(Or Out Of The Frying Pan, and Into The Fire?)
Barry Leigh BA (Hons) FCA, CTA, Partner at Cohen Arnold, considers the possible effects on UK charities of Brexit and the international clampdown on tax avoidance. For further information: 020 8731 0777.
The world seems to be shrinking and expanding at the same time! The UK voted for Brexit, generating much uncertainty in the markets and affecting many Jewish charities, especially those that operate or attract staff from overseas. At the same time, many countries around the globe – including the UK – are collaborating in a concerted effort to stamp out international tax avoidance through a multi-national information exchange agreement, referred to as the Common Reporting Standard (CRS). So charities, and their loyal donors, could now be affected by both Brexit and the CRS.
How will charities be affected by Brexit?
The uncertainty in financial markets and significant drop in the value of the pound, questions on workforce mobility and immigration, and the general economic outlook all present concerns to charities. The lifeblood of a charity is its funding and income stream and many charities obtain grants from the EU – so what will happen in the run up to and post Brexit? The continued drop in interest rates means a reduction in investment income and charities across the UK have considerable financial investments. Many charities enjoy significant legacies which often take the form of property but uncertainty in the property market will affect the value of such donations. Individuals and corporate donors, as philanthropic as they may be, typically are only able to make donations out of disposable income, of which there is less due to current economic conditions. Charities need regular funding to finance their ongoing programmes and facilities and to employ their staff. Post Brexit, there may be a smaller pool of donors available. It is well known that the care sector employs many of its workers from the EU; what will happen to that workforce post Brexit? And to top it all, when a charity carries out its work overseas, it now finds that its buying power is reduced due to the fall in the value of the pound!
Charities and the CRS
Under the CRS, ‘financial institutions’ are required to report to tax authorities on accounts held by, and payments made to, persons resident in other jurisdictions.
A number of Jewish charities (be they companies, trusts etc.) may from now on be regarded as ‘financial institutions’ in circumstances where over 50% of a charity’s income is derived from financial investments (there may be a question as to how one considers rental income) and where at least some of its financial assets and investments are managed by external investment advisers with discretionary investment portfolio management rights. In such circumstances, the charity will have reporting requirements to HMRC on transactions undertaken in the year ended 31 December 2016 with reports to be made by 31 May 2017. Affected charities should have been undertaking their compliance work since January 2016. They must have regard to the rather brief guidance issued by HMRC on the matter which broadly notes that such charities must undertake due diligence checks as regards all of their beneficiaries in receipt of grants and donations as well as their key donors. Effectively, such a charity is now regarded as equivalent to a bank for CRS purposes!
Their beneficiaries are regarded as ‘account holders’ of the charity and are potentially reportable to HMRC. The charity must therefore request each such beneficiary to self-certify whether it is itself a ‘financial institution’ or an active or passive Non Financial Foreign Entity. The beneficiary must also report its tax residency status and other key details to the charity. The charity must compile a list of all non-UK resident beneficiaries and report these to HMRC by 31 May 2017 (and annually thereafter).
It must be expected that this will have an effect on where such charities will apply their donations; one would assume that they would in future prefer to save time and paperwork by making donations solely to UK registered charities, thereby having an adverse effect on international charity.
We all appreciate that in the overwhelming majority of cases, charities are bona fide and act in the public interest. Unfortunately, in recent times, there have been a few cases of certain charities featured in the spotlight for their involvement in tax avoidance mechanisms or mismanagement of charitable funds. It is arguably a shame that as a result of such scenarios, the wider charity sector in the UK has now been brought wholesale into these new laws when charity resources are already so limited and strained!
What with the EU Brexit and a somewhat CRS burdensome union with the rest of the world, it seems that charity trustees will have to man their ships with that much more care. Charities will be best advised to seek appropriate professional advice to enable them to steer through these murky waters.
This article should not be regarded as advice, but as a pointer towards some of the key matters that will be of relevance to people working in the charity trustees. Should readers wish to discuss any of these points with Barry, his contact details are shown above.