The diverse nature of the charity sector means that many charities are engaged in supporting projects and purposes abroad, as well as at home.
However, engaging in global activities does not come without risk. Charities must be aware of the relevant legal and tax rules that apply to making overseas grants.
Generally, a payment made by a charity towards its purposes counts as ‘charitable expenditure’ and is therefore subject to general charity tax exemptions. For payments made to overseas bodies, there are additional conditions that must be met to avoid tax liability.
In this context, payments to an overseas body is money sent outside the UK to charities, companies, agents, partners and individual persons.
You can read the full guidance on non-charitable expenditure, including the treatment of overseas payments on the government website.
Role of trustees
Responsible trustees will be used to carefully regarding their organisation’s management of its assets, so they are appropriately used and protected. Their due diligence is particularly required when making payments overseas.
A payment made to a body outside the UK can only be considered charitable expenditure if the charity can clearly demonstrate to HMRC that it has taken reasonable steps to ensure that the money goes towards charitable purposes. As part of this, trustees much carry out research regarding the overseas body, followed by monitoring and evaluation. Enquiries must be made to identify risks relating to connections between the body and other organisations. This should prevent complications and fulfil their legal duty.
The nature of these steps depends upon the scale of operations, the amounts of money involved, and the circumstances. Trustees must be able to describe the steps they have taken and demonstrate these steps were reasonable with supporting evidence.
Trustees may wish to consult the government’s guidance on Financial Controls for Charities (CC8) or read our article on the subject.
If an overseas body is considered a charity under domestic law of its host country this is not enough to satisfy HMRC. Further evidence and compliance will be required. Alternately, if the recipient body is not bound by its own domestic law to direct all its income to charitable purposes, then trustees should consider seeking a legally binding and enforceable agreement so that their payment is applied charitably.
Whilst it’s essential to meet requirements, aspects of this process are situational and will depend up on the circumstances of the overseas body being paid. For example, if you are making a grant to a newly formed organisation in a region with great turbulence and corruption, this will require greater attention than a repeat gift to a trusted partner, who operates transparently and in a stable environment.
More diligent work by trustees will be needed when dealing with larger sums or where a transfer of funds forms part of an ongoing commitment. Where payments are made to overseas branches or partners, funds should be held in properly operated accounts by authorised persons. For smaller, one-off payments, proof of correspondence between the charity and the overseas body should be sufficient if it provides information of the payment and the purpose for which it was given, as well as confirmation that it will be used for this purpose.
Role of HMRC
While trustees must act in the best interest of their charity and its beneficiaries, they must also satisfy HMRC that their overseas payments count as charitable expenditure. Otherwise, their organisation, or even trustees (such as themselves) could be liable to tax.
Have the steps you’ve taken to justify overseas payments been reasonable? HMRC will want to know:
- What your charity knows about the overseas body
- If you’ve had previous relations with the overseas body
- The history of the overseas body
- Amounts given (in both absolute and relative terms)
- What financial controls you and decision-making processes you used
HMRC will generally ask trustees to provide information and supporting documentation about the:
- Person(s) who received the payment
- Specific charitable purpose for which the payment was given, the reasons, and how the decision was made
- Guarantees or assurances from the overseas body that the payment will be applied for the purpose for which it was given, and what financial controls were in place, including informative financial records for audit trails
- Steps trustees took, such as safeguards, monitoring and oversight, to ensure the payment will be applied for charitable purposes
- Follow-up action taken by the trustees to confirm that payments were properly applied
It’s worth considering the difference between grants and contracts. If you have contract to provide services this may come with its own tax implications; you can check government guidance on this subject here.
Need some guidance?
Compliance checks and reviews of charities’ overseas payments, as well as Gift Aid audits, are on the rise. Consequently, you may wish to review your procedures and record-keeping, so you’re confident you’re doing things properly and can justify your actions should the situation arise.
Burton Sweet has a longstanding commitment to charities and civil society organisations, offering practical, professional and passionate support. We want to assist you, so you can deliver effectively for the communities you serve and show the good you do.
If you require some assistance in this area, please contact us and a member of our team will be happy to assist you.
