This blog aims to break down some of the jargon surrounding the Common Reporting Standard (CRS) regime (an “Automatic Exchange Of Information” regime) as it relates to charities. The CRS is already in force in the UK, and many charities will be subject to its regulations. They will have to provide details to HMRC about how and to whom their grants are applied for sharing with equivalent regulators in jurisdictions where the CRS also applies. The first reporting period is the 2016 calendar year, but detailed guidance for charities was only published by HMRC in late August 2016, leaving charities on something of a back foot in terms of ensuring they are compliant.
What is the CRS?
The CRS is an international information exchange mechanism designed to promote tax transparency and prevent fraud and tax evasion. UK based “financial institutions” are obliged to report to HMRC on the tax compliance of any “account holders” which receive funds and are tax resident overseas. That information will be shared by HMRC with tax regulators in other jurisdictions which are subject to the CRS.
Why does this apply to charities?
The CRS regulations (the International Tax Compliance Regulations 2015) are drafted with the banking and financial sectors in mind, but no exemption is provided for charities. This means that certain types of charities will be caught by the regulations as a matter of definition and be obliged to report to HMRC accordingly. The legislators insist that this is deliberate, due to the need for reciprocity between jurisdictions under the CRS and the risk of charities being used for fraudulent purposes.
Which charities will be subject to the CRS?
The CRS regulations apply to “financial institutions”, a sub-category of which is an “investment entity”; some charities will fall within that category.
An investment entity is an organisation which:
- derives more than 50% of its gross income derives from financial assets; and
- has any part of those assets under management via a discretionary investment mandate.
Any charity whose investments or endowment funds generate at least half of the charity’s income and where any part of those investments are under the control of an investment manager will be required to report.
Any form of charity can be caught but the reporting requirements will differ according to whether the charity is corporate or unincorporated. Of those charities that are subject to the regime, it is only charitable trusts and unincorporated charities which will need to undertake due diligence on their grant recipients and report on them to HMRC. Incorporated charities falling within the CRS will need to report that fact, but HMRC guidance confirms that they will not need to report on their grantees where grants are made from the charity’s corporate property (see “What information must be collected?” below for an explanation).
What information must be collected?
Financial institutions must identify their “account holders” and seek sufficient details to confirm that they are compliant with tax regulation in the jurisdiction in which they are resident for taxation purposes for each reporting period. The information would usually be collected by way of a self-certification form designed to capture the relevant information. For example, during the grant making process, grantees should be invited to complete their tax resident details, which the charity can then rely on.
“Account holders” are not necessarily what you might expect them to be. They are defined as being those with “an equity or debt interest in a financial institution”. Again, this expression has a meaning under the CRS that might not be obvious. For example, HMRC considers grant recipients of charitable trusts and unincorporated charities to hold an equity interest. This means that charitable trusts and unincorporated associations caught by the regime will need to carry out due diligence on all grant recipients and report on those who are tax resident outside of the UK. In some cases, settlors may also be reportable.
HMRC distinguishes incorporated charities, suggesting that their members (albeit referred to as ‘shareholders’ in the guidance, despite the vast majority of charitable companies being limited by guarantee and not shares) hold the equity interest; corporate charities will therefore not usually need to report on their grantees.
What information must be reported?
Whilst charities will need to collect information on all grantees, they will only need to report on those with a tax residence in other jurisdictions which have also signed up for the CRS.
56 countries are committed to report in 2017, and a further 40 are due to join in 2018. A full list of those participating is available on the OECD Automatic Exchange Portal.
HMRC is developing a reporting process separate from the usual tax returns.
What is the impact on charities?
The CRS has a number of consequences for charities, some of which appear unintended.
Compliance will bring with it an administrative cost which is likely to be compounded both by the complexity of a regime which is not designed with charities in mind and the retrospective effect in practice for charities to go back and seek tax details of all grantees since the beginning of 2016. Charities will need to update their grant terms and conditions to explain that they will need to gather the tax registration details of their grantees for sharing under the CRS.
Data protection policies will also need to be updated, together with ICO registration details if the CRS requires charities to process personal data in ways that have not been undertaken previously.
Of potentially greater concern is a human rights issue. Those charities working with vulnerable groups (in particular, those that may be under personal threat within their home country – e.g. LGBT or religious groups) may be worried that the sharing of personal information of grantees with the regulators in the jurisdictions in which they are based might lead to their prosecution, persecution or worse. Safeguards will need to be implemented, but, for the moment, the HMRC guidance remains silent on this aspect.
Can the CRS be avoided?
As it is unincorporated charities that will be most affected by the CRS regulations, an obvious solution to sidestep the reporting requirements would be to incorporate. However, the CRS includes anti-avoidance rules which prevent the entering into arrangements where the main purpose, or one of the main purposes of the arrangements is to avoid the CRS obligations. Anti-avoidance measures will be treated as having no effect.
HMRC has stated, however, that it will not consider a change to a charity’s structure to fall foul of the anti-avoidance rules, provided that the change is part of a review of the charity’s operational structure, as opposed to being made purely to avoid the requirement to report under the CRS.
How rigorously will the regime be regulated?
Whilst it has not helped that detailed charity guidance has come so late, charities can take some comfort from the fact that HMRC is looking to adopt a ‘soft landing’ approach. HMRC’s concern is that charities must at the very least try to put in place systems and controls to obtain the right information so that they can report and show compliance. Provided an effort to comply is made, any failures in reporting, at least in the early implementation of the regime, are less likely to be penalised. However, penalties cannot be ruled out where there are clear failures to engage with the regulations.
HMRC encourages charities to engage with their Customer Relationship Managers for advice if they are unsure about the extent to which their compliance may be at risk.