Common Reporting Standard: Update for UK charities

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Donald Drysdale By Donald Drysdale for ICAS

5 September 2016

Many UK charities face heavy administrative burdens under the CRS, explains Donald Drysdale, and they should study the latest updated guidance from HMRC.


An article on new challenges for UK charities published here on 16 May commented on the impact of the Common Reporting Standard (CRS) and parallel regimes for automatic exchange of information, which are important measures towards tackling international tax evasion.

From April to August this year HMRC have made successive updates to their International Exchange of Information Manual, containing guidance on the automatic exchange of information (AEOI).

The International Tax Compliance Regulations 2015 (SI 2015/878) ensure that the UK government (through HMRC) can force financial institutions (as defined for this purpose) to disclose information about their clients’ reportable financial accounts, and can exchange account information automatically with other jurisdictions under its various international agreements.

Who is affected?

The regulations impose obligations on UK financial institutions to perform specified due diligence procedures to identify information about the tax residence (and US citizenship) of individuals and entities for whom they maintain financial accounts. They must retain that information in respect of all account holders for a period of six years from the reporting period in which it is identified, and report it to HMRC to the extent that it is reportable under any of the agreements.

Banks and building societies are not the only financial institutions required to report. Insurers, wealth and investment managers, trusts and some charities are also included. A charity will be included as a financial institution if it is an ‘investment entity’ – that is, if more than 50% of its income comes from investments in financial assets and it is ‘managed by a financial institution’ (i.e. at least some part of its financial assets are under discretionary management with an external fund manager). For this purpose relevant income includes interest, dividends, royalties, annuities and other income from investing in financial assets. Nonetheless, it won’t always be easy for a charity to determine whether or not it meets the 50% investment income threshold.

If a charity doesn’t fall within the definition of a financial institution – for example, if its income comes mainly from gifts, donations, grants or legacies – it is a non-financial entity (NFE) and therefore not required to perform due diligence or provide financial account information. A financial institution with a ‘passive NFE’ as an account holder must look through it to identify controlling persons who are reportable, but this is not needed if the account holder is an ‘active NFE’.

Where a non-profit NFE is registered with the Charity Commission for England and Wales, the Charities Commission for Northern Ireland or the Office of the Scottish Charity Regulator, or is a Community Amateur Sports Club, and is registered with HMRC for charitable tax purposes, it is treated as an active NFE.

Guidance for charities

On 25 August HMRC updated their International Exchange of Information Manual with the latest version of their specific guidance for charities on how they may be affected by the AEOI requirements.

The CRS is a global standard implemented in the same way in all jurisdictions, and provides no exemption for charitable organisations. This reflects the fact that in some jurisdictions with inadequate regulation, charities have been used for tax evasion and to conceal wealth. HMRC have stated that exempting charities would create a significant risk to the effectiveness of the data being reported, creating loopholes that could be abused. This contrasts with the bilateral FATCA agreement between the UK and the US, under which all UK charities are ‘deemed compliant’ and therefore effectively exempt from reporting because they are regarded as a low risk by the US.

Under the CRS, charities that are investment entities (under the criteria explained above) will have to carry out due diligence checks on all their account holders – that is, anyone with a debt or equity interest in the charity – and must report to HMRC regarding certain financial details of any that are tax resident outside the UK. This extends to all the charity’s beneficiaries, whether mandatory and discretionary, and will include other charities and individuals to whom it makes cash grants. It applies regardless of the sums involved – with limited (optional) exclusions for certain pre-existing accounts.

“This new guidance for charities is not stand-alone,” explains Christine Scott, ICAS Assistant Director, Charities and Pensions. “It provides specific sections for charities on topics such as due diligence and reporting requirements, but these cross-refer to the general guidance for all financial institutions, contained elsewhere in the manual. Charities who think they may be affected will have to study the guidance in depth to discover whether they need to register and report.”

Due diligence

The due diligence checks are needed to ascertain the tax residence of each account holder, irrespective of whether or not they are tax resident in a reportable jurisdiction. Within the due diligence process certain information will have to be gathered and recorded – for example, charities will have to record and verify the tax identification numbers (where these exist) of beneficiaries and other organisations they fund, both in the UK and in other participating jurisdictions.

Where an account holder is tax resident outside the UK, the charity may have to report this information to HMRC to share with the tax authority of the jurisdiction where the account holder is resident.

Charities will be allowed some flexibility in the way they allow their account holders to self-certify their tax residence. For example, they might do so orally, or by including appropriate questions in application forms for charitable grants.

What data is reportable?

Charities that are financial institutions should have been collecting data since 1 January 2016 on all their account holders, wherever they are located. This data must be retained for six years.

Where an account is reportable, the information to be reported includes interest, dividends, account balances, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account. Reportable accounts include accounts held by individuals and entities (including trusts and foundations), and there is a requirement to look through passive entities to report on the relevant controlling persons.

The first CRS reporting deadline, for 2016 data, is 31 May 2017. However, any charity or other financial entity affected should have started considering its due diligence and reporting obligations already to ensure that it will be able to comply in time. Charities must use HMRC’s AEOI online service.


The issues for charities should not be under-estimated, and have not been relieved in any way by the UK’s vote for Brexit.

In May the Association of Charitable Foundations, the Charity Finance Group and the Association of Charitable Organisations wrote to the government in the following terms: “The red tape burden [imposed by the CRS] is potentially so great, the rules so difficult to interpret and the implications so tricky in terms of human rights and data protection law, that we believe there is a very real risk that many funders will scale back grant-making for those most in need on account of a regime designed to monitor the affairs of the world’s wealthiest individuals and corporations.”

Christine Scott adds: “The AEOI regulations impose unwelcome duties and costs on charities, and the potential penalties for non-compliance are significant. Thankfully HMRC have said they will take a light touch approach to compliance in the first two years of CRS reporting – helping charities get it right rather than penalising them for errors. Nonetheless, if charities are uncertain about their status and responsibilities in relation to AEOI, it would be prudent to seek professional advice to ensure that they comply with the relevant due diligence and reporting requirements.”

Article supplied by Taxing Words Ltd


  • Charities
  • Guidance
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