Good news for charity managers: your time is free!

Last year I complained about the burdensome and apparently pointless “Fit and Proper person” test, which appeared to require that HMRC be separately notified of every new trustee and manager appointed by every UK charity. Since incorporated charities already need to register every trustee with the Charity Commission and Companies House, I suggested that the sheer quantity of form-filling was becoming off-putting and offensive.

The new rules will mean millions of extra working hours spent form-filling for HMRC rather than delivering public benefit. This is exactly the kind of unnecessary bureaucracy that the “Big Society” agenda should be weeding out.

Since then, the Fit and Proper Persons test has withered somewhat, and the process provides a textbook illustration of the worst possible way to introduce new regulation.

In April 2010 the initial HMRC announcements clearly indicated the kind of tedious burden I mentioned above. Legal firms and advisors ran seminars and workshops in attempts to interpret the requirements; Lords and lawyers campaigned against the test, the Charity Tax Group set up a working party to challenge it, umbrella bodies lobbied for it to be abandoned.

Then in October 2010, HMRC published 5,345 words of further guidance, and a 1,035 word basic guide setting out a revised view of what charities should do. The key measure outlined in the basic guide is a “suggested procedure”, in which every trustee and manager of the charity should sign a declaration stating that they are fit and proper. Naturally this will do nothing to weed out dedicated wrong-doers, but any well run and risk-averse charity will feel the need to perform this charade in order to protect itself if anything goes wrong. In the unlikely event of a trustee being involved in tax fraud, the first question anyone will ask is “did you follow HMRC’s suggested procedure?”

Infuriated by the process and time I’d spent on all this, I decided to cost it. The bulk of time was spent in reading and summarising various HMRC announcements and pieces of guidance for the trustees (and attending events to learn more), then discussing what I’d learned at board meetings. All in all, it added up to around 12 hours of my time, and 1 hour from each of our trustees. The approximate value of all our time to the charity was £1,200.

It is highly unlikely that many other charities will have been through this process with the same rigour, but if they all did, it would cost the sector £200m. Assuming only 1 in 10 charities have done so, the cost to the charitable sector would be £20m. This doesn’t include any of the time spent on the test by lawyers and umbrella groups, which are all ultimately funded by the charities. The figures are worth bearing in mind, the next time you hear someone complain about charities wasting money on admin.

I then put in a Freedom of Information request to HMRC, asking two questions, presented below with answers:

1)   What was HMRC’s own estimate of the cost of the new test?

Our Impact Assessment, published in March 2010, stated our view that we anticipated no additional cost to charities in complying with this new test and we maintain that position.

2)   In how many cases has the Fit and Proper persons test directly led to the removal of a trustee?

“We may sometimes raise concerns with a charity about a particular manager. We have done this on a couple of occasions, and as a result, the manager has left the charity, but there was no formal refusal of a claim to tax relief.”

Just to repeat that: HMRC says the new regulations in their entirety, over 18 months, have not cost charities a penny, and might have prevented fraud on “a couple of occasions”.

In more detail, HMRC’s position is that:

-      Charities didn’t need to do anything in response to HMRC’s initial announcements in April 2010

-      All the other work charities have done to understand the test, its rationale, and its requirements, is unnecessary.

-      The suggested process for charities (as published) along with 6,000 words of guidance is voluntary, so can be ignored.

I think the crucial point here is that charities do not know in advance which HMRC announcements and lengthy pieces of guidance will be pointless. Refusing to read anything from a key regulator, on the grounds that it might turn out to be unnecessary, would be an unwise strategy.

Further, although HMRC claims that most UK charities don’t need to do anything about the test, in fact they will all need to register “responsible persons” in order to make any changes to the charity’s details, e.g. its name, Gift Aid administrator, or bank details. This requires them to complete an “HMRC Charities Variations Form’, which is a Javascript-infested nightmare. All this time is, of course, free in the eyes of HMRC.

From this extensive and unedifying exercise, I think it is safe to conclude that:

1)   HMRC simply does not grasp that reading and interpreting its extensive guidance is an important precaution for charities, and costs time and money.

2)   The Fit and Proper persons test may have led to a tiny number of managers standing down in return for millions of pounds of time (and donors’ money) wasted on pointless bureaucracy.

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