Charities might have to register with US tax authorities, Charity Finance Group warns

Impending Foreign Account Tax Compliance Act in the US likely to treat foreign charities as 'financial institutions', and the Internal Revenue Service could levy tax

Internal Revenue Service
Internal Revenue Service

UK charities could be forced to register with US tax authorities before they can open British bank accounts, if proposed legislation in the US goes ahead, the Charity Finance Group has warned

In a briefing, the CFG says the same piece of legislation could also prevent UK-based aid organisations from transferring money to agencies in the developing world.

The Foreign Account Tax Compliance Act, which is intended to stop tax avoidance by US citizens, will apply to all organisations based outside the US that are capable of taking money from US citizens as "foreign financial institutions".

The definition considers foreign charities to be financial institutions.

The act gives the Internal Revenue Service in the US the power to levy a 30 per cent withholding tax on banks that do businesses with unauthorised organisations.

The CFG says that if the legislation is passed it is likely that banks will require UK charities to get a Fatca number to prove they are authorised organisations.

The UK government has signed an agreement with the US to make compliance less burdensome, which will make HM Revenue & Customs, rather than the IRS, the agency that charities have to deal with.

"Fatca rules have not been finalised, and their implementation has been delayed several times, so we don’t know for sure how it will be implemented," said Melora Jezierska, policy officer at the CFG. "At the moment, though, it appears likely that these rules will apply to any organisation with more than $50,000 [£31,000] in the bank."

She said the CFG had submitted a consultation response to HMRC asking the government to protect UK charities from having to obtain Fatca numbers. It could do this, says the CFG, by making it clear to banks that Fatca numbers are optional for charities, and not requiring organisations to register again if they are already registered with the Charity Commission, the Office of the Scottish Charity Regulator or HMRC.

Jezierksa said charities that wanted to transfer money to unauthorised organisations, including financial institutions in the developing world, might face difficulties because their banks would not be willing to do business with non-compliant institutions in countries such as Sudan.

Charities themselves might be subject to tax on US-based transactions and US income, she said, if they were to transfer money to countries that do not have agreements with the US.

"We’re particularly concerned about the impact on UK charities that work in developing countries where there isn’t much financial regulation," Jezierska said. "All of these proposals are subject to change, but as they currently stand it would be very difficult for charities that work abroad."

Another issue, she said, was that charities would have to register any US branches, investments or "connected persons", such as American trustees, with HMRC.

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