HM Revenue and Customs has defended its decision to include charities in the new common reporting standard, saying the decision will help prevent legal loopholes that allow tax avoidance.
The CRS is an international information standard for the automatic exchange of information and has been developed by the Organisation for Economic Cooperation and Development.
The rules, designed to prevent tax evasion, have been implemented in the UK by HMRC after an EU directive passed the OECD agreement into law. They are due to be implemented on 31 May 2017.
HMRC claims that exempting charities from the CRS would create loopholes that could be misused by those wanting to avoid tax.
But HMRC’s decision to include charities in the CRS prompted a letter from the Association of Charitable Foundations, the Charity Finance Group and the Association of Charitable Organisations to Rob Wilson, the Minister for Civil Society, last month which says that the CRS could force charities to collect information on all grant recipients’ tax residency and report it in a similar way to banks and investment managers.
The letter concludes that this would prove to be a significant "red-tape burden" on charities and "act as a barrier to people approaching charities for help". It also points out that the US and some European countries have not included charities in their CRS regimes.
A spokesman for HMRC said: "The CRS will be implemented in the same way by every jurisdiction involved to prevent loopholes, and only applies to charities who receive the majority of their income through investments.
"The vast majority of charities are set up for legitimate reasons. However, the generosity of tax rules relating to charities can put them at risk of being misused by those who wish to avoid or evade tax. It is important the government does all it can to protect the reputations of charities.
"Exempting charities from CRS would create a significant risk to the effectiveness of the data we receive under CRS, creating loopholes that could be abused and potentially undermining the charity brand.
The spokesman said that HMRC had worked closely with the sector to minimise any additional reporting burden and said that it had found that many of its requirements could be incorporated within charities' existing processes.
"HMRC will continue to work with the sector over the coming months to help them prepare," he added.