This guidance is for trustees of charities (including directors of corporate trustees), directors of corporate charities, any employees of a charity and volunteers who:
to claim tax reliefs or to exert control over spending the charity's funds.
Follow the link below for a short overview of the main points of this guidance and a model declaration for fit and proper persons.
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 was extended to all other charity tax reliefs administered by HM Revenue and Customs (HMRC) with effect from dates on or after 1 April 2012.
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 HMRC applies this test to people 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 HMRC holds 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 HMRC considers it necessary to make further enquiries.
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 that manager has no ability to prejudice 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 that manager has been in office.
A charity's tax reliefs and exemptions will not normally be withdrawn during an enquiry into whether it meets the management condition.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.
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, for example, 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 is not met, 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.
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 administration of the charity. This can apply to the trustees of charities, directors of corporate charities, directors of corporate trustees, 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 2011, which applies only to trustees of a 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 normally 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. This will be the case 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 either from information that it already holds or that is passed to it. For example, HMRC may be aware that 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 that 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 persons in a charity, charities do not need to notify HMRC about all managers or all changes of managers.
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 a person is suitable to be a trustee of a charity, that person 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 trustees. 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, where individuals:
However, just because a person 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.
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 guidance below explains how HMRC will apply its discretion in practice.
When considering the application of the fit and proper persons test to particular managers, HMRC takes account of the likely impact on the charity’s tax position. The position that the person holds within the organisation is 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 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 applies the fit and proper test flexibly:
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:
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 unknowingly 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. 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.
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 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 that 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 person 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.
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, HM Revenue and Customs, Charities Correspondence S0708, PO Box 205, Bootle, L69 9AZ. 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 person should write to the Head of HMRC Charities, HM Revenue & Customs, Charities Correspondence S0708, PO Box 205, Bootle, L69 9AZ.
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 look at the complaint only 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 Adjudicator's 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 Adjudicator's 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.
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 normally ask them if they intend remaining as a manager of the charity. If the person stands down as a manager HMRC will not normally 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 normally 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 normally 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 tax return.
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.
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.
There is no statutory requirement for charities to follow this suggested procedure but asking managers to read the helpsheet (see link below) and sign a declaration based on the model declaration included in the helpsheet 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 helpsheet 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:
As explained above the definition of 'managers' covers a potentially wide range of persons. 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:
Charities may also appoint a nominee or nominees, who are individuals or organisations outside your charity who you have authorised to submit Gift Aid claims, other repayment claims and GASDS 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 or payment for your charity and other charities. 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.
HMRC will only act on information about changes to the authorised official, other officials 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 authorised officials or other officials.
Charities that already have an HMRC charity reference are not normally asked to complete an 'HMRC Charity Application Form' (ChA1) to confirm their eligibility to charity tax reliefs.
They do not need to do anything until they need to notify changes to the charity’s details, such as their address, or changes in the people who deal with HMRC on a day to day basis (authorised officials, other officials or nominees) or the charity’s agent (see below for more details about agents).
The first time a charity claims a tax relief or exemption HMRC may ask them to complete an 'HMRC Charity Application Form' (ChA1).
HMRC asks all charities claiming Gift Aid repayments of tax for the first time to complete an application form.
If you are asked to complete a form ChA1 you will need to provide information about the authorised officials, other 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 with two letters followed by some numbers such as AB123456.
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 Change of Details Form' (ChV1) which is also the form for charities to notify HMRC of certain other changes to their organisation.
Charities only need to inform HMRC when the following people change:
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.
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 the HMRC 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 Change of Details Form' (ChV1) regarding an agent:
Please send your completed form 64-8 to HM Revenue and Customs, Charities Correspondence S0708, PO Box 205, Bootle L69 9AZ, not the address of the Central Agent Authorisation Team that is shown on the form.