HMRC 'FIT AND PROPER PERSONS' TEST

Updated 20/11/10. This information updates s.50.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
From 1 April 2010, any charity or community amateur sports club (CASC) recovering tax on gift aid donations must satisfy HM Revenue & Customs that it meets the "management condition" set out in schedule 6 of the Finance Act 2010. From 2012 the same rule will apply to charities and CASCs claiming other tax reliefs and tax exemptions.

The stated intention is to reduce the risk of people setting up sham charities to claim tax reliefs, and the risk of charitable/CASC funds and tax reliefs being used for non-charitable/CASC purposes. But the main reason for the legislation is because the European Court of Justice ruled that a donor in one EU state should be eligible for tax reliefs on donations in another EU state, so the EU now needs to ensure that all charities eligible for tax relief anywhere in the EU are legitimate.

As well as meeting the management condition, charities must also meet a registration condition, which means they must comply with any requirement to be registered with the Charity Commission, the Office of the Scottish Charity Regulator, or any comparable registration body in an EU member state.

The management condition requires managers — governing body members and others who are involved in claiming tax reliefs or who are able to exert control over how the charity's or CASC's funds are used — to be "fit and proper persons". "Fit and proper" is not defined in the legislation, but HMRC says a person is fit and proper if he or she ensures that funds and tax reliefs are used only for charitable or CASC purposes.

Managers include:

• the authorised official, a person within the charity or CASC notified to HMRC as authorised to deal with tax affairs, make gift aid or other repayment claims and, where necessary, sign and submit tax returns;
• a nominee, if any — a person or organisation outside the charity or CASC, who is authorised to submit gift aid or other repayment claims;
• between two and four responsible persons, who will generally be members of the governing body. This requirement was changed in July 2010; prior to this HMRC had defined all governing body members and cheque signatories as responsible persons.

GIFT AID ON DONATIONS TO CHARITY SHOPS

Added 11/7/10. This information updates s.50.2.2.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
A new guide explains in detail how gift aid can be claimed on donations of goods to charity shops. It provides illustrations of appropriate accounting treatments, as well as background information on other tax and VAT issues and the legal framework affecting different types of shop activities. Written by Sayer Vincent for Help the Hospices, this guide is relevant to all charities running their own shops. It can be downloaded via tinyurl.com/3vp52ks.

TAX EXEMPTION FOR PAYROLL GIVING INCOME

Added 22/5/10. This information updates s.50.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Under the Finance Act 2010 schedule 8 para.1, new rules on tax relief apply to donations made on or after 24 March 2010 through payroll giving. As is already the case with other donations to charities, the charity is liable for tax on the income, and can exclude the donation from taxable income only to the extent that it is used for charitable purposes. Charitable companies (which in this context includes charitable associations, but not charitable trusts) must make a claim for exemption from corporation tax on eligible payroll giving income.

Schedule 8 is at www.opsi.gov.uk/acts/acts2010/ukpga_20100013_en_15.
The explanatory note is at www.opsi.gov.uk/acts/acts2010/en/ukpgaen_20100013_en_6.
Details are available from HMRC Charities on 0845 302 0203 or charities@hmrc.gov.uk.

ISSUES IN CHALLENGING LEGACIES

Updated 1/12/10. This information updates s.50.6.4 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
Gifts in wills may be challenged in the courts by anyone, but this is most commonly done by relatives who feel they have not been provided for, or by a charity or other party who believes the will is invalid or has not been properly administered.

Two recent cases, both involving the RSPCA, illustrate the issues in charities challenging wills, the importance of getting legal advice at a very early stage and considering mediation as an alternative to litigation, and the importance of encouraging supporters who are or might be leaving legacies to discuss this with their family.

In Gill v RSPCA, Dr Christine Gill challenged her mother's will which left her farm, valued at approximately £2.1 million, to the RSPCA, disinheriting Dr Gill. Prior to the case coming to trial there had been a series of offers, ranging from the RSPCA offering £50,000 and Gill saying she wanted the farm but would give £500,000 to the RSPCA, to the RSPCA offering £650,000 and her legal costs, to her saying she would settle for part of the land with the RSPCA keeping the rest of the estate, including land valued at £1.06 million. Throughout these offers and counter-offers Gill had consistently asked for mediation, and the RSPCA had refused.

When the case came to court Dr Gill argued that her father had put her mother under undue duress in making her will, that both of her parents had repeatedly promised her that she would inherit the farm, and that she had put curtailed her own career to look after her parents. In its decision on 9 October 2009, the court set aside the will. This decision is at www.bailii.org/ew/cases/EWHC/Ch/2009/B34.html.

In a separate judgment on costs on 7 January 2010, the court said that the RSPCA, partly because of its unwillingness to mediate, would have to pay its £400,000 legal costs and most of Gill's £900,000 costs. The decision does not appear to be on BAILII but can be accessed via tinyurl.com/2bzc4qk.

When Dr Gill challenged her mother's bequest to the RSPCA, the RSPCA's trustees had a duty to protect the bequest due to them as part of the charity's assets — but also had a duty to act in the interests of the charity. We can't know their reasons for going to court without even trying mediation, but this case provides a lesson in what can happen.

The RSPCA appealed but on 14 December 2010 the court of appeal upheld the high court's decision in Gill's favour, saying that the will was invalid because Mrs Gill suffered from a rare mental condition which meant she would not have known and approved the contents, she had been very fond of and dependent on her daughter, and that she had no apparent previous connection with the RSPCA and had been derogatory about them.

This decision is at www.bailii.org/ew/cases/EWCA/Civ/2010/1430.html .

Only six weeks after the costs decision in Gill, the RSPCA was criticised on 19 February 2010 in another legacy case. In this one Mr Mason left a house worth £169,000 to his friends Mr and Mrs Sharp, with the condition that any inheritance tax on the property should be paid from his residual estate. From his pecuniary assets of approximately £780,000 he left legacies to his brother and the Sharps totalling the maximum amount he could leave tax-free at the date of his death (£300,000). The residue of his estate was left to the RSPCA.

The Sharps received the house and their share of the tax-free amount, and the brother received his share of the tax-free amount. This left inheritance tax on the house to be paid out of the remainder.

The RSPCA challenged this, saying the £169,000 value of the house should have been included within the £300,000 tax-free amount — so only £131,000, not the full £300,000, should have been divided between the three beneficiaries. This interpretation of the will would have increased the RSPCA's share from approximately £370,000 to £650,000.

The judge found that the wording of the will was clear and added, "It is a matter of regret in my view that this action was ever brought. ... I know it is said that Trustees of charitable organisations are required to maximise the return for their charity but I really wonder whether the discharge of that duty required this action to be brought. In my view the RSPCA ... ought really to have considered that the residuary legacy that I have determined it is entitled to was generous and ample provision out of this estate."

The decision in RSPCA v Sharp & others is at www.bailii.org/ew/cases/EWHC/Ch/2010/268.html.

For summaries and articles about cases, do a Google search on key words in the case name or content.