The pressure is on: HMRC widening charity enquiries

The pressure is on: HMRC widening charity enquiries   

However well-meaning and dedicated trustees are, if proper regard is not given to processes set out by the Charity Commission and HM Revenue and Customs, enquiries may be raised with potentially severe consequences.

Earlier this year HM Revenue and Customs (HMRC) announced that as part of a compliance review they intended to request tax returns from 3,000 registered charities. The charities to whom requests would be sent would be chosen based on the size of their Gift Aid claims with other charities being chosen at random. Until recently, the accepted convention has been that once HMRC have established that a charity is utilising its income for charitable purposes, it does not require the charity to submit tax returns on an annual basis. However, in order for HMRC to investigate a charity its enquiries must be based on a tax return which has been submitted to them. It appears that HMRC would like to check whether charities are claiming the correct amount of Gift Aid, and accordingly they are requesting those charities to complete returns. 

Some of our larger charity clients have recently received requests to submit tax returns even though they do not make significant Gift Aid claims. It therefore appears that HMRC is widening its enquiries to include charities where they perceive there may be a risk of non-charitable activities. One such area which has been identified is where donations are made to entities outside of the UK without sufficient evidence that the funds are being used for relevant charitable purposes.  

In conversations we have had with charity trustees, some have commented that all of the activities of their charities both in the UK and abroad are applied for charitable purposes and have expressed frustration at having to deal with what can be a time-consuming enquiry. It must be borne in mind however, that as a result of several high profile cases of fraud, the Charities Commission and HMRC have come under pressure from MPs to ensure that they are policing the sector effectively. Ultimately these cases are damaging to the sector as a whole, and any way the regulators can restore public confidence in the sector will positively effect all charities.   

On 23rd September the Charities Commission released a statement regarding an enquiry which had been opened into Human Aid UK. According to its website, the charity specialises in assisting victims in war torn regions principally in the Middle East. The charity had previously been under investigation and had recently filed a Serious Incident Report following the interception of two individuals travelling on behalf of the charity at Heathrow Airport. According to reports, the individuals had been attempting to leave the country with undisclosed amounts of cash which were intended for distribution in Syria and Gaza. The funds were seized by border police whilst investigations are ongoing. The Charity Commission used the announcement to remind trustees of other charities of their regulatory advice which cautions against cash couriering. The charity protested the action and according to a statement on its website explained that “restrictions and pressures of delivering aid to such (war torn) zones can on occasion require the use of cash to purchase materials, resources or medicine. There are perfectly lawful provisions for the management of such processes…. The (charity) commission has robust procedures which we follow closely”.  

Whilst the enquiry has not yet been concluded, lessons can be learned from the fact that it was opened. A charity may be legitimately utilising its funds for charitable purposes. It may also feel that in order for it to deliver its objectives it must adopt certain procedures. However well-meaning and dedicated trustees are, if due regard is not given to processes set out by the Charity Commission and HMRC, questions will be raised with potentially severe consequences.  

Given the apparent widening of the scope of enquiries being raised by HMRC, what should trustees be aware of? 

1. Gift Aid 

Charities are encouraged to reclaim the tax paid by individuals who have made donations to them. For every £1 donated to a registered charity, the donor will have paid 25p in tax. Charities must ensure that the donor has paid sufficient tax before they reclaim the tax from HMRC and this is generally done by requesting that the donor signs a declaration confirming this. Charities can rely on this declaration for all future donations made by that individual until notified otherwise. A change in circumstances could result in the charity reclaiming tax on donations made by a donor who no longer pays sufficient tax. If this has occurred, charities could find that they have to repay the gift aid claimed to HMRC out of funds which have already been used or earmarked for specific causes. Administratively it is difficult if not impossible for trustees reconfirm the taxable status of each induvial from whose donations tax is reclaimed under Gift Aid. Trustees should remind donors to let them know of any change in their taxable status and may wish to set aside a proportion of the funds reclaimed under Gift Aid should they be required to repay this. 

2. Foreign donations 

Given that institutions abroad are not regulated by the UK authorities, HMRC and the Charities Commission perceive that there is a greater risk that donations made to beneficiaries abroad may not have been applied for charitable purposes. Accordingly, HMRC expect trustees to be able to evidence the procedures and due diligence they have undertaken to satisfy themselves that funds were utilised in furtherance of the charity’s objectives. Unfortunately, HMRC have not specified the steps which they would consider as sufficient for the trustees to undertake in fulfillment of their duties. Instead the legislation requires that the steps to be taken are those which HMRC considers reasonable in any situation. Our advice is for trustees to meticulously maintain detailed records of all stages of the donation cycle – the initial request to the trustees; the factors considered by the trustees when  approving the donation; the steps taken to ensure the funds were received by the recipient charity abroad and the confirmations obtained following the donation that the funds were used in accordance with the original request.  

Charity Trustees have an important legal duty to ensure that their charity’s funds are spent on the charity’s objects. This includes keeping clear accounting records that can evidence exactly where charity money has gone. Transparent reporting in this way is vital for maintaining public trust and confidence in charities. 

By Yedidya Zaiden   
Associate Partner  

If you have a question or need advice regarding responding to a HMRC enquiry, contact our Yedidya at  yedidya.zaiden@raffingers.co.uk  or call us on 0208 551 7200.