Academies: Are your managers ‘fit and proper persons’?

In February, the National Audit Office (NAO) published a report ‘Converting maintained schools to academies’ which examines whether the Department for Education (DfE) has an effective system for converting maintained schools to academies. In the report, the NAO notes that the DfE does not carry out its own checks to ensure that all academy trustees and senior leaders are ‘fit and proper persons.’

What is the ‘fit and proper persons’ test?

HMRC guidance confirms that it is a statutory requirement (under the Finance Act 2010) which requires that individuals who are ’managers’ of a charity (including exempt charities such as academy trusts) are ’fit and proper persons’ to be managers of such a body. This is known as ‘the management condition’. It exists to ensure that organisations entitled to charity tax reliefs are not managed or controlled by individuals who might misuse the tax reliefs the organisation receives.

‘Managers’ for this purpose is defined as the persons having general control and management of the administration of the charity: this can apply to the charity’s trustees (directors) and also any senior staff who have general control and management over the running of the charity or the application of its assets.

There is no definition of a ‘fit and proper person’ in the legislation, but the HMRC guidance cites examples of factors that may lead HMRC to deciding that a manager is not a fit and proper person, including: where an individual has been involved in tax fraud, identify theft; or where an individual has been actively involved in designing and/or promoting tax avoidance schemes featuring charitable reliefs (and also satisfies the more detailed conditions set out in the guidance); and individuals who have been removed from acting as a charity trustees by a charity regulator; or have been disqualified from acting as a director or charity trustee.

It does not necessarily follow that individuals who are considered by the Charity Commission to be suitable to act as trustees of charities will always be considered to be fit and proper persons by HMRC. This is because different charity regulators have different responsibilities and priorities from those of HMRC and therefore carry out different sorts of checks. Also, HMRC has access to certain information that is not available to the Commission. To ensure a consistent approach, HMRC tailors its checks to cover areas not covered by the Commission and considers additional information to which the regulators may not have access.

HMRC will generally assume that charities have given proper consideration to the suitability of their managers. It applies a risk-based approach and carries out full checks where there appears to be a high risk of non-compliance, including where it receives information of potential fraud. However, HMRC does expect a charity to be able to show, if asked, that it has given proper consideration to the suitability of its managers. Charities can devise their own procedures to ensure compliance or they can follow the procedure set out in the HMRC guidance which involves individuals in relevant positions reading and signing a model declaration. Using the help sheet and model declaration will mean that a charity can assume that they meet the management condition

Academy trusts need to ensure that they are carrying out appropriate checks on their trustees and senior managers as well as other pre-appointment checks. Compliance should be fairly straightforward using the guidance and model declaration produced by HMRC. If an academy trust knows a person may fail the fit and proper persons test they should seek early advice from HMRC about what to do to prevent any loss of tax reliefs.