UK introduces a “fit and proper persons test” for trustees and directors of charities

June 05, 2011 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, Canadian Charity Law, Ethics and Canadian Charities, Avoiding 'Charity' Scams

The UK has introduced in 2010 a “fit and proper persons test” for people involved with the management of charities that apply for Gift Aid. “Factors that may lead to HMRC deciding that a manager is not a fit and proper person include, but are not limited to, individuals: with a history of tax fraud; with a history of other fraudulent behaviour including misrepresentation and/or identity theft; for whom HMRC has knowledge of involvement in attacks against or abuse of tax repayment systems; barred from acting as a charity trustee by a charity regulator or Court, or being disqualified from acting as a company director”

Here is the link:
http://www.hmrc.gov.uk/charities/guidance-notes/chapter2/fp-persons-test.htm

Here is the full text:

Detailed guidance on the fit and proper persons test
Who should read this guidance?
This guidance is for trustees of charities, directors of corporate charities and any employees of a charity and volunteers who:

act on behalf of a charity
are involved in appointing people to act on behalf of a charity
to claim tax reliefs or to exert control over spending the charity’s funds.

Introduction
The Finance Act 2010 introduced a definition for tax purposes of charities and other organisations entitled to UK charity tax reliefs (referred to as ‘a charity’ or ‘charities’ in this guidance). The definition includes a requirement that to be a charity an organisation must satisfy the ‘management condition’.

The definition applies to Gift Aid with effect from 1 April 2010. The definition will be extended to other charity tax reliefs in due course. It follows that this guidance applies at present only to charities claiming repayments of tax under Gift Aid.

The management condition applies, with appropriate amendments, to Community Amateur Sports Clubs (CASCs) as well as to charities. As a result the guidance below applies to CASCs as it applies to charities.

For a charity to satisfy the management condition its managers must be fit and proper persons. There is no definition in the legislation of a ‘fit and proper person’. This guidance explains how HM Revenue & Customs (HMRC) applies this test to those who have the general control and management of the administration of the charity.

HMRC assumes that all people appointed by charities are fit and proper persons unless they hold information to show otherwise. Provided charities take appropriate steps on appointing personnel then they may assume that they meet the management condition at all times unless, exceptionally, they are challenged by HMRC.

Where HMRC finds a manager of a charity is not a fit and proper person, a charity will not necessarily lose entitlement to the charity tax reliefs. As explained below, HMRC is able to treat a charity as having met the management condition where either the manager has no ability to influence the charitable purposes of the charity or the application of its funds, or the circumstances are such that it is just and reasonable to treat the charity as having met the management conditions throughout the period the manager has been in office.

A charity’s tax reliefs and exemptions will not be withdrawn during an enquiry into whether it meets the management condition. HMRC may however decide not to make repayments of tax during an enquiry, depending on the circumstances. Where the management condition is found to be satisfied, or HMRC treats the management condition as being met, throughout the period then the charity will qualify for tax reliefs and exemptions throughout the period. HMRC will make any outstanding repayments at the conclusion of that enquiry.

Why introduce the fit and proper persons test?
The fit and proper persons test makes it harder for sham charities and fraudsters working within a charity, or targeting a charity from outside, to abuse charity tax reliefs. It is not intended as something to deny tax reliefs to charities who make a genuine mistake. Many of the charity tax reliefs work by clawing back tax where the charity has not applied donations or other income or gains for charitable purposes – a ‘look back’ system where tax reliefs and exemptions are given in advance. Where a genuine charity makes a mistake it is usually easy for HMRC to recover the tax due. However where fraudsters have hijacked a charity or are operating within a charity it may be impossible to recover the tax due.

The fit and proper persons test provides for HMRC to exercise its discretion to allow relief even where the fit and proper persons test has been breached, where a charity can show it made a genuine mistake and there has been no misuse of charity tax reliefs. This guidance is therefore intended to help charities understand how the test works and what they need to do to ensure they do not lose their tax reliefs.

Who does the fit and proper persons test apply to?
The fit and proper persons test applies to the ‘managers’ of the charity. The term ‘manager’ is defined in the legislation as the persons having the general control and management of the charity and, for the purposes of this legislation, applies to the trustees of charities, directors of corporate charities, CASC officials, and any other persons having general control and management over the running of the charity or the application of its assets.

The term ‘general control and management’ has a wider scope than that found in the Charities Act 1993, which applies only to trustees of a charity. For example:

In a typical small local charity a manager for the purposes of the fit and proper persons test could include the Chairperson, Treasurer, Secretary and the rest of the management committee who would have control over expenditure.
In a larger charity a manager for the purposes of the fit and proper persons test would include all trustees or directors of a corporate charity but may also extend to certain employees who are able to determine how a significant proportion of the charity’s funds are spent. For example, most large charities have a Board of Trustees and an Executive Board of senior employees. In such a case the trustees and members of the Executive Board would be managers of the charity.
HMRC takes the view that charities will have given proper consideration to the suitability of their managers to act in such capacity, and that consequently those managers are fit and proper persons.

However, where HMRC becomes aware of information that suggests that a charity’s managers are not fit and proper persons, HMRC will normally raise its concerns with the manager initially and later, if appropriate, with the charity, even if the charity regulator has not identified the manager as not being a fit and proper person. HMRC may become aware of such information from information it already holds or is passed to it. For example HMRC may be aware a certain individual has been involved in fraudulently claiming tax credits. If it sees that same individual appointed to the management committee of a small local charity HMRC would want to explore the extent to which the individual was able to exert control over the charity’s finances and tax affairs.

As explained below, whilst the definition of managers can cover a wide range of individuals in a charity, charities do not need to notify HMRC about all managers or all changes of managers.

What is the fit and proper persons test about?
The ‘fit and proper persons’ test is concerned with ensuring that charities are not managed or controlled by individuals who present a risk to the charity’s tax position.

If a charity regulator does not consider that an individual is suitable to be a trustee of a charity that individual will not be able to satisfy the fit and proper persons test.

However, it does not necessarily follow that individuals who are considered by a charity regulator to be suitable to act as trustees of charities will always be considered to be fit and proper persons for the purposes of the management condition. This is because different charity regulators have different responsibilities and priorities from those of HMRC and therefore carry out different sorts of checks on individuals. Also, HMRC has access to certain information that is not available to charity regulators. So, as explained below, to ensure a consistent approach across all individuals, HMRC tailors its checks to cover areas that are not covered by charity regulators and considers additional information to which the regulators may not have access.

Factors that may lead to HMRC deciding that a manager is not a fit and proper person include, but are not limited to, individuals:

with a history of tax fraud
with a history of other fraudulent behaviour including misrepresentation and/or identity theft
for whom HMRC has knowledge of involvement in attacks against or abuse of tax repayment systems
barred from acting as a charity trustee by a charity regulator or Court, or being disqualified from acting as a company director
However, just because an individual has been, say, barred from acting as a charity trustee or one of the other points above applies, it does not follow that the charity will always fail the management condition. This is explained further below.

What happens if a manager is not a fit and proper person?
A charity may claim charity tax reliefs only if it meets the management condition. It will meet the management condition if all of its managers are fit and proper persons.

HMRC also has the discretion to decide whether the management condition is to be regarded as satisfied during a period where one or more managers are not fit and proper persons. HMRC may apply this discretion if it considers that either:

the manager is not able to influence the charitable purposes of the charity or the application of its funds
the circumstances are such that it is ‘just and reasonable’ to treat the management condition as being met
The guidance below explains how HMRC will apply its discretion in practice.

When will HMRC consider a manager cannot influence the charitable purposes of the charity or the application of its funds?
When considering the application of the fit and proper persons test to particular managers, HMRC will take account of the likely impact on the charity’s tax position. The position that the person holds within the organisation will be very important as those with greater control over how the charity tax reliefs are claimed, processed and used will clearly present a greater risk than those with no such control. As a result the checks HMRC applies will vary from case to case, depending on individual circumstances.

HMRC considers that any person who has no dealings with HMRC and no control over financial issues or spending charity funds, even if the person is not a fit and proper person, is unlikely to affect the charity’s eligibility to tax reliefs and the charity is therefore likely to meet the management condition.

As an example, charities concerned with the rehabilitation of offenders may knowingly appoint ex-offenders to management positions within the charity. In such a case HMRC will apply the fit and proper test flexibly:

If the person might not be considered to be a fit and proper person but is not able to exert control over the charity’s finances and tax affairs then HMRC will consider that a person cannot affect the charitable purposes of the charity and the charity would be treated as meeting the management condition. For example this would happen if the person was on the management committee but not on the finance committee of the charity, had no access to charity funds and could not authorise expenditure without the approval of the full management committee and was not in a position to otherwise unduly influence financial decision making.
If the charity wishes to give the person some financial responsibility, such as making claims to tax relief on behalf of the charity then, provided the charity puts into place adequate controls, HMRC may accept the person as being fit and proper for the purposes of the management condition. However in such cases the charity should advise HMRC of the circumstances when they notify HMRC of the appointment. In appropriate cases HMRC will work with the charity in an attempt to ensure that eligibility for the charity tax reliefs continues.
When will HMRC consider the circumstances are such that it is just and reasonable to treat the management condition as being met?
Where a charity unknowingly appoints a person who is not a fit and proper person to a position where they have dealings with HMRC, or control over spending charity funds, the charity will not necessarily lose access to charity tax reliefs.

For example, if HMRC identified a manager who was not a fit and proper person to hold a position giving them influence over the finances of the charity, and either:

the charity moves that person from that role, to, say, another role where they would not have influence
puts in place close supervision of the person’s activities in relation to their financial activities on behalf of the charity
then HMRC has the discretion to treat the charity as having met the management condition throughout the period of the manager being in office. As a result the charity will not lose its entitlement to the charity tax reliefs during that period. However, if a charity does not amend its organisation in response to an approach from HMRC then HMRC may refuse the charity’s claims to reliefs.

If a charity has innocently appointed a manager who is not a fit and proper person, and that person has misapplied some of the charity’s funds, without the charity’s knowledge, the charity will not necessarily be denied charity tax reliefs and exemptions. Whilst the charity will have appointed a manager who is not fit and proper, and the charity’s funds will have been affected, where the charity can demonstrate that it had taken reasonable steps and was not party to the misapplication of funds then HMRC will work with the charity in an attempt to correct the position.

How will HMRC apply the fit and proper persons test?
HMRC does not offer a clearance service for charities to confirm that particular managers are fit and proper persons. HMRC will generally assume that charities have given proper consideration to the suitability of their managers to act in such capacity, and that consequently those managers are fit and proper persons.

If, exceptionally, a charity appoints a person whom the charity considers may not be a fit and proper person (for example a convicted fraudster) to a position where the person is able to exert control over the charity’s finances and tax affairs, the charity should explain in a letter the circumstances of that appointment. HMRC will work with the charity to help them meet the management condition, for example by agreeing what level of supervision of the person’s activities would be required.

HMRC applies a risk-based approach to its activities and carries out full checks where there appears to be a high risk of non-compliance, including where it receives information of potential fraud.

Where a charity is regulated by a charity regulator in its home country HMRC also takes into account the checks that the regulator has carried out on any managers, to ensure that checks are not duplicated. However, if the individual has not been subject to previous checks, or is based in a country where there is no other regulation of the organisation, then, depending on the potential risks presented, the checks that HMRC carries out may need to be extensive. As a result such checks may take some time to complete.

What will happen to the manager if HMRC doesn’t think they are fit and proper?
HMRC would always encourage a person who is appointed as a manager of a charity to be open and honest with the charity to prevent problems arising. If the charity knows a person may fail the fit and proper persons test they can seek early advice from HMRC about what to do to prevent any loss of tax reliefs.

Where the charity has not already approached HMRC but HMRC is concerned that a manager may not be a fit and proper person HMRC will normally notify that person of the grounds for concern and give them the opportunity to challenge HMRC’s view. The person may wish to include the charity in the discussions but there is no obligation to do so.

If following the discussions HMRC continues to consider the person is not a fit and proper person, and also considers that it would not be appropriate to exercise its discretion in relation to the management condition, HMRC will notify the person in writing of their decision.

If the person is dissatisfied with HMRC’s decision that they are not a fit and proper person they can ask for that decision to be reviewed by a senior manager in HMRC Charities. The person should write to the Fit and Proper Persons Test Review Manager, HMRC Charities, St John’s House, Merton Road, Bootle, L75 1BB. Which senior manager reviews the case will depend on who in HMRC took the decision the person was not ‘fit and proper’. The decision would normally be reviewed by a manager not involved in the original decision.

If the reviewing manager considers the original decision was correct and the person is still dissatisfied with the decision that they are not a fit and proper person they can ask for that decision to be reviewed again by the Head of HMRC Charities. The individual should write to the Head of HMRC Charities, St John’s House, Merton Road, Bootle, L75 1BB.

If the Head of HMRC Charities upholds the decision and the person is still dissatisfied then they can ask the Adjudicator to look into the case. The Adjudicator is a fair and unbiased referee, and the service is free. The Adjudicator will only look at the complaint after it has been considered by the Head of HMRC Charities.

The Adjudicator’s Office looks into complaints about mistakes and the use of discretion in HMRC (amongst other issues). A complaint should be raised with the Adjudicator’s Office within six months of a decision by the Head of HMRC Charities, and the Adjudicator aims to reply to initial contact within ten days. The Adjudicator’s Office will need certain information such as contact details, as well as details about the specific complaint being made (see the Adjudicators Office website). A friend, relative or professional adviser may represent the person (but the person must submit written authority to the Adjudicators Office first).

The Adjudicator’s Office will initially screen the person’s complaint and if content that HMRC has had sufficient opportunity to consider the position fully (that is the Head of HMRC Charities has given their decision) the Adjudicators Office will consider an investigation. As part of any investigation the person may be asked to attend (or the person may request) a meeting to give further information or evidence. Adjudicator’s Office enquiries may conclude by way of a recommendation letter (setting out what, if anything, HMRC should do to put the position right) or by way of mediation where the Adjudicator’s Office will set out a resolution acceptable to the person and HMRC.

For more information on the Adjudicators Office website (Opens new window)

Find out about the HMRC Complaints procedure

What will happen to the charity if the person is not fit and proper?
Where HMRC has found someone is not a fit and proper person then, as explained above, HMRC will normally advise the person of its decision and the person may ask for that decision to be reviewed by a senior manager in HMRC Charities, if necessary also by the Head of HMRC Charities and if necessary also by the Adjudicator. If after those reviews HMRC still considers the person is not fit and proper HMRC will ask them if they intend remaining as a manager of the charity. If the person stands down as a manager HMRC will not inform the charity; however, if they remain as a manager HMRC will notify the charity that it considers that the manager is not a fit and proper person if the charity is not already aware. HMRC is not able to disclose specific concerns about the person to the charity without the person’s permission but they will need to explain that, because the manager is not a fit and proper person, the management condition is not met and so tax relief may not be given.

HMRC will also, where appropriate, advise the charity what it must do, and by when, if HMRC is to apply its discretion to treat the charity as having met the management condition throughout the period of the person’s term in office. For instance, the conditions may require the charity to move the manager from a particular role within a specified period or ensure that person has no access to, or control of, charity funds or put in place close supervision of the person’s activities.

A charity’s tax reliefs and exemptions will not be withdrawn during an enquiry into whether it meets the management condition. HMRC may however decide not to make repayments of tax during an enquiry, depending on the circumstances. Where the management condition is found to be satisfied, or HMRC treats the management condition as being met, throughout the period then the charity will qualify for tax reliefs and exemptions throughout the period. HMRC will make any outstanding repayments at the conclusion of that enquiry.

If, in exceptional cases, the charity does not make any changes HMRC may reject the charity’s claim to tax relief. The charity would have a right of appeal through the normal procedures, either by way of appealing against HMRC’s refusal of the claim or against an amended assessment to tax, depending on whether the claim to relief was included in a return.

Find out more about how to appeal against a decision

What will HMRC tell charity regulators?
HMRC works closely with the UK charity regulators and where HMRC identifies a manager who is not considered to be a fit and proper person HMRC will advise the relevant charity regulator of the concerns where permitted by law to disclose the information.

What should charities do to comply with the fit and proper persons test?
HMRC assumes that trustees of a charity would not knowingly appoint someone who was not a fit and proper person. HMRC’s general presumption is that all managers are fit and proper persons and HMRC will not routinely ask charities to demonstrate that their managers are fit and proper persons. As mentioned above, HMRC will consider use of its discretion to treat a charity as meeting the management condition where managers who might not be considered to be fit and proper persons are not able to exert control over the charity’s finances and tax affairs.

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

It is up to charities to decide how they will be able to demonstrate that they have given proper consideration to the suitability of managers, and that the managers are fit and proper persons.

Some, but not all, charities will already have procedures in place, such as records of following up references for the person on their appointment. Charities may wish to devise their own procedures or, if they wish, they can follow the suggested procedure below.

Suggested procedure for charities when they appoint new managers
There is no statutory requirement for charities to follow this suggested procedure but asking managers to read the basic guide (PDF 44K) and sign a declaration based on the model declaration included in the guide is one way the charity can demonstrate to HMRC that it has taken the necessary steps to reassure itself its managers are fit and proper.

Using the basic guide and model declaration in the way suggested will mean that a charity can assume that they meet the management condition at all times unless they knowingly appoint a manager who is not a fit and proper person to a position from which the person is able to influence the charitable purposes of the charity or the application of its funds or, exceptionally, they are challenged by HMRC:

Charities should ask all newly appointed managers to read the basic guide and sign a declaration based on the model declaration. Bear in mind that, as explained above, the term ‘manager’ in this context means more than the everyday meaning of the word.
Assuming the manager signs the declaration the charity should keep that declaration in case HMRC asks to see it. The declaration should be kept for the duration of the manager’s engagement with the charity, and for four years after the manager has departed.
If the new manager is to be one of the ‘responsible persons’ or the ‘authorised official’ as described below the charity will need to notify HMRC of their appointment on form ChV1.
The charity can then assume they meet the management condition unless HMRC contacts them.
If the manager refuses to sign the declaration (and refuses to comply with any other attempts by the charity to verify their suitability as a fit and proper person) then the charity should decide for themselves whether that person should be appointed as a manager of the charity and what financial responsibilities they should be given.
If the person signs the declaration but adds information in the box the charity will need to consider that information and decide whether to seek advice from HMRC on what to do.
The Fit and Proper Persons test: a basic guide for managers of charities (PDF 44K)

Which managers do charities need to tell HMRC about?
As explained above the definition of ‘managers’ covers a potentially wide range of individuals. HMRC need to ensure that the managers making tax claims and receiving tax payments are authorised to do so by the charity and are fit and proper persons.

HMRC may ask a charity about any of its managers but, unless specifically asked to provide more details, charities should only tell HMRC when they appoint or change certain categories of managers:

The authorised official - is the person within your charity you have told HMRC is authorised to deal with your tax affairs, make Gift Aid or other repayment claims and, where necessary, sign and submit tax returns. This is the person HMRC will contact if they have any questions about your charity.
The responsible persons - will normally be trustees or directors of the charity (if the charity is a company), or CASC officials. You need to nominate a minimum of two, maximum of four, responsible persons.
Although nominees are not ‘managers’ for the purposes of the fit and proper persons test, you do still need to notify HMRC if you appoint a nominee or that nominee changes. A nominee is an individual or organisation outside your charity who you have authorised to submit Gift Aid or other repayment claims to HMRC on your behalf. They might just make the claims for your charity or they might make the claim and receive the repayment for your charity.

HMRC will only act on information about changes to responsible persons, the authorised official and nominees (and agents – see below for more information on agents), and changes to the charity’s details such as their address and bank account if the notification is made by existing responsible persons or authorised officials.

Charities with an existing HMRC charity reference
Charities that already have an HMRC charity reference will not normally be asked to complete an ‘HMRC Charity Application Form’ (ChA1) to confirm their eligibility to charity tax reliefs.

They will not need to do anything until they need to notify changes in the charity’s details, such as their address, or changes in the individuals who deal with HMRC on a day to day basis (authorised officials or nominees) or the charity’s agent (see below for more details about agents).

On the first occasion that the charity needs to notify HMRC of such a change, it should use the ‘HMRC Charities Variations Form’ (ChV1) and should include details of the two to four responsible persons who, from that date, together with the authorised official, will be the only persons on whose authority HMRC will act to change details on the charity’s tax record.

Charities without an existing HMRC charity reference
The first time a charity claims a tax relief or exemption HMRC may ask them to complete an ‘HMRC Charity Application Form’ (ChA1). The form ChA1 replaces the former procedure by which HMRC checked a charity’s eligibility to charity tax reliefs and which was carried out through correspondence.

All charities claiming Gift Aid repayments of tax for the first time will be asked to complete an application form. If you are asked to complete a form ChA1 you will need to provide information about the responsible persons, authorised officials and nominees.

Once HMRC is content that a charity is entitled to claim tax reliefs and exemptions they will issue it with an HMRC Charities reference. This is a reference number starting two letters followed by some numbers such as AB123456.

Telling HMRC about changes
HMRC asks all charities to let it know when certain managers change. Charities do not need to inform HMRC of all changes to managers.

Notification of changes should be made on the ‘HMRC Charities Variations Form’ (ChV1) which is also the form for charities to notify HMRC of certain other changes to their organisation. Form ChV1 replaces a number of old forms (ChN1, ChN2, ChN2A and part of form R68) used for notifying HMRC of changes in personnel.

Charities only need to inform HMRC when the following people change:

the authorised official
nominees
agents
responsible persons
You should use form ChV1 to notify HMRC about such changes – except agents as explained below. You do not have to tell HMRC about changes of other managers unless you wish to do so. If you do wish to do so then you should use page 6 on form ChV1 to explain what other managers have left and what new ones have arrived.

As mentioned above, a charity that has not already notified HMRC of the details of the responsible persons must also include details of the responsible persons on the first occasion they need to tell HMRC of a change to a manager. From that point the responsible persons or the authorised official will be the only persons on whose authority HMRC will act to change details on the charity’s tax record.

What about agents?
An agent is an individual or organisation outside your charity who acts on your behalf, such as an accountant or lawyer. You do not have to have an agent but if you do they can submit tax returns, prepare accounts or exchange information with HMRC on your behalf. There is a separate process for informing HMRC that you have appointed an agent using form 64-8. Form 64-8 is available on this website and you must send HMRC a completed form whenever you appoint a new agent. However there are three specific situations where, in addition to the 64-8 you will also need to send a completed ‘HMRC Charities Variations Form’ (ChV1) regarding an agent:

If you appoint an agent as a nominee for your charity then you must tell HMRC. You must also tell HMRC if they cease to act as a nominee, again by using the ‘HMRC Charities Variations Form’ (ChV1).
The only time it is possible for an agent to be the ‘authorised official’ is if the agent is already a ‘manager’ of your charity. This would normally apply where the agent is a trustee or director of the charity. If an agent is not already a ‘manager’ then they cannot be the authorised official for your charity. You need to tell HMRC when an agent is appointed as your authorised official, or when they cease to be, on the ‘HMRC Charities Variations Form’ (ChV1).
If you appoint a new agent to your charity and you have not already told HMRC of the responsible persons in the charity then you should provide those details on the ‘HMRC Charities Variations Form’ (ChV1). HMRC will only act on information about changes if the notification is made by a responsible person or authorised official.
You should send your completed form 64-8 to HMRC Charities, Variations Team, St John’s House, Merton Road, Liverpool, L75 1BB, not the address of the Central Agent Authorisation Team that is listed on the form.

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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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