As we reported previously, the Charity Commission has been consulting over the summer on proposed changes to the Annual Return for 2023-25. The Annual Return is the annual compliance filing which all CIOs and all other registered charities with an annual income of over £10,000 must submit to the Charity Commission within 10 months of their financial year end. Over the years, the Charity Commission has added questions – with increasing complexity and analysis required to answer them.
Having taken soundings from our Charity clients and sector bodies, as well as drawing on our team’s extensive experience of submitting Annual Returns – both on behalf of clients and in our personal capacity as trustees of a range of charities – we submitted our response to the Charity Commission earlier this month.
In the latest proposed revisions, the Charity Commission has proposed extensive amendments to the questions asked in the Annual Return – including nearly doubling the number of questions which charities are required to answer. We have summarised below the key points from our response, with our full response available here.
Role of the Annual Return
The Annual Return is a regulatory filing, the obligation on registered charities to file the Annual Return flowing from s169 Charities Act 2011. Many of the new questions seek to gather information about the sector for the Charity Commission’s policy purposes, rather than for regulatory purposes relating to the specific charity filing the Annual Return. Whilst we appreciate that the Annual Return has the advantage of being compulsory and can therefore provide an opportunity for the Charity Commission to obtain up-to-date data from the majority sector (exempt and excepted charities, as well as those below the registration threshold do not file Annual Returns), it is not appropriate and proportionate to increase the administrative burden on charities for that purpose; particularly in the current financial climate. In our experience, most charities will need to make significant changes to their financial reporting mechanisms to be able to collect the data requested by the revised Annual Return. That burden will fall disproportionately on smaller charities
Instead, data collected for the purpose of supporting the Charity Commission’s policy work should be collected separately (perhaps in conjunction with sector bodies), leaving the Annual Return to focus solely on information the Commission needs (and will use) to regulate that specific charity.
New question on impact of major external event
One of the key changes is the introduction of a new question in relation to the impact of a major external event on the charity. The Charity Commission anticipates including this question for an event such as the Covid-19 pandemic or the war in the Ukraine. In our view the Commission should rely on serious incident reports that are already required to be made to assess the impact of major external events on a specific charity. Even to estimate positive or negative impact in these areas of the myriad events that might affect a charity in a year would involve very significant time and thought, if it is to be done in a meaningful way. As charities must not mislead the Commission, they will need to do that difficult work in order to respond to the Annual Return. Whilst charities will already be considering the impact of external events as part of their risk register and strategic planning, it is highly disproportionate to require all charities to formally consider these points in this specified detail and share the result with the Commission.
Annual Returns are filed throughout the year, rather than at one specific date; it would therefore make it very difficult to compare data of this nature as charities would be completing the questions at different times – for example, one charity answering questions on the impact of the Covid-19 pandemic now, may have a very different response to another charity answering the question in 12 months. That does not mean to say that the impact was not the same today on both charities.
Unnecessary request for information in relation to premises
The Charity Commission is seeking information on the premises from which a charity operates. Except in very limited circumstances, it is difficult to see how this would be necessary. The Commission’s requirements should be proportionate, both in terms of the impact on an individual charity and the impact on responding charities as a whole. Bear in mind that some charities operate from a very large number of premises, for example, care homes, whilst others do not have dedicated premises and instead meet in their trustees’ homes, workplaces or other public meeting places. Given that many charities provide services virtually, particularly following the pandemic, it is not clear why the premises where they operate from is important, and in particular, why that should be made publicly available if those premises are not open to the public (unlike, for example, an art gallery). Charities can operate in a wide geographic area and so collating data on premises would not, for example, give a clear picture of the spread of charitable services (if that is the intention behind the question). Many charities, for example those running telephone helplines, will be based in one geographic areas, but provide support to beneficiaries across the UK.
Potential for confusion in relation to membership structure
The Charity Commission has also introduced new questions on structure; the questions on membership being particularly problematic. All charities formed as companies, CIOs and unincorporated associations will have members and those members will have rights under company/charity/general law, as well as the charity’s governing document. We assume that the Commission is trying to ascertain whether the charity has members who are not also charity trustees, but this is not made clear in the questions, causing difficulties for the many charities who are structured with their trustees as their members. Even where a charity’s trustees are also its members, the charity may also have supporters who it refers to as ‘members’ but who do not have rights under the charity’s governing document. For those charities, it will be difficult to answer binary questions as the answer to both of the questions will be yes and no. Some charities, particularly smaller charities or those with complex structures, may need to take legal advice to answer these questions.
Purpose of collecting additional information
It is not clear the purpose for which the Commission is collecting this additional information; whilst the supporting documentation for the consultation refers generally to the need for information to enable the Charity Commission to perform its various statutory roles – it does not provide specific justification for each question. For example, the Annual Return asks for a detailed breakdown of a charity’s income by various income streams; what does the Commission intend to do with this information? It is a matter for the trustees to consider whether (a) they are reliant on one source of income and (b) it is appropriate in the circumstances of that charity for them to be so reliant.
Need for charities to be clearer on policies adopted
The proposed new annual return will include a list of policies and seek confirmation on whether or not these policies are in place and, if yes, provide the date of the last review. Whilst we appreciate the importance of making sure that charities adopt policies and regularly refer to and review them, the Annual Return does not feel an appropriate place for this sort of questioning. In particular, it may not be appropriate for all charities to adopt these policies and it is not clear what the consequences will be of answering ‘no’ to these questions or for not having recently reviewed the policies.
Significant increase in questions
There is a significant increase in the number of questions asked – many of which involve analysis which may not have been done already. This is likely to be a significant burden for many charities, particularly those who are over the threshold but are not sufficiently large to have the infrastructure in place to collate this level of detail and those operating overseas.
Increased burden on international charities
Whilst there are additional risks for charities operating overseas, the Annual Return fails to clarify the position where a charity makes grants overseas, but does not have its own operations outside of the UK. We have for some time raised concerns on behalf of clients about the Charity Commission’s position in relation to ‘operating overseas’, having been advised that if a grant-making charity makes a grant to an overseas charity, it is deemed to be ‘operating overseas’ and should include the value of the grant in overseas expenditure. Surely it would be better for the Commission’s regulatory activity to draw a distinction between charities which are truly operating overseas (for example, providing services overseas or partnering with overseas organisations to deliver activities) and those charities purely making grants overseas.
Publication of information from the Annual Return
At present, a charity’s full response to the Annual Return is not made publicly available. However, the Charity Commission has indicated that the responses to a number of the questions will be made publicly on the Register of Charities.
Charities have previously been criticised for actions which are compliant with charity law – in particular in relation to staff salaries. As well as total payroll, the Charity Commission proposes to publish information about paying trustees or connected persons for services and whether trustees sit on the board of trading subsidiaries. It will be important that the Charity Commission provides clear messaging that certain arrangements are permissible and appropriate – in particular that the Charity Commission recommends that a trustee sits on the board of a trading subsidiary and that many charities will quite rightly have a high payroll as they employ staff to deliver charitable services.
What happens next?
We hope that the Commission swiftly publishes its revised questions for the 2023 Annual Return having considered the feedback from the consultation.
We will, of course, provide an update once those questions have been finalised, along with our key advice on processes which charities should think about putting in place to respond to those questions.
We would invite any clients who have concerns about the proposed amendments to the Annual Return to reach out to your usual Withers contact or Amy Carter for an initial discussion.