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Charities in Ireland
A number a years have passed since the enactment of the Charities Act 2009 (the “Act”). Most of the provisions of the Act have not yet been commenced. Following a Government consultation with relevant stakeholders in the first half of 2013, the Government confirmed its intention in July 2013 to proceed with the commencement of the provisions of the Act relevant to the Charities Regulatory Authority (the “Authority”) shortly on an ‘interim’ basis with a board expected to be in place by Easter.
It is expected that preparatory work leading to the formal establishment of the Authority is to be carried out during the early part of this year, with the Authority expected to be formally commenced in the second half of the year. This has become the focus of public attention in light of controversy in late 2013 concerning the remuneration of senior executives in the largely State funded health sector bodies, following revelations that executive remuneration in some cases exceeded State guidelines.
In addition, certain changes have been introduced to the tax regime affecting charities since 2009 which will, it is anticipated, simplify procedures.
Key features of the Act
Definition of charitable purpose introduced
The Act establishes the first statutory definition of charitable purpose in Ireland. The categories of charitable purpose are the prevention or relief of poverty or economic hardship, the advancement of education, the advancement of religion or any other purpose of benefit to the community. The Act then details in a non-exhaustive list those purposes of benefit to the community. The definition attempts to mirror those purposes which the Revenue Commissioners currently deem to be charitable when determining charitable tax status.
Additionally, charities will be able to promote a political cause in furtherance of and ancillary to their charitable objects, without risking a loss of their charitable status.
While many lobbied for its inclusion, and it was proposed in both Houses, the promotion of human rights is not included in the list of purposes of benefit to the community.
Register of Charities created
All charities carrying out activities in the State (including those with centres of business outside of Ireland) will require to be included on the Register of Charities. The list of materials which must be presented to the Authority on applying is set out in the legislation.
Importantly, charities currently holding CHY numbers from the Revenue Commissioners will be automatically included on the Register and do not have to apply for registration. New charities seeking registration after the implementation of the Register will have to apply for registration.
Additionally, the Authority has been given the discretion to reduce the volume of registration materials for certain charities where “it would be unduly burdensome on them”. As the list of application materials is quite comprehensive, this will be a welcome amendment for smaller charities with few resources for preparing the materials.
Annual reporting, accounting and auditing requirements introduced
The Act introduces an annual reporting requirement, under which all charities must submit annual returns to the Authority, detailing the activities carried out in the year. The Act also requires charities to prepare annual statements of accounts, and, in certain cases, to have these accounts audited.
Under the Act, if a charity’s gross annual income or total expenditure exceeds €100,000, that charity must submit a full set of accounts to the Authority with its annual return. Charities falling under this threshold need only submit an income and expenditure account and a balance sheet.
A threshold has also been established in relation to the requirement to have accounts audited. That threshold, however, will be established by Ministerial Order, and cannot exceed an annual gross income or expenditure of €500,000. Charities falling under the threshold may have their accounts either audited by an auditor or examined by an independent person who is to be approved by the Authority and has the requisite skills to carry out an examination of the accounts.
There is an important exception to the accounting and auditing requirements for small charities. Charities whose annual gross income or total expenditure is less than €10,000 (or such greater amount as the Minister may determine, but not exceeding €50,000) do not have to prepare annual statements of account, which would normally be submitted with the annual returns, nor do they have to have their annual accounts audited. The same exemption applies to education bodies, who are defined in the Act and include most institutions of education in the State. Importantly, however, all charities in the State are required to keep proper books of account, without exception.
Charity law enforcement regime created
The Act introduces a number of charity law offences and empowers the Authority to pursue breaches of the law and enforce the prescribed punishments. For example, failure to keep proper books of account is an offence under the Act, as is the failure to comply with any order of the Authority in relation to an inspection of a charity’s books or records.
Carrying on the activities of a charity in the State without being included on the Register is an offence, as is falsely holding out a body as a charity. The Authority may bring summary proceedings in respect of all offences, the punishment for which is a fine up to €5,000 and/or twelve months imprisonment. Indictable offences, brought by the Director of Public Prosecutions, are punishable by a fine up to €300,000 and / or ten years imprisonment.
Fundraising provisions updated
The Act largely leaves untouched the current permit regime for public collections of money, but brings the fundraising practices of selling tokens and badges in public and collecting standing orders in public within the remit of the permit regime. Additional requirements regarding the identification of fundraisers and rules about collection boxes are also introduced.
Tax and Foreign Charities
While charities are not obliged to register with the Revenue Commissioners, they will inevitably do so if they receive donations which would otherwise incur a liability to tax.
The Revenue Commissioners recognise charities which are granted tax exemption and are given a CHY reference number. The tax code provides exemption for domestic charities from Income Tax, Capital Gains Tax (“CGT”), Deposit Interest Relation Tax (“DIRT”), Capital Acquisitions tax (“CAT”), stamp duty and Dividend Withholding Tax.
The Finance Act 2010 introduced a regime that would allow non-resident charities apply for a determination under Sections 208A and 208B of the Taxes Consolidation Act 1997 (“TCA 1997”).
It is categorised as a determination, rather than an exemption, on the basis that a non-resident charity will not have a tax liability in Ireland, save in respect of Irish source income, on account of its non-resident status.
The application regime for the DCHY regime will, if successful, result in the overseas charity obtaining a determination that if the body were to have income in the State of a kind from which domestic charities are exempt, then it would qualify for those exemptions. In effect, this levels the playing field in terms of the tax treatment on fundraising income as between domestic and overseas charities.
To be eligible to apply for DCHY status, a body must:-
- Be legally established in an EEA State or in an EFTA State and have its centre of management or control therein;
- Have a minimum of three directors / officers / trustees, the majority of whom must be resident within the EEA or EFTA State and the organisation must have a permanent establishment and some operations therein;
- Ensure that its objects and powers are so framed that every object to which its income or property can be applied is charitable, as defined for Irish law purposes (as noted above); and
- Be bound, as to its main object(s) and the application of its income or property, by a Governing Instrument.
A foreign body which is issued with a Notice of Determination will be given a charity reference number (DCHY). In addition, there are a series of specific conditions which apply to such charities who receive a notice of determination, including account filing obligations, no alterations to its governing instrument without the Revenue Commissioner’s approval and specific restrictions upon its winding up or dissolution.
Donors and Tax Relief
For donations made on or before 31 December 2012 to eligible charities and other eligible bodies, a tiered system of relief applied, depending on whether the donor was an individual or a company. If an individual, the treatment varied depending upon whether the individual was employed or self-employed. For employed individuals, donations over £250 were treated as having been received by the eligible charity or “approved body” net of income tax, such that relief would be given on a grossed up basis to the charity, rather than as a separate claim to tax relief by the donor. For self-employed individuals, the individual claimed the relief and there was no grossing up arrangement. For corporate donations, company claimed a deduction for the donation as if it were a trading expense and again, there was no grossing up arrangement.
A simplification of the rules was introduced in 2013. The old regime highlighted above, continues to apply to donations made up to 31 December 2012. There is no change to the corporate tax relief, companies continue to treat donations as a normal business expense and there is no limit on the amount that can be donated.
The tax refund for donations from all individual donors regardless of their tax status (employed or self-employed) will now go to the charity in all cases at a blended rate of 31%, rather than the prevailing tax rates at 20% (lower rate) or 41% (higher rate).
There is an annual donation limit of £1 million where the donor is an individual (save where the donor is associated with a charity where a 10% of annual income threshold applies), and donations are no longer subject to the high earner restriction relief, because the tax refund goes to the charity in all cases, not to the donor. The first tax refunds will not be made before April 2014 as the timing of refunds for particular donors will depend on when their annual tax liability has been settled with the Revenue Commissioners in the case of PAYE donors that will usually be the end of February for self-assessed donors, mid-November, in the calendar year after the donation was made.
Companies Bill 2012 (the “Companies Bill”)
The Companies Bill which is expected to become law by the end of 2014, and to have its provisions commenced over the following twelve months, has significant implications for charities established as Irish companies. It consolidates Irish company law and forms a significant change in law for companies and their officers. The Companies Bill includes provisions whereby companies limited by shares would have unrestricted corporate capacity. An exception to this principle applies to a designated activity company (“DAC”). Any company which requires to maintain exclusively narrow objects will require to pass an ordinary resolution within a fifteen month period after the enactment of the Companies Bill, in order to convert to a DAC. The passing of such resolution will be important because otherwise the company would be deemed as a matter of company law to be one limited by shares with unrestricted objects.
It is possible to infer the priorities of Government from the public consultation to which we responded in 2013. The consultation sought the view of stakeholders on the priorities which should be pursued in the establishment and maintenance of the Register of Charities by the Authority, indicated an intention to levy a charge, being a modest percentage of annual income on each charity which is required, as a matter of law, to register with the Authority. It also provided an opportunity to stress the importance of adequate resourcing of the Authority, and a smooth transition of the work of the Charity Commissioners under the control of the Authority.