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HMRC and international payments

A charity’s general exemption to corporation tax (or income tax for a trust) applies provided the charity applies its income within its charitable objects. However, for payments made outside of the UK there is an additional condition. The charity must be able to clearly demonstrate that it has taken steps that are ‘reasonable in circumstances’ to ensure that the payment is applied with its charitable objects. This condition has always been there but in our experience the practical application of what HMRC deem ‘reasonable’ has not been tested.

In recent weeks we have been contacted by a couple of clients where HMRC have sought specific assurances on how the charity is fulfilling this condition. This may be coincidental or it may prove part of a growing trend.

It is reassuring that the questions being asked by HMRC are consistent with expected good practice for international NGOs in terms of partner due diligence, partner agreements and monitoring and reporting processes. These are controls that we consider on all our international NGO external audits.

However, if there are risks here they apply to charities that do not regularly make international payments but may do so on an occasional basis. And potentially there are risks for charities in international affiliate structures where there may be less rigour in the set up and monitoring processes of a new project by virtue of working through affiliates.

Do not let HMRC have cause to charge your charity tax for these reasons. If you are in any doubt about whether you are managing this risk sufficiently contact either Jonathan Orchard or your SV engagement partner.