We take a look at HMRC's new definition of a charity and in particular what the 'management condition' means for charitable organisations. 

From 1 April 2012 all charitable organisations claiming any form of UK tax relief or exemption will have to meet the terms of HMRC's new definition of 'charity'.  The definition for tax purposes sits alongside the definition of a charity under the Charities Act 2011 ("the Act"), which is simply an organisation that is established for charitable purposes (listed in the Act) and exists for the public benefit.  Charities which currently claim Gift Aid have been required to comply with the new guidelines since April 2010, but all other charities which intend to continue with their claims for UK tax relief and exemptions should aim to fulfil the new requirements by 31 December 2012.

In order to maintain eligibility for UK tax reliefs and exemptions, charities must now demonstrate that they have satisfied four conditions prescribed by HMRC. In short, they need to be charities under the law of England or Wales, be located in the UK (or an EU member state, Iceland or Norway), and they need to be registered by the Charity Commission where the law requires (or an equivalent Charity Commission in their home country).  The final condition, the 'management condition', which has caused the most controversy, requires that any person involved with the running of a charity's finances must be 'fit and proper'.  

Charitable organisations are advised to familiarise themselves with HMRC's guidance which contains details of a fit and proper persons test, which essentially provides that an individual is considered to be fit and proper if they ensure that charity funds and tax reliefs are used only for charitable purposes.  The rationale behind the management condition is to ensure that charitable organisations are not managed or controlled by individuals who might misuse valuable tax reliefs.  

HMRC recognises that the new test is likely to have little impact in most cases since most charities will already have procedures in place to ensure that their management staff are fit and proper persons.  Nonetheless, charities may wish to take additional precautionary measures by asking their trustees, directors and other employees who are involved in determining how a significant proportion of the charity's funds are spent to sign HMRC's model declaration certifying that they are fit and proper, which could be produced as evidence in the event of an HMRC investigation.

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.