Finance Act 2010: a 'fit and proper' definition?

The Finance Act 2010 contained a surprise for charities in the form of a new definition of a 'charity' for tax purposes, writes Victoria Spratt, a solicitor in Hewitsons charities team.

A charity will only obtain the benefit of the tax exemptions available to it if all elements of the new definition are met, one of which is that the trustees of the charity, and other officers such as Treasurers and cheque signatories, are 'fit and proper' persons.

HM Revenue & Customs (HMRC) is empowered to apply the test set out in the Finance Act 2010 each time a charity appoints a new trustee or senior manager. If the test is failed, tax relief can be denied to the charity.

There are two obvious issues arising from this new legislation. Firstly, there is no definition of a 'fit and proper' person, and this is a clear cause for concern.  Charities have no way of knowing for certain if they will qualify for tax relief.

Secondly, even if there were to be a definition of a 'fit and proper' person, it must be queried why the new legislation effectively forces charities to prove charitable status repeatedly in this way to HMRC, especially given that the charities have, in many cases, already had to demonstrate that they are charitable to the regulator, the Charity Commission.

The new provisions may not succeed in detering those based outside the UK who are determined to perpetrate fraud, as HMRC is unlikely to have access to sufficient information from other European countries to be able to carry out thorough checks in all cases.

Although HMRC has produced guidance on how it intends to interpret the 'fit and proper' person test, this will provide little comfort for charity trustees. It is deeply worrying that such a change has been introduced with no public consultation. This would have allowed charities and their advisors to draw attention to some of the flaws in the new legislation, which was rushed through Parliament owing to the timing of the General Election. Hopefully the new Government will now take steps to address the issues raised.

For more information contact Victoria Spratt on 01604 233233 or click here to email her.