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The new year brings with it the end of the first reporting period under the Common Reporting Standard (CRS), a measure designed to assist in the fight against international tax evasion by requiring “Financial Institutions” to identify and report to their local tax authorities information on individuals who are tax resident in one country but who receive payments in another country.  This note summarises the obligations under the CRS as they apply to UK registered charities.

Financial Institutions

Since the CRS obligations only apply to Financial Institutions, the first step for any charity, regardless of its size, nature, legal form or income level, is to determine whether it will be classified as a Financial Institution (FI).

The legislation sets out four different types of Financial Institutions but the most relevant type for charities is an Investment Entity and in particular a Managed Investment Entity. In broad terms, a charity will be a Managed Investment Entity if:-

1. It holds certain types of investments (generally stocks and shares, or bonds, but not interest on cash deposits, or rental income) managed on a discretionary basis by another Financial Institution (typically a professional fund manager); and

2. 50% or more of the charity’s gross income is generated by these investments, either for the 3 years prior to January 2016, or for the period that the charity has been in existence, whichever is shorter.
If these two tests are met, the charity will most likely be classed as a Financial Institution despite its charity status and will have reporting obligations under the CRS if payments are made to reportable persons or entities.
If the charity does not meet both of these tests, it will likely be classed as an “Active Non-Financial Entity” and will have no reporting requirements.

Reporting Requirements

If a charity determines that it is a FI, it will need to review all payments made to individuals or entities (including other charities) during the period from 31st December 2015 to 31st December 2016 to ascertain whether any payments were made to individuals or entities tax resident outside the UK and resident in a country taking part in the CRS regime. If the recipient was or is in a jurisdiction which has signed up to the CRS, details of the recipient and the amount paid (or intended to be paid, if set aside but not yet actually paid) must be reported to HMRC using the HMRC Online Service.

A list of jurisdictions which have signed up the CRS can be found on HMRC’s website at https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim402340

Steps To Be Taken Now And In Future

Charities which determine that they are Financial Institutions and which are making payments to individuals or to entities must take steps to acquire and keep the information required under the CRS. To do this it is recommended that before any payments are made, the intended recipient should be asked to complete a “Self-Certification” Form to confirm their name, address, date of birth (if an individual), account number (or an equivalent number or reference which distinguishes the payment from other payments), country of tax residency and their Tax Identification Number (being any official number issued by the recipient’s tax authority to identify them, for example a Unique Taxpayer Reference number, or National Insurance Number.

Although the administrative burden of doing so may be daunting, charities should also take steps to check the tax residency of individuals or entities who received payments in the period from 1st January to 31st December 2016. Although checks can be made verbally, the results should be formally recorded and kept securely for a period of at least 6 years.

Even if a recipient is UK resident, documentary evidence to record this is required and a Self-Certification Form should therefore be issued and signed by a recipient before any payment is made, ideally in all cases.

Reporting Dates

Where an individual or an entity is identified as being reportable, charities should notify that individual or entity by 31st January following the year in which the payment is made that their details may be passed on to HMRC under the CRS regime. The notification only needs to be made once, if payment is intended to be made to the same individual or entity in future. Details of reportable payments must then be made by 31st May in the year following payment. As such, payments made to 31st December 2016 must be reported to HMRC by 31st May 2017.

Charities must therefore take action now if they have not done so already.

Magnus Mackay, Associate

Chambers UK 2018

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