The Fit And Proper Persons Test

The Finance Act 2010 ("the Act") introduced a new definition of 'charity' for tax purposes.

All charities must be able to:-

demonstrate that all of its managers, including but not restricted to its charity trustees, are "fit and proper persons", if required by HMRC at any time to do so; and advise HMRC of changes to those who deal with HMRC on behalf of the charity. New charities must also provide certain additional information to HMRC.

The management condition

Intended to reduce fraud in the sector, the management condition requires that charity managers are 'fit and proper persons'. The managers of a charity are defined as being "the persons having the general control and management of the administration of the body or trust". HMRC guidance further states that this will include:

charity trustees and senior managers; directors of charitable companies; community amateur sports club officials; any other officials having day to day control over the running of the charity; and any other persons who are able to exert direction or influence over the running of the charity or the application of its assets. This broad definition means that the management condition can extend to employees who have control over the charity's tax affairs or the spending of charity funds, and has been widely criticised in the press.

The fit and proper persons test

There is no definition of a 'fit and proper' person in the Act, but HMRC guidance states that "an individual is a fit and proper person if they ensure that charity funds and tax reliefs are used only for charitable purposes".

HMRC will assume that all people appointed by charities are fit and proper persons unless they hold information to show otherwise. When a charity notifies HMRC of the appointment of a new manager, HMRC will carry out checks against the information it holds. When deciding whether a manager is a fit and proper person, factors that HMRC will consider include whether the individual:

has a history of fraudulent behaviour; has been involved in abuse of the tax system; is barred from acting as a charity trustee by a charity regulator or Court or is disqualified from acting as a company director. Provided that a charity takes adequate measures to determine that an individual is fit and proper when they are appointed, they may assume that the person is fit and proper unless challenged by HMRC.

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