The Common Reporting Standard ('CRS') is an information exchange regime aimed at international tax transparency. Whereas the US Foreign Account Tax Compliance Act ('FATCA') dealt with the exchange of information with the US, CRS further broadens the global trend towards transparency by requiring multi-party information exchange on an international basis. It can have an unexpected impact in administering legacy income, since some legacies that are held for special purposes (or as endowments) will be treated as separate entities for CRS purposes.
The Organisation for Economic Co-operation and Development ('OECD') is responsible for this global regime, which has been implemented at the EU level in a Directive on Administrative Cooperation ('DAC') in the field of taxation. In the UK, the International Tax Compliance Regulations 2015 have been brought in to implement the CRS principles as contained in the DAC. The CRS came into force in January 2016. Over 40 countries have signed up as early adopters of CRS, including the UK, and the first filing took place this year.
CRS is a global regime and applies broadly. CRS applies to all 'Entities', which includes both legal persons and legal arrangements such as partnerships, trusts or 'foundations' (in the civil law sense), and this definition includes charities. A distinguishing feature of CRS is that it has no exemption or 'deemed compliant' status for charities. Any person or entity that maintains any sort of account with a financial institution within a participating jurisdiction is likely to be asked to complete a CRS self-classification form.
In the absence of any exemption for charities, some charities may be classified as 'Financial Institutions' and will therefore be required to report on their non-UK grantees as if they were 'Account Holders' of a bank or investment house. For instance, a charity may be a reporting Financial Institution if its income is predominantly from financial assets and at least some investments are managed externally under discretionary authority.
A charity that is not a 'Financial Institution' will be an 'Active Non-Financial Entity' ('NFE'). Active NFEs have no reporting obligations under CRS. When completing customer information requests from the banks and investment managers with which they hold accounts, they can simply indicate Active NFE (non-profit).
Anecdotally, it is understood that the OECD considered that the risk for tax evasion represented by charities was too significant to exclude them from the scope of CRS. However, it seems as though the impact that CRS would have on the sector was perhaps not immediately grasped. As a practical matter, CRS presents the potential to burden certain types of charities, such as charitable trusts, more than others with onerous administration.
So how could this be relevant to legacy income? Legacies that your charity has received, or receives in the future, for a restricted purpose (or to create an endowment) may lead to your charity holding some of its funds on separate trusts. These trusts may now have their own reporting obligations, even if the charity is not otherwise required to report under CRS. This is because each fund may each be a separate entity for CRS even if you consolidate them for other accounting and reporting purposes. This is because they are technically separate trusts. They are likely to have investment income only and therefore have their own reporting requirements.
We fear that many charities may have overlooked this separate reporting obligation and risk facing an HMRC fine.
We would be happy to speak with you or your colleagues about how to ensure compliance.