With the Common Reporting Standard (CRS) coming into full force in the UK this year, charities need to be aware how they might be affected by the new mechanism.
In a nutshell
If you are a charity in receipt of a grant, you will be classed as an account holder of your grant provider under the new regime. If you are not registered with the Charity Commission, this means you may be asked for some extra information about your tax compliance.
The new CRS regime should have minimal practical impact on small charities classed as account holders, although charities classed as financial institutions will feel more of the administrative burden.
With grant providers classed as financial institutions being expected to report to HMRC by 31 May 2017, I will take you through what you will have to do as an account holder.
What is the CRS?
The CRS is an international information exchange regime aimed at promoting tax transparency and preventing offshore tax evasion. Developed in response to a G20 request, the CRS calls on participating jurisdictions to gather information from banks and other financial institutions about their clients who are tax resident abroad. This information will then be exchanged with the relevant countries.
What are financial institutions and account holders?
A charity will be required to report as a financial institution when its investments or endowment funds generate at least 50% of the charity’s income and where an investment manager controls any part of those investments. In practice, it will only be charitable trusts and unincorporated charities who will be required to undertake due diligence on their account holders and report to HMRC.
So, what is an account holder? An account holder is defined as an individual or entity with an equity or debt interest in a financial institution. HMRC considers a grant recipient to hold an equity interest in the trust or charity that is providing the grant. The grant recipient will therefore be regarded as an account holder and may be asked for extra information.
What will you have to do as an account holder?
Helpfully, HMRC have advised that financial institutions can assume that charities registered with the Charity Commission in England, Wales, Northern Ireland or the Office of the Scottish Charity Regulator, are resident in the UK and there will be no reporting requirement – so if you’re registered, you shouldn’t be asked for any additional information.
If you are not registered with the Charity Commission, you will be asked to self-certify your details (including tax-residency and tax number if possible). While this may be a new process for your organisation, it’s worth bearing in mind these details aren’t hugely different from that the Charity Commission publishes for registered charities.
Financial institutions have been advised that they are free to collect this information as part of a grant application, verbally or through a form – so the way you may be asked could vary. However they do it, they must collect the mandatory data required by CRS in accordance with local rules.
They will also need to incorporate self-certification into their grant-making process as well as obtaining details for grants already made in 2016 – so you may see this come up in relation to grants you’ve already been given. The Association of Charitable Foundations (ACF) have created some useful resources for charities, including a self-certification form template.
It’s also worth being aware that if the financial institution finds any discrepancies with the self-certification provided and information they already hold about you, they might get in touch to clarify or ask for evidence.
How will your data be used and protected?
Financial institutions will be required to report information to HMRC about their account holders who are tax-resident abroad. HMRC will only be able to share information with the tax jurisdiction(s) in which entities or individuals are tax-resident. Although the data will only be used for the purposes of combating tax evasion, there may be some circumstances where it could be shared with third parties. However, bear in mind the data being shared is limited, and very similar to that routinely published on registered charities. The CRS is also bound by the requirements of consent and domestic privacy laws as they exist in each country.
Although there is no requirement to report on account holders who are UK resident, financial institutions must still collect data on all account holders (wherever their tax-residency) and retain this information for six years.
Where can you read more?
For further reading and details, the revised HMRC guidance for charities brings together materials that are relevant to charities and presents it in user-friendly terminology.