We have seen a growing emphasis on the importance of charities maintaining a tax‑focused risk register as part of effective governance and financial stewardship.
Overview
All charities have a duty to ensure that the funds they receive are used effectively and that their assets are protected. An important place to start is to prepare a risk register, identifying issues which could have a negative impact on the charity, its activities and its finances, and recommending safeguards to reduce the risks. The Charity Commission guidance on risk management (CC26) highlights the main risk areas for charities to consider – governance, operational, financial, external and compliance with law and regulation. This article focuses on compliance risk, in particular tax.
Virtually all charities have some tax payment and filing obligations to deal with, whether it be VAT, payroll taxes, corporation tax, Gift Aid, income tax or capital gains tax. Failure to deal with tax correctly can result in penalties, interest, a loss of tax relief or an unexpected tax charge, if appropriate planning is not undertaken. HM Revenue & Customs are undertaking more Risk Reviews so having your house in order is crucial. HMRC are likely to ask to see a risk register when they start their review.
HMRC reviews look at:
- What taxes are relevant to the charity?
- What internal controls are in place?
- Who is responsible for each tax?
- How is fraud prevention addressed?
There is a helpful guide, general approach to VAT compliance controls (GfC8) – which covers VAT risks but also has pointers to general tax risk management. This guide follows the whole VAT process, including dealing with orders, invoicing, receipts and payments, receipt of supply, dispatch of goods or deliver of service, credits notes, employee expenses, recording data to enable reporting and the actual reporting process.
A tax risk register provides trustees and management with a framework to ensure their systems are robust and they maintain a positive relationship with HM Revenue & Customs. For example, a risk register entry for gift aid would generally consider the following:
- Potential risk e.g. inaccurate Gift Aid claims
- Potential impact e.g. underclaim of relief or overclaim with repayment required plus interest and penalties
- Steps to mitigate risk e.g. having a clear step by step process from the receipt of the donation through to the entries on the claim, including ensuring declarations are obtained, benefit threshold are not breached, etc
- Who is responsible for managing each risk e.g. which members of the finance team
- How the risk is monitored e.g. spot checks undertaken, training provided for new team members
- When reviews should take place e.g. on an annual basis, new finance team, new systems
Next steps
Charities should consider these steps for all relevant taxes. Charities with operations overseas may also have tax in other jurisdictions to consider.
It is important that those involved in the day to day finances of the charity are aware of the risk register and follow the processes implemented.
If you would like to discuss your tax risks please get in touch with us.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
