The tax dimension of charities having fit and proper people
The Finance Act 2010 introduced the "Fit and Proper Person" test. The test was initially introduced as one way of defining a charity in respect of claiming tax reliefs. The new definition applies to Gift Aid with effect from 1 April 2010. Whilst the guidance issued by HMRC is only in connection with Gift Aid at present, it is due to be extended to other charity tax reliefs later in 2010
Deloitte's Reza Motazedi - the introduction of the legislation clearly puts a huge burden on charities to ensure that any managers involved with their affairs are fit and proper.
The guidance states that a charity must satisfy the "Management Condition", i.e. its managers must be "Fit and Proper Persons". There is, however, no definition of a "Fit and Proper Person" in legislation.
“HMRC assumes that all people appointed by charities are 'fit and proper persons' unless they hold information to show otherwise. Provided charities take appropriate steps in appointing personnel, then they may assume that they meet the management conditions at all times unless, exceptionally, they are challenged by HMRC."
Even in circumstances where HMRC finds that the manager of a charity is not "fit and proper" the charity will not necessarily lose its entitlement to the relief. In order for this to apply, the charity must show that it has made a genuine mistake and that there has been no misuse of charity tax arrangements.
The definition of manager, as stated in the first guidance issued by HMRC, is very wide. It includes trustees, directors, and
"any other officials having general control and management over the running of the charity or the application of its assets".
HMRC may decide that a manager is not "fit and proper" if, for example, the individual:
- Has a history of tax fraud.
- Has a history of other fraud.
- Has been banned from acting as a charity trustee.
The introduction of this legislation clearly puts a huge burden on charities to ensure that any managers involved with their affairs are "fit and proper". This may not be easy to do. It can also add significant administration time to conducting the affairs of charities.
Caution is therefore urged so that charities put in place, if not already in existence, strict conditions to ensure that, as far as possible, the managers employed by them are "fit and proper".
However, advisers to the sector have been actively campaigning to reduce the burden of administration on charities by asking HMRC to reconsider the broad definition used for managers.
In response to this campaign, HMRC has issued new guidance that requires charities only to provide HMRC with details of three types of managers:
- Authorised officials.
- Between two and four "responsible persons" nominated by the charity.
As a result of this welcome change, other charity managers do not need their details to be communicated to HMRC when the personnel changes from time to time. However, they still need to comply with the "Fit and Proper Person" test.
In the meantime, it is important that all charities require that their managers should read and sign the declaration to confirm that they are "fit and proper". Further guidance can be found by visiting the HMRC website.