Common Reporting Standard for Charities - Update
The Common Reporting Standard (CRS) which asks Financial Institutions to report on account holders as well as being a method of preventing tax evasion. It came into force at the beginning of 2016.
This will place a significant administration bill on grant making Charities in particular.
The regulations require UK Financial Institutions (see later) to undertake due diligence on their account holders and to make reports to HM Revenue & Customs. This means that the Charity may receive forms from its Bank and/or Investment Manager requesting that it categorises itself for the purposes of the CRS.
Most Charities do not provide financial services and so would not expect to be classed as a Financial Institution. However, the definition under the CRS is very broad. Some Charities particularly endowed Charities and those that receive a large proportion of their income from investments will be categorised as a Financial Institution. In such cases the Charity may be under an obligation to make reports to HM Revenue & Customs.
The first reporting deadline for Financial Institutions under the CRS are not until 2017. However, it is expected that reports will need to be filed for the year ended 31 December 2016 by 31 May 2017. Therefore, given the onerous nature of the new reporting requirements you should start considering your due diligence.
The definition of a Financial Institution
The Charity may be regarded as an investment entity if it is managed by a Financial Institution and its gross income is primarily attributable to investing, reinvesting or trading in financial assets.
A Charity must meet both these criteria to be deemed a Financial Institution.
1. A entity is regarded as being managed by a Financial Institution where it has appointed someone like an Investment Manager to manage all or part of its assets under a discretionary basis.
2. An entity’s income is primarily attributable to investing, reinvesting or trading in financial assets where this activity accounts more than 50% of the Charity’s gross income.
Therefore, a Trust with significant money in investments managed by Investment Managers would be classified as a Financial Institution.
If a Charity is not a Financial Institution, then it would be regarded as a NFE (Non-Financial Entity). A Charity which is an NFE will not have its own reporting requirements under the CRS, but for the purposes of CRS classification forms, the Charity will still need to consider whether it is an active or passive NFE.
Where a UK Charity is not a Financial Institution it is likely that it will be classed as an active NFE.
A not for profit NFE is a not for profit organisation established and operated in its jurisdiction of residence exclusively for religious, charitable, scientific, artistic, cultural, athletic or educational purposes etc.
The Charities that are Financial Institutions under the CRS will need to identify whether they maintain financial accounts which must be reported to HM Revenue & Customs.
Charities that may be deemed to maintain financial accounts include those who have issued equity interest, bonds or other debt instruments and also those Charities constituted as Trusts who make grants to beneficiaries.
Where such Charities are Financial Institutions they will need to perform due diligence upon their account holders or beneficiaries and will need to report certain information regarding them to HM Revenue & Customs.
By way of an example, this would include Charities recording and verifying the tax identification numbers of beneficiaries and organisations that they fund, both in the UK and in other reporting jurisdictions.
Reporting will be via returns to HM Revenue & Customs via a Government Gateway account.
Further information. HM Revenue & Customs has issued a 105 page draft guidance on these matters.