Revised HMRC Guidance On Payments To Overseas Bodies

Until last year, when a charity made a payment overseas, it had to take such steps as were reasonable to ensure the funds would be applied for purposes that are charitable under the law of England and Wales.

The Finance Act 2010 introduced an element of subjectivity to this requirement such that the steps a charity takes no longer have to be objectively 'reasonable', they must be reasonable in the view of HMRC. Some of the uncertainty raised by this new subjective element has been clarified as HMRC has updated the relevant section of Annex II of the Detailed Guidance Notes for charities available here.

Though this guidance comes more than a year after it was promised 'within weeks', it is welcome clarification.

Who does this guidance apply to?

This guidance applies to any charity that sends payments outside the United Kingdom, for example, by making a grant to a foreign partner charity to fund a charitable project.

Why is this important?

Charities enjoy a wide exemption from income or corporation tax but must apply their income and gains for charitable purposes only – any 'non-charitable expenditure' can lead to a tax charge on income which would otherwise have been exempt from tax. In the context of overseas payments, failing to take steps HMRC consider to be reasonable to ensure that funds sent abroad are properly applied for UK charitable purposes could mean that those funds will be treated as non-charitable expenditure.

Reasonable steps

In making payments to overseas grantees, trustees must be clear about the identity of:

the person to whom the grant was paid; the purpose for which the grant is being given; the assurances being given by the recipient that the grant will be properly applied; and the follow-up action to be taken by or on behalf of the trustees took to confirm that the fundswere properly applied. In other words, charities need to ensure that proper pre-grant due diligence is undertaken, records of the results kept and, in most cases, that a written grant agreement is used.

The obligations imposed on overseas grantees need to be proportionate to the risks involved and the scale of the award.

What has changed in the guidance?

The guidance now expressly clarifies that payments abroad for goods or services in the ordinary course of the charity's activities will be 'charitable expenditure'. This was always the common-sense interpretation, but it is useful clarification.

It is helpful that the revised guidance clearly indicates...