Communal and nation-wide charities send millions of pounds each year to overseas causes, attracting significant tax concessions. In recent years, HMRC has increased its scrutiny in this area and is currently shining a spotlight on offshore charity payments.
It is evident that HMRC are seeking to use a small but powerful piece of legislation to devastating effect against trustees and their charities, which leads to their ultimately denying relief on offshore payments.
At the moment many charities are exposed. Ignorance about HMRC’s specific powers in this area means that accidental non-compliance can have costly consequences. It is likely that a significant driver for the increased scrutiny by HMRC are the wider issues experienced by the charity industry including alleged abuses of Gift Aid.
Over the last few years there have been a number of high profile charity scandals. Trust in the industry is at an all-time low. Indeed the Chair of the Charity Commission, Baroness Stowell, recently said that charity organisations could no longer expect to receive the “benefit of the doubt”.
As advisers, our focus is to raise awareness and make sure that this risk from HMRC is known and understood, and secondly to initiate an immediate change in mind-set resulting in a long-lasting change in behaviour and best practice.
At BDO’s recent event held with charity Interlink, Daniel Dover and Talia Greenbaum stressed the powers of the tax authority HMRC to demand supporting documentary evidence for all charity payments sent overseas – or face substantial charges.
Charities were also cautioned to ensure they have a sufficient trail of evidence showing they have carried out due diligence on the beneficiary overseas organisation, as well as adequate monitoring checks on how monies are subsequently spent. The financial penalties for failing to do this are substantial recharge of tax reliefs.
Additionally, it is important that charities are aware of what constitutes a charitable payment eligible for tax relief. Charities misstating income from events, raffles, school fees or similar risk being hit with punitive charges from HMRC.
The key lesson learnt from this is that prevention is always better than the cure. Charities must have in place governance and accounting policies to prevent the crisis happening in the first place. Professional advisers to charities should ensure their charity clients are ready for an enquiry from HMRC.
To discuss how BDO can advise your organisation and trustees, get in touch.
To read more about how we can help, download our guide: