Charity concert

For an organisation to be registered as a charity under the law of England and Wales, it must be able to demonstrate that its aims are for the 'public benefit'. The Charities Act 1993 (as amended by the 2006 Act) does not contain any definition of public benefit or suggest what charities should do to demonstrate that their aims are for the public benefit. The Charity Commission is responsible for explaining the public benefit requirement and applying it. Charities may only provide 'private' benefits to people other than their beneficiaries if those benefits are incidental. They will be incidental if it can be shown they directly contribute towards achieving the charity's objects or are a necessary result of or by-product of carrying out those objects.

These issues of private and public benefit were considered by the commission recently in its scrutiny of the Andrew Lloyd Webber Art Foundation. The trustees of the foundation were criticised for failing to manage the conflicts of interest in respect of transactions between the founder, Lord Lloyd Webber, and the foundation, and for not doing enough to displace the perception that the founder was deriving private benefit.

Taxing Cecilia

The object of the foundation was to 'advance the education of the public in the knowledge, understanding and appreciation of the arts generally and in particular in the field of painting' by lending its artworks to galleries and exhibitions for public display. It was funded by personal donations from the founder and income from licence agreements between the founder and the foundation, which enabled him to hold the paintings for personal use when not on public display.

The commission provided advice to the foundation on a number of occasions and, in particular, advised in relation to transactions involving the founder and the management of any conflicts that arose from them. In 2003, as part of its Review Visits programme, the commission strongly recommended the appointment of additional trustees with no personal connection to Lord Webber. The trustees sought professional advice and decided that additional trustee appointments did not need to be made at the time.

The commission subsequently became aware that the Lord Webber and his charity were the subjects of a challenge by HMRC in 2008. The objection revolved around the amount paid to the foundation by Lord Webber as a licence fee for a painting, St Cecilia by J W Waterhouse. The dispute was settled in 2009 with the accounts showing £1.47m paid to HMRC in settlement.

This challenge by HMRC gave rise to regulatory concerns for the commission regarding the governance of the charity and as a result a statutory inquiry under section 8 of the Act was opened. A section 8 inquiry may be instigated as a result of, for example, information in the press, complaints from trustees, employees or the public, concern from a funding body or from the commission's own monitoring of accounts. The commission has extensive powers under section 18 of the Act where it is satisfied there has been any misconduct or mismanagement in the administration of a charity; this includes suspension or removal of some trustees and the appointment of new trustees. In practice, the commission does not usually open a formal inquiry unless it sees the need to use its powers under section 18. It will usually use its powers under its general objectives to enquire into a charity's activities informally. In this case, because of the high level of cooperation from the trustees throughout, the commission concluded that on the basis of assurances given by the trustees, no further regulatory action was required.

Access all areas

The commission decided that the foundation had a clear charitable purpose. The foundation's activities of purchasing and displaying paintings was capable of furthering its charitable purposes, subject to meeting the public benefit test. The commission came to the conclusion that there was a clear benefit flowing from the foundation's activities for those people who viewed the paintings while on public display. It found that there had been sufficient public access to the paintings notwithstanding the times the artwork was held by the founder under the licence agreements.

The most obvious way of satisfying the public accessibility aspect of the public benefit test was for the public to have direct physical access to the paintings. Overall, the foundation's paintings had been sufficiently displayed and on the occasions when the paintings were not on public display, the trustees had generally been able to demonstrate why this was the case. The inquiry accepted that where the paintings were on loan to galleries and exhibitions, the trustees had little control over how long an individual gallery would retain a painting. The commission therefore recommended that future loan agreements with galleries and exhibitions should include a mechanism whereby the foundation is notified where a gallery or exhibition is unable to hang the painting publicly for a significant period of the loan agreement.

Before the inquiry, the trustees had been operating on the basis that three months of the year was a sufficient minimum period for the foundation's paintings to be displayed. The inquiry made it clear to the trustees that there is no such minimum period. The starting position should always be that the paintings are on permanent display subject to legitimate constraints.

Perception of private benefit

For periods when the trustees could not find a gallery or exhibition to display a painting, they had entered into licence agreements with Lord Webber to enable him to hang the painting privately on payment of a licence fee and the costs of insurance and security. The commission acknowledged that a licence agreement under these circumstances was a cost-effective alternative to paying for private storage and insurance costs but scrutinised the frequency of these agreements. The foundation's governing document allowed it to enter into transactions where one or more of the trustees had an interest subject to certain conditions; for example, at least one of the trustees must have no interest in the transaction being considered and an independent valuation must be obtained.

Evidence was provided to show that an independent valuation from a reputable specialist auction house had been obtained which had specified the fee to be paid by the founder. Despite this, the commission found that the number and frequency of transactions between the founder and the foundation created a 'perception' that the founder was receiving a private benefit. In particular, the commission found that the trustees' decision to display the St Cecilia painting during performances of the founder's musical, Woman in White at London's Palace Theatre further enhanced this perception. The clear links between the musical and the founder created the perception that the painting was being used to support a private venture of the founder. The commission was also concerned that paintings had been recalled from public display to the founder's private collection, on some occasions to coincide with private visits from academics, parliamentarians or foreign visitors who were viewing the collection. The commission took the view that paintings on public display should not be recalled in this way as this was a private benefit not legitimately incidental to the foundation's objects.

The trustees confirmed that there was no exclusivity to the founder in relation to the licence agreements, although it was found that this did confer a private benefit on the founder. The number and frequency of the licence agreements and the fact that agreements had never been entered into with third parties created an overwhelming perception that the founder was receiving a private benefit.

Cast and crew

The original composition of the governing body had been Lord Webber, his wife and a partner in a law firm which advised both the founder and the foundation. The commission acknowledged that there was no legal bar to a composition of this sort but stated that where there is a small trustee body and transactions involving trustees, it can become difficult to manage conflicts of interest properly.

Although the trustees had the power to enter into such transactions, the onus was on them to demonstrate that it was in the best interests of the foundation. Close inspection of the minutes of trustees' meetings showed that the conflicts of interest were not formally declared by the trustees and the conflicted trustees participated in decisions on transactions involving the founder. Generally, trustees must declare any interest and unless there is a provision in a charity's governing document or an established policy on managing conflicts, trustees should remove themselves from voting on relevant decisions.

The inquiry accepted that the independent valuations obtained provided some level of protection but found this was not sufficient to safeguard the trustees' decisions from challenge. The commission recommended the appointment of independent trustees. Four new trustees were subsequently appointed, three being independent of the founder. The commission criticised the foundation for not acting on its earlier advice to appoint independent trustees. The governing document was also amended to provide that decisions between the foundation and the founder must be taken by a majority of independent trustees.

The commission did recognise that Lord Lloyd Webber had made invaluable contributions to the promotion of the arts and it was acknowledged that the continued involvement of a charity's founder can have positive benefits. However, it indicated that if a 'private' benefit is derived and found to be more than incidental, it may indicate that the charity is in fact being set up and run for a 'private' benefit.

Charity trustees need to ensure complete transparency to avoid a perception of private benefit, but also, crucially, to ensure that any conflicts of interest are properly managed.