The Finance Act 2010 (“the Act”) introduced a new definition of ‘charity’ for tax purposes.

All charities must be able to:-

• demonstrate that all of its managers, including but not restricted to its charity trustees, are "fit and proper persons", if required by HMRC at any time to do so; and

• advise HMRC of changes to those who deal with HMRC on behalf of the charity.

New charities must also provide certain additional information to HMRC.

The management condition

Intended to reduce fraud in the sector, the management condition requires that charity managers are ‘fit and proper persons’. The managers of a charity are defined as being “the persons having the general control and management of the administration of the body or trust”. HMRC guidance further states that this will include:

• charity trustees and senior managers;
• directors of charitable companies;
• community amateur sports club officials;
• any other officials having day to day control over the running of the charity; and
• any other persons who are able to exert direction or influence over the running of the charity or the application of its assets.

This broad definition means that the management condition can extend to employees who have control over the charity’s tax affairs or the spending of charity funds, and has been widely criticised in the press.

The fit and proper persons test

There is no definition of a ‘fit and proper’ person in the Act, but HMRC guidance states that “an individual is a fit and proper person if they ensure that charity funds and tax reliefs are used only for charitable purposes”.

HMRC will assume that all people appointed by charities are fit and proper persons unless they hold information to show otherwise. When a charity notifies HMRC of the appointment of a new manager, HMRC will carry out checks against the information it holds. When deciding whether a manager is a fit and proper person, factors that HMRC will consider include whether the individual:

• has a history of fraudulent behaviour;
• has been involved in abuse of the tax system;
• is barred from acting as a charity trustee by a charity regulator or Court or is disqualified from acting as a company director.

Provided that a charity takes adequate measures to determine that an individual is fit and proper when they are appointed, they may assume that the person is fit and proper unless challenged by HMRC.

Breach of the fit and proper persons test

Where the fit and proper persons test is not met a charity will not necessarily lose its entitlement to tax benefits. HMRC have discretion to treat a charity as having met the management condition where:

• the failure has not prejudiced the charity’s purposes;
• the manager is unable to influence the charitable purposes or funds; and
• where it is just and reasonable to treat the charity as having met the management condition in the circumstances, if the charity removes the manager from the role which involves dealing with charitable funds or tax matters or puts close supervision measures in place.

HMRC may also exercise its discretion if the charity unintentionally appoints a manger who is not a fit and proper person and the manager misapplies funds. However, the charity must show that it was not aware of the misapplication of funds and that reasonable steps were taken to appoint a fit and proper person.

What should charities do to comply?

HMRC have issued a ‘basic guide for charity managers’ which includes a model declaration. Asking managers to read the guide and sign the declaration is one way in which charities can show it has taken reasonable steps in selecting fit and proper managers.

Ultimately, it is for the charity to decide which vetting methods to use in appointing personnel. However charities must be able to demonstrate, when challenged, that they fully considered the suitability of individuals for roles which involve managing the charity’s funds or tax affairs and that those individuals are fit and proper persons.

Further information

For further information on this or any Charity issue, please contact Anne Swarbrick or Victoria J W Simpson in our charity team.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.