Does your charity make grants to overseas bodies? How well do you know your beneficiaries? Are you evidencing your due diligence checks sufficiently?
In addition to paying close attention to guidance from the Charity Commission on operating overseas, you should be aware of growing scrutiny from HMRC on the funding of work overseas by charities.
What’s the fuss?
The Finance Act 2010 states that payments may only be made by charities to bodies outside the UK if trustees have taken such steps ‘as HMRC considers reasonable to ensure that payments are applied to charitable purposes.’
If HMRC decides that trustees have not taken reasonable steps to protect charity funds and have not directed them towards charitable purposes, then payments may be taxable as non-charitable expenditure, with the charity losing tax exemption on an equivalent amount of its income and gains.
It’s notable that there is no objective test here and that trustees need to refer to HMRC’s guidance on how to take ‘reasonable steps.’
Not taking reasonable steps means that charities leave themselves open to a loss of tax relief. Trustees should thoroughly review their policies, procedures and agreements with overseas partners.
What do you need to do?
In the course of an HMRC visit or review, you may need to present evidence of the steps you have taken to get to know the bodies you are supporting overseas, and beyond this, that supporting them meets your charitable purposes. More specifically, HMRC may ask about:
- Your knowledge of the entities receiving payment from you
- The charitable purpose for which the payment was given
- What assurances you obtained from the recipient about the use of the funds
- What steps you took to ensure the payment would be applied for charitable purposes
- What follow-up action you took to confirm that the funds were applied properly
Consequently, it’s vital you maintain good records, so you can evidence these steps if necessary.
HMRC do make it clear that the nature of the steps taken will depend on the scale of operations and size of sums involved. Therefore, a risk-based approach to determining the steps necessary is an appropriate response to these requirements.
HMRC’s guidance illustrates the steps that might be reasonable in the context of small one-off payments differ from those needed for very large or long-term funding commitments.
Which charities need to be particularly vigilant?
Charities that have been funding bodies overseas for a long time based on informal relationships must have appropriate records in place. They should consider formalising these relationships and introduce written agreements with such recipients, recording the knowledge of the recipient and the relevant steps they will take.
Donor-advised grant making charities and those working in new territories must invest sufficient time and rigour to gain a good understanding of recipients, their operating environment and the risks involved in funding their work.
Need some support?
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 would like some guidance on any aspect of running your charity, please get in touch with our Head of Charity Development, Ed Marsh.