The latest effort is the Common Reporting Standard (CRS), which was introduced in the UK at the beginning of 2016, with the first reports now being made.
This is a method by which tax authorities around the world will gather and share information about financial investments held by overseas taxpayers, with financial institutions and other entities in each country having to make reports to their respective tax authority. The idea is that the tax authority in each participating jurisdiction will be able to compare the data received to individual tax returns and thus identify if income has been under declared.
All very admirable, but how are charities affected by the new rules? Well, the definitions behind the standard are very long and complex (311 pages). Unfortunately, a consequence is that some charities may need to report information to HM Revenue & Customs (HMRC) on an annual basis. The charities that may need to do this include those classed as passive non-financial entities (NFEs) and as financial institutions, which includes a large proportion of charities.
Is your charity a ‘financial institution’?
A UK charity is generally classified as a financial institution when:
- its funds are managed by an investment manager under a discretionary management agreement; and
- its investment income contributes to at least 50% of its total gross income.
For a charitable company that holds an endowment fund, this test has to be undertaken twice — once for the endowment fund and once for the balance of the charity’s other activities.
What has to be reported?
The reporting obligation applies only to certain transactions with individuals or entities that are resident overseas for tax purposes. This will include donations paid to overseas beneficiaries (unless the beneficiary is an overseas charity that is itself classed as a financial institution).
Affected charities will need to collect the required information on their overseas beneficiaries and the grants paid to them in the relevant year. Once the information has been collected it will need to be reported to HMRC annually. There is a set format for the reporting, which includes the name of the individual or entity, address, date of birth (if relevant), taxpayer identification number, tax residence, and entity type under CRS (for example, an individual, an entity that is not a financial institution, or a financial institution).
CRS is complex — this article provides a simplified summary of the main issues that affect charities.
Affected charities need to have processes to obtain and record additional information about their overseas beneficiaries, and they may need to report this data to HMRC.
If you consider that your charity may be affected you should take appropriate professional advice.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.