Her Majesty's Revenue and Customs (HMRC) have released guidance on how they will implement part of the Finance Act 2010.

New definition of Charity

The Act introduces a new definition of charity for tax purposes and includes a 'fit and proper person' test for the trustees and senior managers of charities. This will also affect Community Amateur Sports Clubs which already register with the HMRC.

The legislation follows an European Court of Justice case which found that charity tax relief should be given on donations to charities that are based in other European member states. 

For the purposes of the Finance Act, and hence for tax relief, a charity must:

• Be established for charitable purposes
• Be subject to UK law, (for charities in the UK)
• Be registered with the Charity Commission (for charities in England and Wales)
• Meets the management condition i.e. all the trustees and senior managers meet the new fit and proper person test.

Fit and Proper Person Test

The fit and proper person test is designed to prevent charities claiming tax exemptions where the trustees or senior managers may abuse the charities tax status. So, any of the following will be likely to cause an individual trustee or manager to fail the test:

• a history of tax fraud
• a history of other fraudulent behaviour including misrepresentation and/or identity theft
• HMRC knowledge of involvement in attacks against or abuse of tax repayment systems
• information or evidence pointing to a heightened risk of involvement in other fiscal or financial impropriety
• being barred from acting as a charity trustee by a charity regulator or Court, or being disqualified from acting as a company director

If a manager or trustee fails the test HMRC may reject the charity's claim to tax relief.

This new definition of charity could lead to an organisation being recognised as a charity by the Charity Commission, but not being recognised as a charity by HMRC.

What next?

HMRC say that they do not intend to routinely ask charities to demonstrate that their senior managers and trustees will pass the fit and proper person test. However:

HMRC will expect charity trustees to be able to show, if challenged, that they have given proper consideration to the suitability of people they appoint to positions of trust or influence in the charity, especially where they are able to exert control over the charity's finances and tax affairs.

Trustees may wish to obtain a declaration from any new managers, trustees and directors appointed after 5 April 2010. A template for this is available here and includes a declaration by the individual that they are a fit and proper person to act as a charity manager.

Model Declaration for Fit and Proper Persons

People in some of the categories on the model declaration may already be excluded from acting as a trustee by the charities governing documents. This is particularly the case is a charity has used one of the Charity Commission's model governing documents.

As many governing documents do not have a power to remove trustees from office it may also be worth looking at the options available to a charity should one of their trustees or senior managers fail the new test.