Charity Accounts Update – Fit and proper persons test
The Finance Act 2010 brought in new measures that charities must adhere to in order to maintain their access to tax relief. This article looks in detail at the “Fit and Proper Persons test”, part of a new “management condition”.
The Fit and Proper Persons test forms part of the management condition, one of three new tests that charities must pass in order to claim tax relief on Gift Aid. (The other two tests are the jurisdiction condition – that charities fall under the jurisdiction of the High Court; and the registration condition, which governs the proper registration of charities under the Charities Act 1993.) The test has been brought in to make it harder for sham charities to operate and to prevent fraudsters from working within a charity to abuse the tax relief system. While HMRC will clamp down hard on criminals, they will help those charities who have made genuine mistakes.
Who does the Fit and Proper Person Test apply to?
The new test applies to charities and other organisations who claim tax relief, such as Community Amateur Sports Clubs (CASCs) and the legislation defines “managers” as “the persons having general control and management of the charity”. This could include:
The Chair, Secretary and Treasurer of a small charity
Directors of corporate charities
Any committee members, volunteers or employees who have control over the charity’s funds
Who does not count as a Fit and Proper Person?
HMRC assumes that anyone appointed by a charity is a “fit and proper person” unless they know otherwise. So long as charities can show they have taken steps to ensure anyone with control of funds is “fit and proper”, then HMRC will be able to help them if they encounter problems later. However, because HMRC has access to a far greater range of data than most charities, it may investigate if it has information indicating a manager is not fit and proper. Factors may include:
A history of tax fraud, including tax credits and benefits
A record of any other fraudulent activity such as identity theft
Knowledge or experience of tax system abuse
Disqualification as a company director
A bar by Court or a charity regulator from acting as a charity trustee
What happens if a manager is not a Fit and Proper Person?
Charities can only claim tax relief if they pass the management condition; that is, if all their managers are fit and proper persons. It’s assumed that charities will only employ fit and proper persons but that’s not always the case. For example, charities concerned with offender rehabilitation will often knowingly have ex-offenders working within the management structure. HMRC will use its discretion and there are a variety of circumstances and situations where charities can still access tax relief even if one of their managers fails the test.
If the charity notifies HMRC that a manager will fail the test, they may still pass the management condition so long as the charity puts adequate controls in place
The charity moves the manager to a position where they have no influence over funding decisions
A supervisor is put in place to oversee and control the work of the manager
If HMRC is concerned that a manager is not fit and proper they will initially contact the person directly and may include the charity in discussions. In most cases HMRC will work with the individual and the charity to find an acceptable resolution, such as those above, but in extreme cases the person will be notified in writing that they have failed the test and, if they continue working with the charity, tax relief will be withheld.
What do charities need to do?
Most charities will not be affected by the new regulations, but all charities need to be aware of the legislation – failure to adhere to it could result in the withdrawal of tax relief which would be a huge financial loss. There are more details about the Fit and Proper test on the HMRC website (link below) as well as a basic guide. HMRC recommends that all existing and newly appointed managers read this guide and sign the declaration. This will help the charity prove they have taken steps to ensure the suitability of managers should HMRC ever investigate. Charities should also let HMRC know when they change those managers who are the authorised officials or nominees dealing with tax relief.