Charity Bites: Match Fit? Would Your Directors Pass The New HMRC Charities 'Fit And Proper Persons' Test?

Until recently, this was a question that you'd be more likely to hear in the boardrooms of professional football clubs, where the "fit and proper persons" test is undergone by owners and directors (mandated by the Premier League, the Football League and the Football Conference), in the hope of preventing clubs from falling into the hands of corrupt or untrustworthy businessmen. Since its introduction in 2004, there have been some headline-making examples of owners and directors falling foul of the test, such as Stephen Vaughan, who was disqualified as a director of Chester City in November 2009 following his conviction in a £500,000 VAT fraud case.

Now the managers of charities are also having to face a fit and proper persons test in order to qualify for charity tax relief - a move which has already sparked a great deal of debate, comment and confusion.

Why?

In March 2010, the UK Government announced that UK charitable tax reliefs - previously restricted to UK resident charities - were to be extended to eligible charities established in Europe. This meant that new measures were required to ensure that these reliefs were used only for charitable purposes.

In order to achieve this, the Finance Act 2010 stipulated new conditions that organisations must fulfil before they could be recognised as a charity for tax relief purposes, the most controversial of which was the 'management condition' - or the fit and proper persons test for managers of charities. There have been substantial complaints and widespread concern about the new test, particularly with regard to the lack of clarity around what is actually required, and the increased administrative burden that it imposes.

Who does the test cover?

The term "managers" is defined by the Finance Act 2010 as "the persons having general control and management of the administration of a charity". If this sounds familiar, that is because it is precisely the same wording as the definition of "charity trustee" in the Charities and Trustee Investment (Scotland) Act 2005. However, it is important to note that the guidance issued by HMRC indicates that they will be applying the term more broadly: -

The term "manager"... for the purposes of this legislation, applies to the trustees of charities, directors of corporate charities, CASC officials, and any other persons having general control and management over the running of the charity or the application of its assets... For example: in a typical small local...