of them to determine whether they are tax resident in a “Reportable Jurisdiction” – those that are, are “Reportable Accounts”.
There is a long list of Reportable Jurisdictions, covering much of Europe as well as parts of South America and Africa. Beneficiaries and other equity interests that are tax resident in the UK are not Reportable Accounts.
The final step is reporting to HMRC a list of Reportable Accounts including the name, address, date of birth (if an individual), taxpayer identification, the jurisdiction in which they are reportable, the entity status (if not an individual) and the account number that the charity uses to identify its investors or beneficiaries.
Most of the above can be self-certified by the individuals (meaning the charity does not need to do its own independent check) but there is clearly still the potential for an administrative burden here. There are also questions about confidentiality, and what a charity should do if its beneficiaries do not wish to provide some or all of the above information.
When does this apply to?
Information has to be shared using the CRS “from 2017”, relating first to the year to 31 December 2016. This must be reported by 31 May 2017. A new return must be filed on the same timescale each year.
Guidance from HMRC specifically on the application of the CRS by charities can be found here.
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