New international tax transparency legislation will require some charities to make reports to HMRC. Importantly, those charities that are affected may not currently have the facilities to comply with the forthcoming obligations. Charities should take time to consider whether they are affected and, if so, how they will comply with these new obligations.
1. What is the Common Reporting Standard?
The Common Reporting Standard (commonly known as the CRS) has its roots in the Foreign Account Tax Compliance Act (commonly known as FATCA).
FATCA aims to prevent tax evasion by US citizens by requiring financial institutions outside the US to pass information about their US clients to the US tax authorities. In 2012 the UK and the US signed a treaty to bring FATCA into UK law.
The CRS is the result of a drive by the G20 nations to develop a global network of legislation similar to FATCA in order to prevent individuals and entities using offshore structures to evade tax. The CRS was published by the Organisation for Economic Co-operation and Development (OECD) in 2014 and draws heavily on the approach taken by FATCA, using many of the same classifications and terminology.
Following publication of the CRS, the European Union incorporated the CRS into an EU Directive in order to make disclosure of financial account information mandatory between EU Member States. This directive is known as the EU Directive on Administrative Cooperation (DAC). The CRS and DAC have now been implemented into UK law by The International Tax Compliance Regulations 2015.
2. How does the CRS affect charities?
The new regulations require UK financial institutions to undertake due diligence on their account holders and to make reports to HMRC where required. There are two principal ways in which this may affect charities:
A charity may receive forms from its bank and/or investment manager requesting that it “categorise” itself for the purposes of the CRS. The CRS divides all entities into two broad categories – "financial institutions" and "non-financial entities". There are also a number of sub-categories.
Although a charity may have previously received similar forms requesting their FATCA classification, there are some distinct differences between FATCA and the CRS. Charities will either need to become acquainted with the CRS rules and guidance or ask their professional adviser to assist with this determination.
Reports to HMRC
Most charities do not provide financial services, and so would not expect to be classed as a “financial institution”. However, the definition of "financial institution" under the CRS is very broad and some charities – particularly endowed charities and those that receive a large proportion of their income from investments – will be categorised as a “financial institution”. Where this is the case, the charity may itself be under an obligation to make reports to HMRC.
This is one of the key areas in which FATCA and the CRS differ: the rules implementing FATCA in the UK contain an exemption meaning that UK charities do not have reporting requirements under FATCA. However, the CRS does not contain such an exemption; all charities who fall into the "financial institution" category should consider whether they are required to make reports.
3. How can a charity determine whether it is a "financial institution" or a "non-financial entity"?
A charity may be regarded as an investment entity (a type of financial institution) if it is managed by a financial institution and its gross income is primarily attributable to investing, reinvesting, or trading in financial assets.
A charity must meet both of these criteria to be deemed a financial institution.
Charities may find it helpful to note that, in general:
- an entity is regarded as being "managed by a financial institution" where it has appointed a financial institution (for example, a professional investment manager) to manage all or part its assets on a discretionary basis; 
- an entity’s income is “primarily attributable” to investing, reinvesting, or trading in financial assets where this activity accounts for at least 50% of the charity's gross income.
The CRS and related commentaries contain further detailed guidance upon how these tests should be interpreted.
This determination may be difficult for charities who receive income from various sources (for example, investment income, trading income and donations). Such charities should ask their professional adviser to assist.
If a charity is not a financial institution then it will be a "non-financial entity" (NFE). A charity which is an NFE will not have its own reporting requirements under the CRS. However, for the purposes of CRS classification forms, the charity will still need to consider whether it is an “active” or “passive” NFE. The criteria for determining whether an entity is an "active" or "passive" NFE are set out within the DAC and the CRS.
Where a UK charity is not a "financial institution" it is likely that it will be classed as an "active NFE". A charity is likely to view classification as an active NFE as preferable, as active NFEs are usually not required to provide further information relating to their controlling persons. However, we would again recommend that charities seek professional advice to ensure that this is the case.
4. Reporting obligations for charities who are "financial institutions"
Charities that are "financial institutions" under the CRS will need to identify whether they maintain "financial accounts" which must be reported to HMRC.
Charities that may be deemed to maintain "financial accounts" include those who have issued equity interests, bonds or other debt instruments and also those charities constituted as trusts who make grants to beneficiaries. Where such charities are "financial institutions" they will need to perform due diligence upon their account holders or beneficiaries and will need to report certain information regarding these account holders or beneficiaries to HMRC.
The majority of charities who are "financial institutions" will not maintain "financial accounts" but it remains to be seen whether HMRC will require these charities to submit "nil returns".
The first reporting deadlines for financial institutions under the CRS are not until 2017. However, charities that suspect they may be in scope should now start considering their due diligence and reporting requirements.
5. Tips for charities completing CRS forms
We would recommend that charities consider the following before completing a CRS classification form:
- read the form carefully. Often the form itself will contain notes for completion and an explanation of any defined terms used. Always consider these and, if in doubt, contact the institution who provided the form for an explanation;
- make a note of any deadline for completion as soon as the form is received. Often financial institutions will specify that there may be sanctions for clients who fail to complete and return the form in time (including the possible closure of accounts). If a deadline seems unreasonable, contact the institution who provided the form;
- check that the form does in fact require classification under the CRS (and not FATCA or other legislation). The charity's classification is likely to be different under FATCA;
- as with any contractual declaration, the charity should ensure that it is comfortable with all affirmations given on the form; and
- if unsure, consult a professional advisor.
6. Further Resources
Charities may find it helpful to note that HMRC has issued a draft guidance note for entities seeking to classify themselves under the CRS (dated 14 September 2015) which can be accessed here.
HMRC has recently identified that CRS compliance may pose particular problems for charities. We understand they are planning to draft additional guidance on charity issues arising from the CRS.
If you require further information on anything covered in this briefing please contact Julian Smith (firstname.lastname@example.org; 020 3375 7432) or Jessica Reed (email@example.com; 020 3375 7518) or your usual contact at the firm on 020 3375 7000. Further information can also be found on theCommercial and Regulatory page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2016
 The term "financial asset" is defined at Annex 1, Section VIII(A)(7) of the DAC and the CRS and notably does not include a non-debt direct interest in real property.
 Please see paragraph 17 of the OECD's commentary to Section VIII of the CRS.
 See at Annex 1, Section VIII(D)(8)(h) of the DAC and the CRS.