UK: Charity Bites: Match Fit? Would Your Directors Pass The New HMRC Charities 'Fit And Proper Persons’ Test?

Last Updated: 7 June 2011
Article by Kirstie Penman

Until recently, this was a question that you'd be more likely to hear in the boardrooms of professional football clubs, where the "fit and proper persons" test is undergone by owners and directors (mandated by the Premier League, the Football League and the Football Conference), in the hope of preventing clubs from falling into the hands of corrupt or untrustworthy businessmen.  Since its introduction in 2004, there have been some headline-making examples of owners and directors falling foul of the test, such as Stephen Vaughan, who was disqualified as a director of Chester City in November 2009 following his conviction in a £500,000 VAT fraud case.

Now the managers of charities are also having to face a fit and proper persons test in order to qualify for charity tax relief - a move which has already sparked a great deal of debate, comment and confusion.

Why?

In March 2010, the UK Government announced that UK charitable tax reliefs - previously restricted to UK resident charities - were to be extended to eligible charities established in Europe.  This meant that new measures were required to ensure that these reliefs were used only for charitable purposes.  

In order to achieve this, the Finance Act 2010 stipulated new conditions that organisations must fulfil before they could be recognised as a charity for tax relief purposes, the most controversial of which was the 'management condition' - or the fit and proper persons test for managers of charities.  There have been substantial complaints and widespread concern about the new test, particularly with regard to the lack of clarity around what is actually required, and the increased administrative burden that it imposes.  

Who does the test cover?

The term "managers" is defined by the Finance Act 2010 as "the persons having general control and management of the administration of a charity".  If this sounds familiar, that is because it is precisely the same wording as the definition of "charity trustee" in the Charities and Trustee Investment (Scotland) Act 2005.  However, it is important to note that the guidance issued by HMRC indicates that they will be applying the term more broadly: -

The term "manager"... for the purposes of this legislation, applies to the trustees of charities, directors of corporate charities, CASC officials, and any other persons having general control and management over the running of the charity or the application of its assets... For example: in a typical small local charity a manager for the purposes of the fit and proper persons test could include the Chairperson, Treasurer, Secretary and the rest of the management committee who would have control over expenditure. In a larger charity a manager for the purposes of the fit and proper persons test would include all trustees or directors of a corporate charity but may also extend to certain employees who are able to determine how a significant proportion of the charity's funds are spent. For example, most large charities have a Board of Trustees and an Executive Board of senior employees. In such a case the trustees and members of the Executive Board would be managers of the charity.

In particular, it will be noted that HMRC Charities specifically includes senior management staff within the definition of "manager". While OSCR has occasionally referred to the possibility that it might treat a senior employee as a charity trustee in exceptional circumstances, the general rule - so far as Scottish charity law is concerned - is that only board/management committee members are treated as charity trustees.

Who qualifies as "fit and proper"?


This is quite a difficult question to answer, as the phrase is not defined in the legislation - so we have to rely on the HMRC guidance.   They provide a list of examples where a person may fail the test: -

"Factors that may lead to HMRC deciding that a manager is not a fit and proper person include, but are not limited to, individuals:

  • with a history of tax fraud
  • with a history of other fraudulent behaviour including misrepresentation and/or identity theft
  • for whom HMRC has knowledge of involvement in attacks against or abuse of tax repayment systems
  • barred from acting as a charity trustee by a charity regulator or Court, or being disqualified from acting as a company director."

However, the wording used makes it clear that there could be other instances where a person would not meet the test. HMRC states in its guidance that it "does not offer a clearance service for charities to confirm that particular managers are fit and proper persons" - so charities are left unsure where the boundaries may lie.

What do charities have to do to meet the test?


New charities applying for charity tax relief

Charities not yet in possession of an HMRC charity reference number will need to file a form CHA1, along with a copy of the charity's governing document (constitution), registration documents from the charity regulator (presumably the charity recognition letter issued by OSCR, in the case of a Scottish charity), any available accounts, bank statements, and evidence of the charity's public benefit activities.  

The form asks for information about the funding history of the charity, how it will raise new funds and details of its operating area, as well as asking for details of various individuals involved with running the charity, including

  • the person making the application;
  • the nominee - a person outside the charity (if any) who is authorised to submit Gift Aid or other repayment claims; and
  • any "responsible persons".  

Responsible persons are defined as:

"the people responsible for running your organisation...all trustees (the people legally responsible for your organisation), directors, authorised official, the person who is making this application (where you are not an agent) and other persons in controlling positions within your organisation such as chairman, treasurer, secretary and any cheque signatories."

The form goes on to state that all such "responsible persons" should read the guidance on "fit and proper persons" - and that anyone included on the form must meet the test.
The HMRC guidance states that HMRC "will generally assume that charities have given proper consideration to the suitability of their managers to act in such capacity, and that consequently those managers are fit and proper persons."  

HMRC say that they will only carry out full checks where there appears to be a high-risk of non-compliance, so the responsibility for ensuring that managers meet the test rests firmly with the charity itself - and despite the fact that (see above) the boundaries of what is or is not a problem from the point of view of the "fit and proper persons" test remains unclear.  

HMRC has attached a declaration to the end of its guidance note on fit and proper persons.  It is recommended that the charity ask everyone who falls within the category of "managers" or "responsible persons" to read the guide, and then sign the declaration - which contains a number of statements confirming, for instance, that they have not been involved in tax fraud, and declaring that they will ensure that all tax reliefs are used for charitable purposes.  These forms are then retained by the charity, and can be produced in the event of an investigation by HMRC.  Such a step is not obligatory, but would be highly recommended.

Existing charities (already recognised as eligible for charity tax relief)


It is important to note that the test will also apply to charities which are already in receipt of tax reliefs.  Whilst they will not be obliged to submit the CHA1 form, it would still be sensible to take reasonable steps to ensure that their existing managers meet the test; how this is achieved is left up to the individual charity - but, again, asking managers to sign the declaration form would be recommended.  Also, on the first occasion that the charity needs to notify HMRC of a change to its details - such as change of address, or changes in the individuals who deal with HMRC on a day to day basis (authorised officials or nominees) or the charity's agent - it should use the 'HMRC Charities Variations Form' (ChV1) and should include details of its responsible persons who, from that date, together with the authorised official, will be the only persons on whose authority HMRC will act to change details on the charity's tax record.

What happens if a charity fails the test?

Where HMRC finds that a manager is not a fit and proper person, they will first advise the manager of its decision.  The manager can then ask for that decision to be reviewed by a senior manager in HMRC Charities, and if they are still not satisfied by their decision, then by the Head of HMRC Charities, and if necessary also by the Adjudicator.

If, after those reviews, HMRC still considers the person is not fit and proper,  HMRC will ask him/her if he/she intends to remain as a manager of the charity. If the person stands down as a manager HMRC will not normally inform the charity; however, if he/she remains as a manager HMRC, will notify the charity that it considers that the manager is not a fit and proper person. HMRC is not normally able to disclose specific concerns about a person to the charity without that person's permission - but they will need to explain that, because the manager is not a fit and proper person, the management condition is not met and so tax relief may not be given.

However, the fit and proper persons test does allow HMRC to exercise its discretion to allow relief even where the test has been breached, if the circumstances are such that it is 'just and reasonable' to treat the management condition as being met - for instance, where a charity can show it made a genuine mistake and there has been no misuse of charity tax reliefs.  It can also apply discretion where the charity can demonstrate that the manager concerned is not able to influence the charitable purposes of the charity or the application of its funds.

HMRC also has wide powers to work with charities to find a remedy for the situation by implementing measures such as introducing supervision to an unfit manager, moving him/her to another role, or dismissing the individual in question, as a condition of maintenance of tax relief.

If, in exceptional cases, the charity does not make any changes, then HMRC can reject the charity's claim to tax relief. Whilst the charity would have a right of appeal, it is clear that the only sure way to avoid having a claim denied is for an organisation to maintain its own rigorous internal procedures to pass the test and ensure that its managers are 'fit and proper' - or else risk being caught offside by HMRC...

Further information

You can read the guidance in full, and download the required HMRC Charities forms from their website at http://www.hmrc.gov.uk/charities-donors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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