Maintaining a social conscience

Earlier this year, the government consulted on providing the Charity Commission with wider powers to tackle abuse in charities, taking on board some of the recommendations in Lord Hodgson’s report and criticisms of the Commission made by the Public Administration Select Committee (PASC) and others.

The consultation suggested 17 new powers, ten of which are being taken forward under the new draft Protection of Charities Bill that was published at the end of October. Two others are marked for a further review and the remaining five have been discounted for now.

The new powers include the ability to remove a disqualified trustee, to issue official warnings, and to disqualify a person from acting as a trustee.

The next stage is for the Bill to be considered by a cross-party committee. The Commission has said that it will press the committee to include two powers not included in the Bill but to be considered at a later date. These relate to the ability for the Commission to prevent those who have been disqualified from acting in another position of power within a charity and a power to allow the commission to make an order preventing actions being taken by trustees, which would amount to misconduct or mismanagement.

The Commission will need to explain what safeguards will accompany the additional powers, so that trustees and charities can be confident it will act proportionately and within the legislative framework.

The new legislation is coming out in the context of the Commission being told to be a more proactive regulator. While most charities do not need to be protected from rogue trustees, those trustees who do not have their charity’s interests at heart may well find that the Commission is taking a more robust, innovative and wide approach to its job of protecting charities.

Social investment

The boundaries between charities’ use of their funds for investment and for the furtherance of their charitable purposes have become increasingly blurred. Charity trustees recognise that, in making their charity’s financial investments, they cannot ignore their objectives and, indeed, that it is possible to achieve both a financial return and a social good, ie to make a ‘social investment’.

However, while the area of social investment is one of increasing importance to society, charities have been deterred from involvement because of the uncertain legal position in relation to trustees’ powers to make social investments.

In September, the Law Commission published its final recommendations on reforming the law relating to social investment by charities as part of its Eleventh Programme of Law Reform. After discussions with the Office for Civil Society, the Law Commission had agreed to accelerate its work on social investment by charities.

The main outcome is that the Law Commission has recommended that a new statutory power should be created conferring on charity trustees the power to make social investments. This new statutory power will enable charity trustees to feel more confident about their power to make social investment and should help alleviate the current uncertainties that prevail. Trustees should be able to take investment decisions with greater confidence.

Furthermore, the commission has recommended that another potential barrier to social investment should be removed, by extending the new statutory power to charities with permanent endowment, so that charities will be able to use permanent endowment to make social investment, provided that the trustees are satisfied the investment is likely to preserve the value of the invested endowment capital for future beneficiaries.

One of the key concerns was the fact that tax legislation does not align with social investment and that insufficient guidance is given by HMRC in this area. Accordingly, another key recommendation by the Law Commission is that charities should be able to obtain earlier clearance from HMRC as to the tax treatment of a proposed social investment. Until that recommendation has been adopted, charities should consider the tax position carefully before proceeding with social investments – the risk being a reduction in their overall tax exemptions.

Charity trading subsidiaries

The Institute of Chartered Accountants for England and Wales (ICAEW) has recently obtained counsel’s advice on the position in relation to payments made in excess of distributable profits by a trading company to its parent charity.

Usually, profits are donated to the charity by the trading company, and the charity then claims the gift aid on them. In some cases, the amount donated exceeds the amount of profits available for distribution under the Companies Act 2006. This practice was endorsed until recently by the Commission in its guidance note CC35 to the effect that the donation to the parent charity was not a distribution. Tax relief on the payment meant that no tax was payable by the subsidiary.

However, the position in CC35 was being questioned and, given the importance of this issue to charities, the ICAEW sought counsel’s opinion. Lawyers have confirmed that to the extent that the amount exceeds the trading company’s profits available for distribution, which will often be the case, the excess payment is unlawful. HMRC is currently considering the tax impact of this for charities and their trading companies and will publish their view in due course.

Registration decisions

Full Fact (FF), an independent fact-checking organisation, submitted an application for registration as a charity in 2009 with objects that included the advancement of citizenship and civic responsibility. The Commission rejected that application for registration in 2010.

On appeal, that decision was upheld by the First-tier Tribunal. Subsequently, FF made a further application for registration in 2013 with revised objects, based on the advancement of education and having taken into account aspects of the tribunal judgement.

While the decision of the First-tier Tribunal is not a legal precedent binding the Commission, it did have regard to certain observations made by the Tribunal in its decision when considering the FF’s renewed application.

The Commission was satisfied on the basis of the revisions to FF’s governing document that it was established for exclusively charitable educational purposes for the public benefit and that its operational framework had within it a sufficiency of independence, impartiality and rigour for it to meet the requirements of education in charity law.

Consequently, in September, the Commission announced that FF could be entered onto the register of charities, but its activities will be monitored by the Commission. Within 18 months of registration, and every two years after that, the trustees must appoint ‘a fit and proper person’ to audit and review the public educational work of the charity.

Independent Press Regulation Trust

The commission published its decision in relation to the Independent Press Regulation Trust (IPRT) in October following a decision review. The IPRT is an organisation set up in the wake of the Leveson press inquiry for the purposes of supporting responsible journalism with the assistance of the regulator(s) and set up in accordance with the recommendations of the inquiry.

This was a decision review of the commission’s original decision not to register the organisation as a charity, and the review upheld that decision. It concluded that IPRT is not established for exclusively charitable purposes and cannot be entered onto the register of charities.

It will be interesting to see whether IPRT appeal this decision, or wait until a regulator is established so that they can show public benefit.

Community interest companies

Community interest companies (CICs), and particularly potential investors in CICs, will welcome the news that from 1 October 2014 the asset lock provisions have been relaxed slightly. CICs must contain certain asset lock provisions, and one of the criticisms of those provisions has been that they were too restrictive, which discouraged investment.

The changes mean that CICs will no longer be subject to the maximum dividend per share cap which restricted dividend payments to 20 per cent of the paid-up value of a share. The maximum aggregate cap is retained at 35 per cent. The CIC regulator also took the opportunity to increase the performance-related interest from ten to 20 per cent.

Whether this acts as significant enough incentive to increase investment remains to be seen, but it is at least a step in the right direction if encouraging more social investment is the goal. SJ

Sarah Clune is a professional support lawyer at Stone King