Charities taxation – Guidance on the fit and proper persons test

Finance Act 2010 introduced a definition of charities and other organisations which are entitled to charity tax relief.

The definition applies to Gift Aid from 1 April 2010 and from 1 April 2012 it was extended to all other charity tax reliefs administered by HMRC. The definition includes a requirement that the charity (and also Community Amateur Sports Clubs) must satisfy a ‘management condition’. To do so, its managers must be ‘fit and proper’ persons. ‘Managers’ for this purpose are persons having general control and management over the administration of the charity. A charity may claim tax reliefs only if it meets the management condition. 

HMRC have now issued detailed guidance on this fit and proper test. HMRC will presume managers appointed by charities are fit and proper unless they receive information which suggests otherwise. (Note that just because someone is approved by the charity regulator to be a trustee of a charity does not mean that they automatically pass the fit and proper test.) Should HMRC find that a manager is not a fit and proper person, the charity won’t necessarily lose entitlement to charity tax reliefs provided the person in question is not able to direct the use of the charity’s funds. However, HMRC will open an enquiry and tax repayments may be withheld until the enquiry is concluded, although HMRC do have discretion in this matter. The objective of the fit and proper test is to prevent loss of tax where fraudsters are operating a charity; it is not to penalise genuine mistakes made by genuine charities. 

HMRC’s guidance sets out a list of factors which they will take into account in deciding if someone is a fit and proper person.  Along with involvement in fraudulent behaviour, having been debarred by the charity regulator and having been disqualified as a company director, are also persons who:

  • Have been  involved in designing and/ or promoting tax avoidance schemes; and
  • Have used a tax avoidance scheme featuring charitable reliefs or using a charity to facilitate the avoidance
  • Are known to have been involved in attacks against, or abuse of, tax repayment systems.

The abuse of charities for tax avoidance was highlighted in last week’s National Audit Office report. As well as investigating and challenging the schemes, excluding those with any involvement in tax avoidance from being a fit and proper person, HMRC are seeking to prevent future abuse of charitable tax reliefs. Charities will need to take care in appointing managers that they will meet the fit and proper test.