The Common Reporting Standard for Financial Institutions – impact on charities

The Common Reporting Standard (CRS) could affect charities that have large endowment funds. The CRS was implemented into UK law in 2015, via the International Tax Compliance Regulations 2015, and is part of a wider drive to prevent the global use of off-shore structures to evade tax.

How does the CRS affect charities?

All UK financial institutions, such as banks and investment managers, are required to perform due diligence procedures to identify certain information in relation to their account holders and make reports to HMRC where required. To enable them to do this charities may receive forms from their bank and/or investment manager asking them to categorise themselves as a financial institution or a non-financial entity for the purposes of CRS.

Is my charity a financial institution?

Financial institution

Although charities do not normally provide financial services and so would not therefore expect to be classified as a financial institution, the definition is wide which means that some charities, particularly grant giving charities and/or those with large endowment funds, may be caught by the definition of a type of financial institution called an investment entity.

A charity may be considered to be an investment entity if it meets these criteria:

  1. It is investing on its own account; and
  2. It is managed by a financial institution, meaning that it has appointed a financial institution to manage all or part of its assets on a discretionary basis; and
  3. At least 50% of the charity’s gross income is attributable to investing, reinvesting or trading in financial assets.

Charities that are financial institutions will need to apply specified due diligence procedures to identify whether they maintain “financial accounts” which must be reported to HMRC. Financial accounts in this case are not the annual accounts prepared by charities; rather charities that are deemed to maintain these financial accounts include, for example, trusts that make grants to beneficiaries.

Charities deemed to hold financial accounts will have to perform due diligence upon their account holders or beneficiaries and report certain information about them to HMRC. Therefore if a grant-making charity is a financial institution, everyone to whom a grant is made will be an account holder and so the charity will have to perform due diligence on each grant made.

It is important to note that you can be a financial institution but not maintain financial accounts, in which case it is not clear whether HMRC will require these charities to submit some sort of “nil return”.

Non-financial entity

If you conclude that you are not a financial institution you will then have to look at whether you are an active or passive non-financial entity which will determine whether or not you have reporting obligations to HMRC relating to its controlling persons.

When does this take effect?

Reporting deadlines for financial institutions begin in 2017 however charities that think they may fall within the scope should consider now how they will address their due diligence and reporting requirements.

Guidance

Guidance specifically for charities was released by HMRC in June 2016 and can be found here.

More information

We’ll provide more updates when HMRC issues its guidance; in the meantime, if you have any questions please contact charities@chiene.co.uk.