A significant administrative burden could be placed on the sector if charities are obliged to collect and share tax information under a new common reporting standard, three charity bodies have warned.
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 HM Revenue & Customs after an EU directive passed the OECD agreement into law.
But in a letter to Rob Wilson, the Minister for Civil Society, which was also sent to the three UK charity regulators and Damian Hinds, the Exchequer Secretary to the Treasury, the Association of Charitable Foundations, the Charity Finance Group and the Association of Charitable Organisations express concerns that the standard is being interpreted in a way that requires charitable funders to collect and report tax information on grant-holders.
The letter says that unlike similar CRS regimes in the US and some other European countries, charities have not been exempted from the new tax transparency rules by HMRC.
Under the CRS, some endowed charities could be regarded as "financial institutions", which the letter says will force them to collect information about their grant recipients’ tax residency and report on it in a similar way to banks and investment managers.
The letter argues that the information needed to do this is not currently collected by charities, will "require changing all grant agreements and forms to be able to include this additional information" and will make it necessary follow up with beneficiaries if they do not have the right information to hand.
While the onus is on the recipient of a grant to certify their tax status, the sanction will fall on the charity involved if the recipient fails to comply, the letter says.
There is also a risk that the requirement for tax information will "act as a barrier to people approaching charities for help" and could turn the relationship between charities and beneficiaries "into something akin to setting up a bank account", the letter says.
It continues: "In practical terms we believe that, because charities work with hard-to-reach groups, many beneficiaries will find it difficult to provide even the most minimal self-certification demands."
The letter says that implementing the CRS will require significant resources and might be beyond the capabilities of small charitable funders.
The letter argues that unlike organisations in other affected sectors, such as banking, charities have had no time to prepare for the implementation of the CRS on 31 May 2017.
This means that charities will have to start collecting information already in advance of the implementation, the letter continues.
"The red tape burden is potentially so great, the rules so difficult to interpret and the implications so tricky in terms of human rights and data protection law, that we believe there is a very real risk that many funders will scale back grant-making for those most in need on account of a regime designed to monitor the affairs of the world’s wealthiest individuals and corporations," the letter says.
"We cannot believe that this is the government’s policy intention and urgently seek your help."