Opinion

The Common Reporting Standard – Three Years On

9th May 2019

The Common Reporting Standard – Three Years On

The Common Reporting Standard (“CRS”) came into effect in January 2016 and aims to reduce tax evasion by providing a co-ordinated approach to the exchange of information on an international level.

Some three years on and this is still an issue that some charities are getting to grips with. The CRS regime applies differently to unincorporated and incorporated charities and you need to understand how it applies to your charity.

Is your charity caught by the regime and do you fully understand your obligations?

Over 100 countries, including the UK and all EU member states, have signed up to the CRS regime. At the moment it seems unlikely that Brexit will impact on the UK’s commitment to implementing CRS.

Which charities does CRS apply to?

In very broad terms, the CRS regime is most likely to impact on charitable trusts which generate most of their income from investments.

Broadly, there are three stages involved:

1. Is Your Charity a Financial Institution?

Those organisations which meet the definition of “Financial Institution”, including charities, must carry out due diligence and report on financial accounts to HMRC, where required. Typically this will involve reporting on grant recipients for charities. There are penalties for non-compliance.

Investment Entity

Charities to which CRS applies are most likely to be "Investment Entities" (a type of Financial Institution).

Your charity will come under the "Investment Entity" definition if:

  • more than 50% of its gross income comes from investments; and 
  • any of those investments are professionally managed by a "Financial Institution", such as a bank or investment manager, on a discretionary basis; and
  • it has been this way for at least three years or since its inception.

However, if most of your charity’s income comes from donations and grants then you are unlikely to be a "Financial Institution", and if so, you may not be subject to these requirements. 

2. Due Diligence

If your charity is a "Financial Institution", you need to collect due diligence information on each of its Account Holders (anyone with a debt or equity interest in the charity, which is usually a grant recipient for charitable trusts) so it can report on those who are tax-resident outside of the UK.

This can be done by requesting information during your grant application process and needs to include information about a grant recipient's tax residency status.

3. Reporting

If your charity falls under the CRS regime it will be required to keep records and report to HMRC annually by 31 May, if necessary.

If an Account Holder (for example a grant recipient) pays tax in the UK only, then there is no need to report to HMRC but you still need to retain evidence of the due diligence information obtained. If they are tax resident overseas you may need to report to HMRC so they can share the information with the tax authority where they are tax resident.

Penalties for non-compliance apply. When the regime originally came into effect, the HMRC confirmed a “soft-landing” for charities where efforts have been made to carry out due diligence and report accurately. However, three years on there is no room for complacency and it is important trustees are aware of and understand these obligations.

The CRS regime has the greatest impact on charitable trusts and charitable unincorporated associations which meet the Investment Entity definition above. Once again the regulatory and administrative burden on charitable trusts has increased and for many charities this has re-ignited discussions about incorporation.

The CRS regime is complex and this article is intended to be an introduction. Action is needed now to make sure your charity complies and charities should consult HMRC guidance and take professional advice where required.

The experts in Higgs & Sons Charity and Not for Profit team can assist charities with understanding how the CRS regime affects them and what action the trustees need to take to comply.

 

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