Where a charity makes a payment to an overseas body, current tax legislation requires the charity be able to show that it has taken the steps that HMRC considers are ‘reasonable in the circumstances’ in order to ensure that the payment will be applied for charitable purposes. If it has not done so, HMRC ‘may not be able’ to treat the payment as charitable expenditure i.e. it may be non-charitable expenditure. (As a matter of domestic charity law, the trustees also need to ensure that they have the power under their governing document to make such payments.)

According to HMRC’s detailed guidelines for charities, the charity trustees must be able to describe the steps they have taken, explain how those steps ensured charitable application of funds, demonstrate that those steps were reasonable and produce evidence that the steps were, in fact, taken.

When considering whether the steps taken by the charity were ‘reasonable in the circumstances’, HMRC will have regard to:

• the charity’s knowledge of the overseas body
• previous relations with the overseas body
• past history of the overseas body
• the amounts given in both absolute and relative terms and
• the charity’s observance of its own internal financial, management and decision making procedures, and whether or not these were adequate.

When reviewing payments made to overseas bodies HMRC will generally ask the charity trustees to provide information about:

• the person or persons to whom the payment was given
• the specific charitable purpose for which it was given, the reasons, and how the decision to provide the payment was arrived at
• the guarantees or assurances given by the overseas body that the payment will be applied for the purpose for which it was given
• the steps that the trustees took to ensure the payment will in fact be applied for charitable purposes and
• the follow-up action taken by the trustees to confirm that payments were properly applied.

The HMRC guidance goes on to state that the steps to be taken will depend upon the nature and circumstances of the expenditure.

HMRC expects trustees to make adequate enquiries to find out such information as is reasonably available about the overseas body and establish what evidence will be provided or made available by that body to show that the payment(s) will or have been applied for charitable purposes. The nature of the steps will depend upon the scale of operations, the size of the sums involved and the relevant circumstances.

For example, in the case of small one-off payments, an exchange of correspondence between the charity and the overseas body may often be sufficient. Where possible, the correspondence should be on headed paper and it should give details of the payment and the purpose for which it was given; and provide confirmation that the sum has or will be applied for the purpose given.

The current HMRC guidance includes worked examples illustrating the above.