HMRC has updated the ‘fit and proper persons’ declaration and helpsheet for managers of charities and Community Amateur Sports Clubs claiming tax relief to clarify that anyone involved in a disputed tax avoidance scheme could be caught by the rules. Further background to the test can be found here.

CTG was involved in the review of the declaration and also the detailed guidance on the fit and proper persons test, which has also recently been updated. The changes that have been made are highlighted in yellow here.

HMRC officials have also confirmed to CTG that charity managers that have signed the old declaration do not need to submit an updated declaration only new managers.

The term ‘managers’ applies to the trustees of charities, directors of corporate charities, directors of corporate trustees, CASC officials and any other persons having general control and management over the running of the charity or the application of its assets.

The ‘fit and proper persons’ test is a statutory requirement. The test requires that individuals who are ’managers’ of the charity, CASC or other organisation are ’fit and proper persons’ to be managers of such a body. It exists to ensure that charities, CASCs and other organisations entitled to charity tax reliefs are not managed or controlled by individuals who might misuse the tax reliefs the organisation receives. Unfortunately fraudsters have been known to exploit charity tax reliefs so the fit and proper persons test exists to help prevent that.

An individual is ‘a fit and proper person’ if they ensure, or are likely to ensure, that charity funds and tax reliefs are used only for charitable purposes. In signing the declaration managers will ensure that funds are used for charitable purposes and also disclosing certain information about your past that may impact on whether or not you the manager is indeed ‘a fit and proper person’.

When a charity notifies HMRC of certain new managers, HMRC cross-checks that person’s details against any information it has and will raise any concerns it has if there is anything to indicate the person may misuse the charity funds and tax reliefs. Factors that may lead to HMRC deciding that an individual manager is not a fit and proper person include where:

• the individual has been involved in tax fraud or other fraudulent behaviour including misrepresentation and/or identity theft
• HMRC has knowledge of the individual’s involvement in attacks against, or abuse
  of, tax repayment systems
• the individual has been removed from acting as a charity trustee by a charity regulator or been disqualified from acting as a charity trustee or company director.
• the individual has used arrangements notified under the Disclosure of Tax Avoidance Schemes (“DOTAS”) rules in Part 7 Finance Act 2004 in respect of which a reference number has been issued under section 311 of Finance Act 2004, and the arrangements featured charitable reliefs or which used a charity, and their tax position has been adjusted by HMRC to wholly or partly remove the tax advantage generated by the arrangements and such adjustments have become final.
• the individual has used tax arrangements which have been successfully counteracted under the general anti-abuse rules (see Part 5 of Finance Act 2013 or section 10 National Insurance Contributions Act 2014, as enacted or as amended from time to time) and such counteraction has become final.
• the individual has been actively involved in designing and/or promoting tax avoidance schemes featuring charitable reliefs or which used a charity, and they are:
  • a promoter named by HMRC under the Promoters of Tax Avoidance
    Schemes (POTAS) legislation in Part 5 of Finance Act 2014, or
  • a promoter of any tax arrangements designed or intended to obtain for any
    person a tax advantage and such tax advantage has successfully
    counteracted by HMRC under the general anti-abuse rule
  • a promoter of arrangements notified under DOTAS, in respect of which a reference number has been issued under section 311 of Finance Act 2004, and the tax position of all or any of the users of the arrangements has been adjusted by HMRC to wholly or partly remove the tax advantage generated by the arrangements and such adjustments have become final

However, just because a person has been, say, barred from acting as a charity trustee or one of the other points above applies, it does not always follow that the charity will not be eligible for tax reliefs. When considering the application of the fit and proper persons test to particular managers, HMRC will take account of the likely impact on the charity’s tax position. For example any person who has no dealings with HMRC and no control over spending charity funds, even if the person is not a fit and proper person, is unlikely to affect the charity’s eligibility to tax reliefs.

The new guidance gives a useful and helpful overview of the distinction between tax avoidance and tax planning. This is helpful as we previously had concerns that this could have inadvertently have caught tax advisers that are charity managers on a voluntary basis and were not clear on their obligations and eligibility.

What is tax avoidance?

Tax avoidance is an attempt to exploit legislation to gain a tax advantage that Parliament never intended. This often involves contrived or artificial transactions that serve little or no purpose other than to produce a tax advantage. However, tax avoidance is not the same as tax planning, which involves applying tax legislation in the way it was intended – for example making a donation to charity under Gift Aid. While such actions may reduce the total amount of tax paid, they are not tax avoidance, because they involve using tax reliefs in the way that Parliament intended when it passed the relevant legislation. 

You can find out the sorts of activity that HMRC may consider as avoidance from the leaflet ‘Tempted by tax avoidance’.

Download the ‘Tempted by tax avoidance’ leaflet (PDF 851K)

To encourage charitable endeavour the Government allows charities a number of valuable tax reliefs.  Using these in the ways intended is tax planning.  For example:

• Encouraging eligible donors to use Gift Aid when making cash donations to charity;

• Giving advice on legacy gifts to charity in a will that will attract tax relief from inheritance tax; or

• Encouraging higher rate tax payers to claim the higher/additional rate relief (the difference between their marginal rate tax and the basic rate of tax) on their cash donation and adjust the amount they donate to charity as a result of the overall cost to them of the donation being lower.