Over 200 UK charities have had their US tax exemption automatically cancelled without them even being told, meaning that tax breaks on gifts made to these charities by US donors face being reduced.

There are a total of 218 UK charities so far with revoked US tax status on a list produced by the Internal Revenue Service (IRS), for failing to complete US returns for three consecutive years. The IRS did not contacted the charities directly.

Affected UK charities that have US interests should check to see if they appear on the IRS list (see below) as they could face higher US withholding taxes on their dividend income and on some capital gains. Where they do appear on the list, they can take corrective action, but not before weighing up the professional costs of doing so.

Such professional costs will include filing fees for all forms not previously filed, together with appropriate late filing penalties. This can be weighed up against the likely US withholding taxes that will be incurred from doing nothing, such taxes not being creditable against UK tax.

UK charities seeking backdated reinstatement that have not previously been aware of their entitlement to zero US withholding tax on dividends, may be able to reclaim tax from earlier years.

Clearly, professional advice should be sought before taking any action, or before choosing to take no action, in order that the costs of any decision can be accurately computed.

What to do next

  • Check the list at the EO Select Check page of the IRS website: click on ‘Exempt organisations select check tool’, then ‘were automatically revoked’; then select ‘United Kingdom’ on the ‘Country’ drop-down list.
  • If a UK charity with US interests does not appear, it should ensure that going forward it files any required annual US returns, where not already doing so.
  • If the UK charity finds its name on this list, it must consider whether the costs of reinstatement outweigh the benefits.
  • The UK charity must then also consider whether it should seek prospective or retrospective reinstatement. Prospective is cheaper and simpler, but the interim period of revoked status will be tricky if during that time the charity received gifts or investment income from the US. Backdated reinstatement will require additional professional fees, but once obtained will result in a continuous history of US tax exemption, allowing the charity to avoid penalties or US withholding tax on investment income earned in the interim.

If you would like to discuss the issues raised in this article, please contact a member of our Charities Team.

 
 
 
 
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