Consultations and changes in charity law

The last charities update (SJ 158/48) covered the publication of the draft Protection
of Charities Bill following a government consultation. A joint committee was appointed
to consider the draft Bill and it issued a call for evidence and held oral evidence sessions from November 2014 to early January 2015.

In its report, published on 25 February 2015,
the committee backed proposals to give the Charity Commission more powers to ensure effective regulation of the charity sector. However, the committee was clear that effective safeguards must be in place to ensure charities and their trustees are treated fairly by the commission.

On 26 March 2015, the government published
its response to the joint committee’s report. The government has accepted most, but not all, of the joint committee’s recommendations, and the draft Bill is being amended to reflect the government’s response. However, a decision on next steps for the Bill will then be in the hands of the government formed following the May 2015 general election.

The government’s acceptance that failure to follow specified good practice should not, in
itself, be considered evidence of misconduct or mismanagement of a charity is particularly welcome, given concerns about the commission’s revised explanation of what trustees ‘must’ and ‘should’
do in its rewritten guidance for charity trustees.

Despite the committee’s reservations, the government remains committed to giving the commission a discretionary power to disqualify
a person from being a charity trustee where it is satisfied that the person is unfit for the position, and where that person has been either found by HMRC not to be a fit and proper person to be a charity trustee or cautioned for a disqualifying offence.

However, the government will review the concerns raised by the committee with the commission and HMRC. In particular, it will consider whether additional factors could be included in the draft Bill to narrow the circumstances in which a caution for a disqualifying offence can trigger the commission’s power to consider disqualification.
It will also work with the commission to:

• Refine the clause to ensure that there are limits on the regulator’s powers and clearly defined criteria for the circumstances in which a person might
• be disqualified;
• Produce a non-exhaustive list of matters which demonstrate when a person is unfit to act as a charity trustee; and
• Provide greater clarity on what is meant by the term ‘unfit’.

Charity law technical issues

On 20 March 2015, the Law Commission published a consultation report on technical issues in charity law as part of its charity law reform project. The detailed report sets out provisional proposals for reform on a wide range of issues, including:

• Making changes to governing documents of charities (including making it easier for charities governed by Act of Parliament and Royal Charter to amend the documents);
• Cy-près schemes and the proceeds of fundraising appeals;
• Charity land transactions;
• Permanent endowment;
• Payments to charity trustees and other non-beneficiaries;
• Charity incorporations and mergers;
• Charitable trusts in insolvency;
• Charity Commission powers; and
• Charity tribunal and courts.

The Law Commission’s recommendations, which are designed to remove inefficiencies and unnecessary complexity in the current law, have been broadly welcomed by the charity sector. The consultation closes on 3 July 2015.

Essential trustee guidance

On 26 March 2015, the Charity Commission published a brief commentary of the consultation responses it received to its rewritten guide on charity trustees’ duties, ‘The essential trustee (CC3)’. According to the commission, overall support for the new approach was strong. However, it has acknowledged concerns about the overall tone of the guidance and will improve it.

In our response to the consultation, we expressed concern about the commission’s use of ‘must’ and ‘should’, and the definitions of these words. We also felt that, while we understood the commission’s need to show itself as a tougher regulator, the tone of the guidance could potentially be off-putting for individuals considering becoming trustees, which would be a real shame given the difficulties
often faced in recruiting trustees.

Funding non-charitable organisations

Following recent controversy surrounding the funding of the advocacy group Cage by two charities, the commission has issued a statement reminding charities to exercise vigilance when considering funding non-charitable bodies
to ensure that funds are used only for charitable activities which further the purposes of their charity, and do not expose it to reputational risks or other risks that impact on public trust and confidence in charities more widely.

Trustees must undertake reasonable due diligence to ensure that they are protecting the charity’s funds and reputation when making grants.

The commission states in its guidance that
the following scenarios would give rise to
serious regulatory concerns:

• A charity funds activities that are either not charitable or not capable of furthering the charity’s specific purposes;
• Trustees do not undertake appropriate due diligence or adequately ring-fence grants in the hands of recipients, or have not taken adequate steps to protect the charity’s position and ensure proper use of the charity’s funds;
• Trustees risk their charity’s reputation by making grants without fulfilling their legal duties; and
• Trustees fail to take adequate steps to monitor the use of funding their charity has provided.

Trustees must be clear about what their charity hopes to achieve and how funding a certain organisation will help them achieve that aim.

The commission expects trustees to:

• Follow its guidance on decision making, including by acting in good faith, informing themselves adequately, taking account of all relevant factors and disregarding irrelevant ones, seeking professional advice where relevant, and ensuring any decision is within the range of decisions a reasonable trustee body may make;
• Assess whether a grant would pose reputational risks for the charity;
• Compare their charity’s objects with those of the proposed recipient;
• Carry out appropriate due diligence checks on the proposed recipient;
• Set proportionate terms and conditions that restrict what the funds can be spent on;
• Take reasonable and appropriate steps to
• monitor how the charity’s funds are used; and
• Seek repayment if funds are not spent in accordance with the charity’s terms and conditions.

Changes to audit thresholds

On 31 March 2015, changes to charity audit thresholds which are aimed at reducing the regulatory burden for charities came into force. The changes include increasing the basic audit threshold from £500,000 to £1m, meaning fewer charities will be required to have their accounts formally audited. Those charities can instead have their accounts looked at by an independent examiner, selected from a widening pool, ensuring that the level of assurance remains high.

Other changes that have come into force include:

• Increasing the aggregate group income threshold at which parent charities should have group accounts from £500,000 to £1m;
• Increasing the preparation threshold for group accounts from £500,000 to £1m; and
• Adding the Institute of Financial Accountants and the Certified Public Accountants Association to the list of recognised professional accountancy membership bodies whose appropriately qualified members can carry out independent examinations of the accounts of charities with incomes that are more than £250,000.

The changes follow consultation by the Office for Civil Society with charities and the accounting sector. It is hoped that the changes will make it easier for charities to find a qualified independent examiner. Charities – particularly those whose financial year has recently ended – are encouraged to be aware of the changes. The commission has produced updated guidance (CC15c) on its website.

Changes to the annual return

The annual return has been updated following consultation and the changes will apply when charities report on their financial years ending in 2015. The commission believes that the additional questions will strengthen its ability to identify risk and will ensure people have access to the information they need to make confident decisions about charities.

Charities must now answer three new questions when they go online to complete the annual return:

• In the reporting period, how much income did you receive from (a) contracts from central or local government, and (b) grants from central or local government?
• Does your charity have a policy on paying its staff?
• Has your charity reviewed its financial controls during the reporting period?

The commission intends to revisit the issue of campaign expenditure for the 2016 annual return, but will investigate whether technology solutions, such as accounting software, may enable it to collect key financial information without impacting heavily on smaller charities. 

Budget 2015

The two main budget announcements relevant to charities were the announcement of the charity authorised investment fund structure (CAIF), and the new diverted profits tax.

• CAIF

This is a new investment structure available to charities, which will have the benefits of a common investment fund (i.e. being a registered charity), but with the added advantage of improved regulatory oversight, and an exemption from VAT on management fees.

The CAIF will be a registered charity, with the aim of promoting the effectiveness of charities by enabling participating charities to carry out their purposes more economically and efficiently. Although registered as a charity and therefore subject to the Charity Commission’s regulation, the CAIF will also be regulated by the Financial Conduct Authority (FCA), which offers additional protections for investing charities. CAIFs will have to comply with the reporting and disclosure requirements of the FCA, but rule modifications are being looked at in case they are necessary to make the scheme effective. This is certainly a development for charities to consider when reviewing their investments.

• Diverted profits tax

The government has announced plans to introduce a 25 per cent tax rate on companies that are seeking to avoid payment of UK corporation tax by moving profits artificially to a jurisdiction or entity with lower tax rates. The intention is to make companies that transfer profits to an entity with more favourable tax treatment where there is no economic substance to the transaction subject to a higher tax rate than the corporation tax that would otherwise be payable.

This would, on a strict interpretation of the provisions, apply to trading subsidiaries of charities. However, section 107 of the Finance Act 2015 excludes payments from a subsidiary company to a charity from being treated as a contrived tax mismatch arrangement to which diverted profits tax applies. Without this exemption, it was feared that it would become impossible for charities to use trading subsidiaries. SJ

Sarah Clune is a professional support lawyer at Stone King