Article:

Charities Bill Briefing - proposed changes

09 September 2021

The introduction to the bill states that “Charities legislation is commonly perceived as being complicated, uncertain and in places unduly burdensome. This can delay or prevent a charity’s activities, discourage people from volunteering to become trustees and force charities to obtain expensive legal advice. It also hinders the Charity Commission in its regulation of the sector”.

The bill aims to address some of those issues by addressing the Law Commission’s recommendations set out in 2017, and covers England and Wales only, subject to certain exceptions.

The Charity Commission has highlighted the following proposed changes:

  • charities and trustees will be able to amend their governing documents or Royal Charters more easily – remaining subject to the Commission and the Privy Council’s approval in certain circumstances
  • charities will have access to a much wider pool of professional advisors on land disposal, and to more straightforward rules on what advice they must receive, which could save them time and money when selling land
  • charities will have more flexibility to make use of a ‘permanent endowment’ – this is money or property originally meant to be held by a charity forever. This includes a change which will allow trustees to borrow a sum of up to 25% of the value of their permanent endowment funds, without the Commission’s approval
  • trustees will be able to be paid for goods provided to a charity in certain circumstances, even if not expressly stated in the charity’s governing document (currently trustees can only be paid for supply of services). From pencils to paint, this will allow charities the flexibility to access goods from trustees when it is in the best interests of the charity (e.g. if cheaper), without needing Commission permission
  • charities will be able to take advantage of simpler and more proportionate rules on failed appeals. For example, if a charity appeal raises too little money, the charity will be able to spend donations below £120 on similar charitable purposes without needing to contact individual donors for permission

We set out below a more detailed analysis of the Bill, and provide comment on each part, focussing on the financial reporting and fiscal implications.

Purposes powers and governing documents

Clauses 1 – 5 increase the ability and flexibility of all types of charity ( e.g companies, trusts, CIOs, Charter bodies) to amend their constitutions, powers or objects. Essentially any alteration to the purposes or objects which do not alter the substance of the charitable purposes of the company will not constitute a "regulated alteration". It also creates a more consistent platform for the Commission in deciding on changes to charitable constitutions across all types of entity.

Comment: charities are not able to do what they like - trustees need to act within their constitutions and change them if necessary. They should check regularly that governing documents are still fit for purpose. Operating outside the governing document may constitute non charitable expenditure, leading to a potential tax liability.

Clauses 6 -7 increase charities’ ability to apply “failed donations” cy pres, subject to specific procedures. This may apply where it would be expensive to repay funds, the amounts involved are small (annual donation per donor < £120), or there are untraceable donors. The same principles will apply to fundraising appeals under £1,000, after which Commission consent is required.

Comment: where donations are received for particular purposes, the trustees are not free to use those funds for other purposes without proper consideration. Restricted funds may therefore become liabilities.

Clause 8 is a technical change to Commission’s power re schemes

Clauses 9 -13 address various aspects of permanent endowments. Clause 9 defines a permanent endowment more clearly, namely if it is subject to a restriction on expenditure which distinguishes between income and capital. The power to release permanent endowment  will depend entirely on the value of the permanent endowment, up to a new threshold of £25,000.Clause 10 formally extends the power to release endowments to include limited companies, and tidies up other procedural anomalies, and other clauses tidy up aspects of the Commission’s role and involvement. Clause 12 allows charities’  to borrow up to 25% from an endowment without seeking Commission consent.  Any repayments may include capital appreciation based on a statutory formula. Clause 13 allows charities who operate their permanent endowment on a total return basis to invest in social investments, which would otherwise constitute spending capital.

Comment: this may be a good opportunity for trustees to consider the terms on which they hold assets, and consider whether they are getting endowed funds right, especially under the revised, clearer definition. Trustees can also consider whether there are more options in how to apply their funds than they had assumed.

The accounting presentation around total return accounting and social investments can be complex individually. This change will combine two areas of complexity.

Clause 14 – technical amendment

Clauses 15 -16 permits trustees to make small ex gratia payments there is a moral obligation but no legal power to make the payment. Previously this would require Charity Commission consent. How much may be paid out depends on the charity’s size ((between £1,000 and £20,000 max., for charities with income over £1million.)  Where Charity Commission consent is required, clause 16 formalises the test as to whether the trustees "could reasonably be regarded" as being under such an obligation.

Comment: often payments made by charities are not actually ex gratia, but based on some sort of commercial compromise. Nonetheless, trustees need to be aware that using funds outwith their charitable purposes always require careful consideration. Ex gratia payments require disclosure under the Sorp (9.24), even if consent has been obtained, unless they consist of flowers or chocolates.

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Land disposals

Clause 17-18 address the strict rules that apply charity land disposals. Clause 17 clarifies that restrictions on disposals of land only apply to land where the whole of the land which is being disposed of is held beneficially by a charity solely for its own benefit (if it is a corporate charity) or in trust solely for that charity (if it is an unincorporated charity). Various specific scenarios are addressed in clause 18: liquidators’ powers, the consent of the Secretary of State under the Universities and College Estates Act 1925; and when a disposal is neither (1) a commercial transaction nor (2) a social investment. This last point is to ensure that in cases where the price obtained as a result of the disposition is a motivating factor (even if only a partial one in the case of a social investment) charities will have to comply with the advice requirements in the Act designed to protect against disposals at an undervalue.

Other changes relating to land include the removal of the requirement to advertise a proposed disposition as advised in the surveyor’s report (Clause 19) There is an extended category of advisers who can provide advice (clause 20), and these could include trustees and employees (clause 21), a relaxation on the rules where short term leases are granted to employees, who are otherwise connected parties (clause 22). There is a technical requirement for statements about compliance with charities act requirements to be included in the contract and the conveyance (clause23).

Comment: trustees should always check their powers and the terms on which they hold properties before making any decisions on disposal - this is a complex area. The rationale for a disposal may alter how such a transaction is presented in the accounts and annual report. Trustees should be aware of the requirement to disclose related party transactions, and the specific transactions that fall outside the disclosure requirements.

Clause 24 replaces numerous and complex powers in the Universities and College Estates Act 1925 Act with a consolidated general statutory power in respect of land transactions, removes the requirement to obtain consent from Defra prior to entering into certain types of transaction, and removes restrictions and powers in relation to dealing with capital money.

Comment: the definition of charity extends beyond those that are registered with the Charity Commission or country regulator. Trustees should ensure they understand the framework applying to their own organisation and those with whom they conduct business. In some cases, this could have indirect tax implications, such as SDLT or VAT.

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Charity Names

Clause 25 confers enhanced powers on the Charity Commission to require charities to change, or stop using, unsuitable names, whether their formal name, or a working name, and makes the regime consistent across the various legal constitutions used by charities. Additionally, clauses 26 and 27 allows the regulator to delay registration of a charity if a name change is required. The same powers are now extended to exempt charities under clause 28, subject to consultation with the principal regulator.

Comment: charities often operate under working names, rather than their formal registered name. Trustees may wish to consider whether or not that is desirable or whether there is proper due process over name use – for instance a trading subsidiary may be using the intellectual property of the charity without proper consideration.

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Charity Trustees

Clause 29 allows the Commission to resolve uncertainties or defects in the appointment or election of charity trustees. To facilitate this the Bill introduces the concept of a qualifying position, as a catch all to define the trustee role across different types of charity. This is a stand-alone power for cases where there is uncertainty about the validity of an appointment or election (or it is known that the appointment or election was invalid), so as to avoid the need to repeat the appointment or election process.

Clause 30 provides that in future trustees can be paid for goods, as well as services, and that this statutory power can be relied on generally unless the constitution expressly prohibits such payments.

In addition, clause 31 gives the Charity Commission a power to order a charity to remunerate a trustee (or to authorise a trustee to retain a benefit already received) where a trustee has done work for the charity; and it would be inequitable for the trustee not to be remunerated for that work (or not to retain the benefit received in connection with that work). Previously this would have required a court order.

Clause 32 confers trust corporation status any trustee of a charitable trust that is a body corporate and itself a charity, in its capacity as trustee of a charitable trust.

Comment: the law does not currently permit trustees to be paid for the provision of services as a trustee, nor to be paid as an employee of the charity. That position is not changed by clause 30.

Any payments to trustees will be subject to tax in the normal way, so trustees should ensure that any amounts agreed take the relevant tax into consideration. Payments to trustees require disclosure in the accounts, and references to open market value need justification.

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Charity mergers

Clause 33 enables gifts to a charity which has since merged (as part of a "relevant charity merger") to be treated as a gift to the new charity. This will be the case even where the gift specifies that it will only take effect if the charity continues to exist on the date the gift takes effect. Clause 34 expressly excludes leases containing an absolute covenant against assignment from vesting declarations. Clause 35 addresses a rare combination of termination clauses and endowments to ensure a merger is still effective in law.

Comment: this should reduce the scope for uncertainty or disputes, especially in relation to legacies left to charities that have since merged and make mergers easier in some cases. This may increase legacy receivables in new charity groups - merger accounting is applicable in certain circumstances for charities.

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Legal proceedings

Clause 36 gives the Charity Tribunals power to make an "authorised costs order" ("ACO"). An ACO will provide charity trustees with advance assurance that any legal costs that they incur in proceedings before the Charity Tribunal are a proper use of the charity’s funds and will therefore be payable from the charity’s funds.

Comment: charity trustees cannot always initiate legal proceedings and incur costs without the power to do so. Legal costs incurred that relate to the trustee role itself would be disclosed as governance costs, but otherwise would be allocated to the relevant activity.

The bill contains a further 5 clauses dealing with consequential amendments and general matters.

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Conclusion

The proposals are all welcome, but they are also a reminder to trustees just how complex the regulatory regime is for charities. The above summary is not legal advice, and trustees need to take professional advice when dealing with such matters. As well as the legal considerations however, trustees should not overlook the potential tax implications, or the fact that one a proposed course of action has been adopted, it will need to be disclosed and accounted for in the year-end report and accounts. Trustees should also consider these factors in their decision making.

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