From May, the CRS may require charities to make reports to HMRC. Will your charity clients be affected?
The Common Reporting Standard (CRS) is a global network of legislation which aims to prevent individuals and entities using offshore structures to evade tax. Unlike the USA’s Foreign Account Tax Compliance Act (FATCA) – under which charities are exempt from reporting requirements – the CRS may require charities to make reports to HMRC. The CRS is the result of the drive by the G20 nations to develop a global standard for the automatic exchange of financial account information.
The immediate assumption on reading the above is that this only affects large charities; however, the new rules could affect many smaller or less complex charities.
We recommend any member involved with charities review whether or not they are affected as the first reports under the CRS are due in May 2017.
How might CRS affect smaller charities? The CRS divides all entities into two broad categories – ‘financial institutions’ (FIs) and ‘non-financial entities’ (NFEs). If a charity is considered to be an NFE, it will not have its own reporting requirements under the CRS. So for instance a charity won’t need to provide its financial account information if its income is mostly from:
The issue for smaller charities is that most of them do not provide financial services, and so would not expect to be classed as an FI. The definition of FI under the CRS, however, is very broad and some charities – particularly endowed charities and those that receive a large proportion of their income from investments – may be categorised in this way.
So a smaller charity might be deemed to be an FI if it is managed by an FI and its gross income is at least 50% attributable to investing, reinvesting, or trading in financial assets. Note that ‘managed’ is also subject to a broad definition. It could be that a charity merely has to appoint a professional investment manager to manage all or part of its assets on a discretionary basis to make it ‘managed’.
An entity is not regarded as managed by a financial institution if that financial institution does not have discretionary authority to manage the entity’s assets either in whole or in part. If this is the case, charities should consider whether they are required to make relevant reports.
What needs to be reported? This is where it gets even more complicated!
Where the charity is deemed to be an FI it must collect data on ‘financial accounts’ for the calendar year to 31 December 2016 and report it to HMRC by 31 May 2017. For these purposes financial accounts are not the standard reports for each year-end but relate to charities where equity interests, bonds or other debt instruments are involved. It also may include charities set up as trusts which make grants to beneficiaries. It would appear that many charities which are deemed to be FIs will not in fact have ‘financial accounts’ but it is not clear whether HMRC will require these charities to submit nil returns.
The CRS refers to these beneficiaries as account holders of an equity interest. This includes anyone who may receive a distribution, directly or indirectly. These account holders are reportable where they are tax resident outside the UK, in a reportable jurisdiction. Note that payments to suppliers for the provision of services are not included.
Further information HMRC has published specific guidance for charities with AEOI reporting obligations, please see IEIM404700+