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The new "fit and proper persons" test

The Finance Act 2010 has introduced a new definition of charity for UK tax purposes. Whilst this opens the way for charities established in EU Member States to be recognised as charities for UK tax purposes, it also introduces a new and seemingly onerous requirement for both EU and new UK charities seeking to register in the UK for tax purposes. Such charities are required to ask intrusive questions into the financial affairs of people who are considered to be "managers" of the charity, as are existing UK charities, on any change in personnel who may come within that description.

EU case law
Following EU case law developments, which suggested that the UK’s practice of recognising only UK based charities for tax purposes may have been contrary to the treaty rights of Freedom of Establishment and Free Movement of Capital, the changes introduced in the Finance Act 2010 extend the favourable tax treatment awarded to UK registered charities to bodies situated in other Member States (including Norway and Iceland); as long as they fall within new definitions of charity, charitable company or charitable trust. However, less well publicised and rather ominously, the Act also introduces a new application requirement for charities as well as a new statutory definition of charity with which it may prove difficult to comply in practice.

The new definitions are in force from 6 April 2010, but do not supersede existing definitions until these are repealed by statutory instrument. The only, but significant, exception is that charities wishing to benefit from Gift Aid have to comply with the new definitions with immediate effect. To apply for recognition, both registered and unregistered charities based in the UK or in other Member States (including Norway and Iceland) will have to fill in form ChA1. The form does not differentiate between the different kinds of tax relief and so it seems that the new procedure must be followed from now even though not all necessary legislative steps have been taken to bring the new rules fully into force.

The new statutory definition of charity
HMRC will then consider whether the charity meets the new definition, which is for the most part familiar, with a number of limbs to satisfy.

To be a charity, the “body of persons or trust” has to:

* Be established for charitable purposes only (as defined in s.2 of the Charities Act 2006 to come within the definition of "charity" in s.1 of that Act);
* Meet the jurisdiction requirement
* Meet the registration requirement; and
* Meet the management condition

The jurisdiction requirement extends the Charities Act 2006 definition ("subject to the control of the High Court in the exercise of its jurisdiction with respect to charities") to the effect that the organisation must be within a court’s jurisdiction in respect of charities. The registration requirement is met when the organisation is registered with the charity regulator in its territory, if there is such a regulator and the organisation is required to register.

Fit and proper persons
The management condition, the final requirement, is less easily satisfied, as it requires the “persons who have control and management of the organisation” to be fit and proper persons. There is no statutory definition of what is required to be "fit and proper". HMRC has released some guidance on which categories of people might be regarded as having control and management of a charity. This extends the "net" to include individuals who are not even trustees, for example those who write cheques on behalf of the charity in an administrative capacity with no real authority and influence. Unhelpfully, the non exhaustive examples provided in the guidance tend to focus on circumstances in which a manager is not “fit and proper” (for example those with a history of tax fraud or identity theft, or someone who has been disqualified as a company director). While such conduct would clearly render an individual not “fit and proper”, we are concerned that there is no guidance on the effect of a lesser transgression. The guidance therefore offers little comfort to charities that want certainty that all of their managers are “fit and proper”, particularly as the potential consequence of failing to fulfil the condition is not being recognised as a charity for tax purposes at all.

The charity is then left at the mercy of HMRC's discretion who may take a more lenient approach on a case by case basis. HMRC say that they will “take account of the likely impact on the charity’s tax position and that the position that the person holds within the organisation will be very important as those with greater control over how the charity tax reliefs are used will clearly present a greater risk than those with no such control”. However, if a "manager" is judged not to be "fit and proper", not only will the charity lose its beneficial tax status, anyone who has made a donation which would otherwise have qualified for Gift Aid, will lose the personal tax benefit as well.

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