18 March 2019 - Article
Background- What’s happened?
The Charities Act 2006 was the first to have an automatic review procedure built into it. Nearly six years after the Act’s passage into law, Lord Hodgson of Astley Abbotts has undertaken a wide-ranging review – not only on the operation of the Act itself but also on the wider legal and regulatory framework for English and Welsh charities.
The result of this comparatively swift eight month process was published yesterday in a 159 page report entitled; ‘Trusted and Independent: Giving charity back to charities.’
The review attracted significant feed-back from sector bodies and charities alike and sets out over one hundred recommendations: some of them are technical corrections to unplanned effects of the Act but many more are fresh (although in some cases controversial) and responsive to the wishes of many in the sector. They could create real opportunities for those working in and with charities throughout England and Wales.
We set out below some of Lord Hodgson’s key recommendations and highlight those likely to be of particular interest to charities and their donors.
Paying charity trustees
The report recommends that charities falling into a new category of ‘large charities’ (with income over £1 million per year) should be allowed to pay their trustees (for being trustees) without the need to get express permission to do so from the Charity Commission.
Payments would be subject to certain disclosure requirements. The recommendation would not affect the power of charities of all sizes to reimburse trustees’ proper expenses. It is argued by the report that this move would encourage a more diverse range of trustees.
Smaller charities would not be affected by this recommendation and would have to continue to seek Charity Commission authority where a payment is proposed that is not permitted by a power in the charity’s governing document.
The principle of voluntarism has been the subject of much debate in the consultation period. It has been suggested that the whole character of English charities may be affected by a more permissive stance on the payment of charity trustees and the issue has polarised many in the sector.
Where trustee payment becomes the norm rather than the exception in larger charities, it may be increasingly difficult for larger charities who do not wish to pay trustees (or only some of them) to avoid a new trustee expectation. The risk is that this could lead to a ‘two-tier’ sector where trustees at smaller charities are generally volunteers and those at larger ones are generally paid.
The proposal would be likely to lead to an increase in the number of larger charities where the chief executive also sits on the board, raising particular governance challenges for charities and possibly blurring the distinction between those with a governance function and those involved in day to day management.
Trustee terms of office
The report recommends that trustees should normally be limited to serving a maximum of three terms of three years
If a charity wishes to extend this period it would be required to explain its reasons in its annual report. Lord Hodgson would like to see the Charity Commission’s model governing documents reflect this. Whilst this may be appropriate for the average operating charity, it may be less appropriate for family foundations.
At present all charities with an annual income of over £5,000 (that are not exempt or excepted from registration) must register with the Charity Commission.
The report recommends that this threshold should be raised to £25,000 and whilst highlighting the value of having a registered charity number notes that registration can be a burden for smaller charities.
To address this issue the report suggests that charities that fall below the compulsory registration threshold should be permitted to register voluntarily (subject to certain transitional provisions). Although registration has never conferred charitable status, it merely recognises it, many new charities nevertheless want to obtain a charity registration number to give donors assurance of their legitimacy. A voluntary regime would allow charities to weigh the burden of registration against the benefit of obtaining that regulatory ‘seal of approval’.
One benefit to this higher registration threshold would be to link compulsory registration with the level at which accounts and a Trustees’ Annual Report must be filed with the Commission.
The report considers the operation to date of the existing regime of self-regulation as led by the Fundraising Standards Board (FRSB). It notes although membership of the FRSB could be much higher , it has had some success in improving complaints handling in the sector.
The report recommends that a more streamlined approach is taken to the self-regulation of fundraising, removing duplication and providing increased clarity and transparency to the public.
Lord Hodgson suggests that the Charity Commission could do more to support self-regulation, recommending the inclusion of the FRSB logo on the online register of charities where a charity is a member of the scheme. This would demonstrate to those viewing the entry that the charity complies with various codes of fundraising practice. The FRSB tick logo could also be used on a wider range of materials to encourage trust and confidence in charities.
Much of the report supports the FRSB’s work and advocates that it should be given more formal support from the sector, particularly regarding the FRSB’s rulings. The report recommends that that there should be an ‘initial expectation’ that all fundraising charities with an income over £1 million would register with the FRSB, although membership should not be compulsory.
The Charity Tribunal
The role and operation of the Charity Tribunal also receives much coverage in the report. It suggests simplifying the Tribunal’s jurisdiction in order to cover more cases and address a wider range of matters. It encourages the Tribunal and the Charity Commission to work more closely together and produce more meaningful guidance on what the Tribunal can and cannot do.
The report also recommends that the Charity Commission should be able to refer cases to the Tribunal without first having to ask the Attorney General’s permission as is currently the case.
Companies House and the Charity Commission in partnership
The report acknowledges that most charities are formed as charitable companies and therefore subject to regulation by both Companies House and the Charity Commission. It recommends that these two regulators work more closely to develop a single reporting system for charities, ending duplication of reporting requirements.
The report notes that the public’s view of what a charity does and the impact that it has is crucial to the long-term sustainability of, and confidence in, the sector as a whole. It recommends that delivering public benefit and reporting it should be central to all charities.
The report notes that; ‘…interest in social investment is increasing rapidly around the world’. Social investment means investing in charities, social enterprises and other community organisations – investing for a positive social impact as well as a financial return.
Given the growing interest in this area, the report argues that the FSA should establish a specialist unit to handle the regulatory challenges of social investment.
One of the critical recommendations of the report is the plea to the Government to amend the Trustee Act 2000 to allow trustees to consider a range of benefits from an investment and not merely the financial gain.
The report goes on to suggest that charities should be able to go to HMRC to seek approval of a proposed social investment to ensure beneficial tax treatment. Without confidence on the tax position of social and mixed motive investments, trustees would not be likely to take advantage of any new statutory power, so it would be imperative for these particular recommendations to go hand in hand.
Gift Aid penalties
The proposal to penalise charities with a restriction on Gift Aid relief where there is non-compliance with certain regulatory requirements has been hotly debated in the press during the consultation and review process.
Lord Hodgson has recommended that sanctions for the late filing of accounts and annual returns should include the withdrawal of Gift Aid.
An analysis of the timeliness of the filing of returns at Companies House in comparison to filing with the Charity Commission showed that the fines for late filing issued by Companies House encouraged organisations to file on time.
The practical implications of this recommendation remain to be seen, however the report argues that there is an urgent need to increase the transparency brought by the universal and timely filing of accounts and returns.
Both HMRC and the Charity Commission would need to work closely to achieve a balanced and manageable penalty regime. For charities that do not make much use of the Gift Aid such an approach would not act as a deterrent.
Should the Charity Commission impose charges?
The consultation prior to publication of the report involved much debate on whether or not the Charity Commission should impose new charges on charities for filing reports and for the registration of new charities.
The report acknowledges that this might discourage the establishment of new charities but recommends that a fair and proportionate charging system be developed.
Charities must follow certain detailed regulatory procedures when disposing of charity land that simply do not apply when disposing of other assets or applying their funds generally. The report recommends that disposals, mortgages and charges over charity land should be deregulated. Deregulation was to be expected particularly given the pressure on the Charity Commission’s resources. This approach fits with principles-based regulation of trustee duties; charity trustees can be relied upon to discharge their duties and clear guidance on disposals and mortgages can support this.
The Charity Commission’s involvement in disposals of charity land to connected persons is rightly recommended to continue.
Larger charities may be happy to see the recommendation that the Summary Information Report be abolished on the basis that it reports information already available elsewhere. This report is currently an additional part of the Annual Charity Return that only the largest charities must fill out and its completion would seem to be an unnecessary burden of extracting information from the charity’s accounts and trustees’ report.
In line with the general deregulatory theme, the audit threshold is proposed to be increased generally from £500,000 to £1 million.
The report clearly set its sights beyond a mere legislative review and took its wide terms of reference to heart. With some controversial recommendations, and many practical ones, it would seem that the reforming spirit is alive and well in the sector.
We will provide further detailed briefings on particular aspects of the report and will follow the debate and anticipated implementation of its findings on our dedicated microsite.
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