Opinion

Clarity sought over Charity Commission draft guidance

9th November 2018

Clarity sought over Charity Commission draft guidance

A lot of interest has been generated recently regarding the Charity Commission’s publication of draft guidance in relation to the relationships between a charity and third parties where there may be a long-term close relationship. The guidance focusses particularly on such relationships with a charity’s wholly- owned subsidiary trading company.

The subject of the guidance has been of particular interest to charity trustees and their professional advisers, such as lawyers and accountants.

If published, the guidance will not change the present law and there is a feeling that the Commission should resist the temptation to indulge in regulation ‘creep’ by imposing its own standards of what makes good practice in this way. However clear guidance in this area would certainly be of benefit it were able to explain:

  • at whom or at what it is aimed
  • the legal duties of charity trustees
  • general guidance on best practice
  • simple examples of the challenges of managing third party relationships based on the Commission’s regulatory experience

As it stands the Charity Commission guidance repeats at length the principles and duties applicable to trustees which are set out clearly in other documents. For the sake of clarity therefore it would be beneficial if the Commission cross-referenced to relevant points in its existing guidance rather than repeat or, worse, potentially contradict what it has said in other documents.

To what type of relationships is the guidance relevant?

At present the draft guidance would apply to any relationship between a charity and a third party, and there is an argument for preparing separate guidance for different types of relationships.

As you will see from the list given below, there is an array of different types of relationship that exist between charities and non-charitable entities and so a “one-size fits all” perspective such as this guidance offers, may not in fact be the best approach: 

  • corporate foundations established by retailers or other businesses to fund a charitable cause which is allied to their business, such as a baby milk manufacturer and an ante-natal support charity
  • non-charitable membership organisations
  • charities which are subsidiaries of non-charitable bodies
  • charities which have a non-charitable corporate trustee such as professional membership bodies
  • wholly-owned non-charitable subsidiary trading companies
  • Charities which own or co-own with family members all or a significant proportion of the shares in a private family company
  • Charities controlled by the NHS
  • Charities controlled by a local authority
  • Charities which were established and funded by a local authority to run local recreation and leisure facilities
  • Benevolent funds for the benefit of members or retired members of a particular trade or profession
  • Charities delivering public sector contracts as part of a consortium which includes non-charitable bodies, e.g, providers of residential care
  • Charities which contribute money and other resources to campaigns run by non-charitable bodies with similar aims
  • Charities and non-charitable bodies which share a common logo or brand for a particular project or purpose
  • The sharing of premises by a charity and a non-charitable body
  • Charities that outsource their primary purpose activities to a commercial provider
  • Charities which own investments in companies, some or all of the directors of which are also trustees or close family members or business partners of trustees
  • Non-charitable social enterprises, such as Community Interest Companies, in which charities have made a social investment such as a wind farm
  • Central government departments which appoint or nominate trustees of a charity and provide it with funding
  • Non-charitable organisations based overseas which receive grants from charities, eg, hospitals, universities or third world poverty relief organisations

 What is the mischief at which the draft guidance should be aimed?

The primary legal duties of charity trustees are:

  1. to observe the terms of their governing document
  2. exercise proper stewardship of money and apply their resources only for their charitable purposes
  3. avoid conflicts of interest.

The Commission’s main concerns, are that long-term relationships with non-charitable third parties should be properly managed so that charities and their trustees observe their legal duties and in so doing: 

  • protect their image and reputation and focus on achieving their charitable purposes
  • do not enable non-charitable bodies to benefit from their charitable status and tax reliefs or receive other unauthorised private benefits
  • do not support or promote non-charitable purposes such as campaigning on party political grounds
  • (at the outset and during the period of the relationship) ensure that the arrangement benefits and continues to benefit the charity
  • conduct the relationship on arms’ length terms without any blurring of the boundaries between the parties or confusion over the nature of the relationship
  • manage conflicts of interest, e.g, where a trustee is also a director or employee or has a financial interest in a non-charitable third party
  • anticipate and, where possible, manage threats and risks to the charity, its assets and its reputation, arising out of the relationship. 

A wholly-owned non-charitable subsidiary company

A common example of a relationship with a non-charitable body is one between a charity and its wholly-owned subsidiary company.

The usual reasons for establishing a subsidiary company are: 

  • To conduct a non-charitable trade which would be ultra vires and give rise to a tax liability if carried on by the charity; and/or
  • To ring-fence an activity which falls within the charity’s objects and could, therefore, be conducted by the charity but where the activity may be regarded as one that could put at risk the charity’s assets and money.

The main point, which is often not understood or recognised by a charity and its professional advisers, is that in order to achieve the tax benefits or asset protection and observe the rules of good governance, the charity should not, on behalf of the subsidiary, conduct the activities and the directors of the subsidiary should be wholly responsible for the management of the subsidiary company.

In other words, the relationship should be conducted ‘at arms length’ and the subsidiary should not be treated like a shell company. Where this does happen, the Charity Commission will justifiably have regulatory concerns.

Trustees should address their minds to the question of whether it is necessary or expedient to have a subsidiary in the first place as it can impose additional administrative burdens on a charity.

Good governance?

Leaving aside the regulatory concerns of the Charity Commission, the law and/or the rules of good governance generally stipulate adherence to the following requirements: 

  • All or a majority of the directors of the subsidiary should not also be trustees or members of staff of the charity
  • If the charity lends to, or invests money in the subsidiary or makes a social investment, it should be in compliance with the trustees’ legal duties – including the duty to have regard to the guidance published by the Charity Commission [see Charities and Investment matters: A guide for trustees (CC15b)]; tax advice is highly desirable – an improper investment in a subsidiary could give rise to a tax liability for a charity
  • A trustee, or someone connected to a trustee, cannot be a paid employee or consultant of the subsidiary, unless it is expressly authorised by the charity’s governing document or by the Charity Commission – see also Trustee Expenses and Payments (CC11)
  • Conflicts of interest must be authorised and managed. See Conflicts of Interest: a guide for Charity Trustees (CC29)
  • Line management of employees should not be confused; employees of a subsidiary should report to its directors and so should anyone who is seconded from the charity to the subsidiary;
  • The relationship should be fully documented in writing; this may take the form of a written agreement, a trust deed, a lease or license of land and buildings or a licence to use or share the Charity’s intellectual property and website; the prior consent of the Charity Commission must be obtained to lease, underlease or dispose of land and buildings to a subsidiary – see Disposing of Charity Land (CC28)
  • The charity should not subsidise the subsidiary and use of the charity’s resources, buildings or staff should be paid for by the subsidiary based on tax advice
  • In some cases, the charity’s financial interest in the subsidiary may need to be protected by personal guarantees from its directors or a mortgage over the subsidiary’s undertaking
  • The use by, or disclosure of, information to a subsidiary or the sharing of databases concerning individuals who are clients, beneficiaries or donors to the charity must be in compliance with data protection legislation; knowledge gained by a trustee of a charity may not be used by a subsidiary of which he/she is a director without compliance with that legislation
  • The charity should obtain independent professional advice before entering into legal relations with a subsidiary
  • The charity should be prepared to enforce its legal rights, to sever ties with the subsidiary and should not advance funds or meet or guarantee its debts when it is in financial difficulties or is or is becoming insolvent without separate professional advice – this may be a temptation where the directors of the subsidiary are also trustees of the charity who may also require independent advice if they are at personal risk of liability to creditors or might be removed as directors under the Company Directors Disqualification Act 1986.

What now for the draft guidance?

As it stands there is a feeling that the draft guidance is muddled in places and in its current guise, cannot be relied upon by trustees and their advisers to bring clarity to what can be a difficult subject.

It is to be hoped that the Charity Commission will take note of the sector’s concerns and either abandon the document in its current form or bring greater clarity and accuracy to the draft guidance before it is published.

The consultation period has closed and we must wait and see what the Commission will do.

Higgs & Sons regarded the issues as being of the utmost importance to its clients and will continue to inform them of its progress.

Moira Protani is a senior charity law practitioner and a consultant to Higgs & Sons.  As a member of the Charity Law Association, Moira contributed to the Working Party set up to respond to the draft guidance

 

 

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