The Common Reporting Standard was introduced in early 2016. Charities should make themselves aware of its requirements because they may be falling foul of the law by not complying. This short blog should demystify what the Common Reporting Standard is, how it affects charities and what the practical implications are where it applies.

What is the Common Reporting Standard?

Essentially the Common Reporting Standard (CRS) has been introduced in the UK to prevent tax evasion. The principles of the legislation which introduced the CRS regime are not unique to the UK - they are the result of a drive by the G20 nations to develop a global network of legislation to prevent individuals and entities using offshore structures to evade tax. The CRS is sometimes also referred to as the Automatic Exchange of Information (AEOI).

Who does it affect?

In basic terms, the legal requirements affect UK 'financial institutions' who are required to undertake due diligence on their account holders. The majority of charities will not be affected. However, the definition of 'financial institution' under the CRS is broad and therefore some charities will be included in the definition, for example:

• charities that have an endowment fund where the endowment asset is a portfolio of investments
• those that receive more than half of their income from investments where their assets are managed by a third party (such as a bank or investment manager).

The first potential challenge for charities is that they will have to work out whether or not they are actually required to report. HMRC have produced guidance for charities on the requirements of the CRS and this was updated in December 2017 when the definition of gross income was amended (this is relevant to the assessment of whether an organisation falls into the reporting requirements).

The Association of Charitable Foundations have produced a useful flowchart that charities may find helpful in determining if the requirements of CRS apply to them or not. However, one point to note here is that the definition of Gross Income for CRS purposes is not necessarily the entire income of the charity which is how this term is generally used. Instead it is specifically defined by HMRC for this purpose and their definition was amended in December 2017. There are some brief guides available that explain the changes made and how the definition works in practice.

What will this mean in practice for charities?

Where a charity has established that the requirements of the CRS apply to it, the next job is to ensure the charity is equipped to meet the reporting requirements. The exact requirements will depend on the legal form of the charity - trusts and unincorporated associations have different requirements from charitable companies and SCIOs for instance. However, there are four basic elements that will be relevant: 

1. Carry out due diligence – what is required will depend on the charity’s legal form.
2. Register with HMRC – before a charity can report the required information it will need to register with HMRC as a ‘financial institution’ and will have to register at least 24 hours before it wants to report.
3. Report to HMRC – make sure this is done on time as there are financial penalties for non-compliance
4. Consider human rights and whether the exchange of information could interfere or put at risk the human rights of individuals concerned.

There is guidance from HMRC available on the requirements plus other bite-size pieces of guidance too. However, this is a technical area and charities are likely to find the services of a professional advisor helpful in establishing whether the CRS requirements apply to them and if so to understand exactly what reporting is required. Remember, don't be nervous about seeking help - it's better to ask than to end up with a penalty for failing to meet a legal requirement!