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Charities and Social Enterprise News

A quarterly newsletter which aims to keep clients and contacts up-to-date with the latest legal developments in the world of charities and social enterprises.

Latest Issue

In the latest edition of our Charities and Social Enterprise News we look at report from the Parliamentary and Health Service Ombudsman, about the Charity Commission's poor handling of a case over a 20 year period. We also have a feature on the importance for trustees to file accounts on time and other updates from the Charity Commission as they strive to make changes.

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Charity’s failure to file accounts leads to statutory inquiry

Friday 27th May 2016

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Charities & Social Enterprise News - Issue 22

In February 2015 the trustees of the Vyoel Moshe Charitable Trust (‘the Charity’) found themselves under the scrutiny of the Charity Commission for a second time having reportedly failed to file their accounts with the Commission for nine years.

In 2013 the Charity had been part of a class inquiry conducted by the Commission into charities that were in default of their statutory obligations to meet reporting requirements. That inquiry was concluded, but it seems next year the Charity missed the filing deadline again. As a result of this the Commission opened a further statutory inquiry. The main issues under investigation were:

  • The trustees’ failure to comply with their statutory duty to submit annual accounts, reports and returns for the financial year ending 2014;
  • The administration of the Charity by the trustees;
  • The financial management of the Charity.


Failure to submit annual accounts

The Commission concluded that there is a legal duty for the trustees of a charity with an income of £25,000 or above to submit annual accounts, reports and returns to the Commission. The Charity’s failure to adhere to these obligations constituted mismanagement and misconduct in the administration of the Charity. The trustees explained that the reason for the failure had been that the responsibility for filing accounts had been delegated to one individual, who due to personal circumstances, was unable to meet the deadline. In addition, the trustees stated that their financial information was stored on paper and so their accounts were consequently time consuming to prepare.

Be that as it may, the Commission concluded that the trustees’ reasons were no “justification for non-compliance”. Carl Mehta, head of investigations and enforcement at the Commission, stressed that trustees are “collectively accountable” for submitting accounts and found that they were in breach of their legal duties.

Administration of the Charity

Having had a meeting with the trustees of the Charity and examining their policies on financial controls, grant making, volunteers and accounting, the Commission concluded that other than the non-compliance with their duty to submit their accounts, there were no other areas of concern regarding the administration of the Charity.

Financial management of the Charity

As the Charity’s income was above the audit threshold, they were required to prepare an annual report. The full trustees report, together with the statutory audit included all of the required information. The report was SORP (Statement of Regulatory Practice) compliant and when analysed against the Charity’s bank statements, no anomalies were identified.


Giving consideration to all three issues, the Commission concluded that there had been mismanagement and misconduct in the administration of the Charity due to the trustees’ failure to file their annual financial documents.

This case highlights two key lessons for trustees. Firstly, that trustees are collectively responsible for the overall management of the charity and secondly, it is essential that charity trustees file their accounts with the Commission each year as “the public have the right to see that the financial activities of charities are properly recorded and that their financial governance is transparent”.

As previously reported the Commission is continuing in its efforts to ensure that charity trustees comply with their accounting and reporting obligations. Trustees who fail to comply can expect to hear from the Commission and as this case demonstrates, this can lead to much wider scrutiny of a charity’s management.

Need advice or wish to talk to us?

If you would like to discuss any of the points raised in this article please do not hesitate to contact Rebecca or a member of the Charities team.

Rebecca Tucker

Paralegal, Charity and Social Enterprise
Tel: 0151 600 3064

Latest news from the Charity Commission

Friday 27th May 2016

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Charities & Social Enterprise News - Issue 22

The Charity Commission has been through a lot of changes in recent years. Funding cuts, sector crises and public scrutiny and criticism have all led and contributed to the Commission reviewing its modus operandi and there have been a range of attempts to improve certain aspects of the Commission’s functions.

One area where the Commission has made changes is to the manner by which it communicates with the sector and the public as a whole and in recent months, the Commission has begun reporting news more frequently on its website.

Two very recent news items made for particularly interesting reading…

William Shawcross’ speech

On 18 May, William Shawcross, the Charity Commission’s chair delivered a speech at Wild Search. The full speech can be found here and it covered a range of topics, including the Fundraising Regulator, governance and the Commission’s approach to regulation.

Shawcross’ comments in relation to charity campaigning did stand out in particular and these are repeated below:

Campaigning treads a fine line, of course. We have seen the damage charities can do to themselves if they push too hard. A few weeks ago, the Charity Commission issued guidance to help charities stay on the right side of this line in the referendum debate.”

“Some felt our guidance was too restrictive and threatened to deter charities from becoming involved. I regret this. Our aim was not to stifle legitimate contributions, rather to advise charities how they may contribute within the limits set by law. In response to some concerns, we adjusted this guidance to offer further clarity, and indeed is clearly states ‘there may be some circumstances in which it is appropriate for a charity to set out the pros and cons of a yes or no vote’.”

During the General Election last year, the subject of charity campaigning was very much in the headlines and the Lobbying Act (or to give it its full title, the Transparency of Lobbying, Non-party Campaigning and Trade Union Administration Act 2014) caused significant concern amongst charities who engage in campaigning.

Campaigning by charities is permissible in charity law so long as it is carried out solely in order to further or support its charitable purposes. An example used in the Commission’s current guidance is that of a children’s charity drawing attention to the dangers of domestic violence and child abuse.

However during the run up to the General Election (and since), charities have been of the view that the Commission and the government have been seeking to gag charities, preventing them from campaigning on matters relevant to their purposes.

The current debate around the EU Referendum presents another potential flashpoint for charities engaging in campaigning activity and the latest comments by Shawcross may be welcomed by charities who have previously felt discouraged from engaging in campaigning activities.

Public consultation on the disqualification of charity trustees

As reported in previous blogs and articles, the Charities (Protection and Social Investment) Act 2016 has introduced significant new regulatory powers for the Charity Commission.

One such power is the new power of discretionary disqualification. This power allows the Commission to disqualify certain persons from being trustees in circumstances where they are judged not fit to act, for a period of up to 15 years.

The new power is set out in section 10 of the 2016 Act and introduces a new section 181A into the Charities Act 2011. It states that the Commission may make an order disqualifying a trustee if it is satisfied that:

(a)   one or more of the statutory conditions are met;

(b)   the person is unfit to be a trustee; and

(c)   making the order is desirable in the public interest in order to protect public trust and confidence.

The statutory conditions include:

  • where a person was a trustee, charity trustee, officer, agent or employee of a charity at a time when there was misconduct or mismanagement in the administration of the charity (subject to conditions); and
  • where any other past or continuing conduct by a person, whether or not in relation to a charity, is damaging or likely to be damaging to public trust and confidence in charities.

The discretionary power itself is potentially very wide and the Commission’s exercise of the power will be interesting. The Commission has very recently set out its proposed approach in exercising this power in a consultation paper and the Commission is now inviting responses.

The full consultation can be found here.

The Commission has stated that it recognises the significance of the new power and has said that “it is important that our approach is set out clearly and understood by the sector. We hope that charities, professional advisers and other interested parties will respond to our consultation to further inform that approach”.


The Commission’s current approach to communication is quite useful and as noted above, has provided the opportunity for those involved in the sector to influence the manner by which the Commission will exercise its new powers.

As for campaigning activity, charities wishing to engage in the EU referendum debate should consider taking legal advice. Charity campaigning is a complex area and it can be very easy for charities to unwittingly fall outside of the presently accepted rules.

Need advice or wish to talk to us?

If you would like to discuss any of the points raised in this article please do not hesitate to contact: 

Stephen Claus

Head of Charity & Social Enterprise
Tel: 0151 600 3341
Email Stephen

Charities and people with significant control

Friday 29th April 2016

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Charities & Social Enterprise News - Special Issue 21


Does this sound like your charity?

  • A charitable company limited by guarantee?
  • Charity trustees who are also its only members, all with equal voting rights?
  • Charity trustees are appointed by a third party organisation that enjoys nomination rights in respect of your charity?
  • You have a trading company that is a wholly owned subsidiary of the charity?
  • You employ a chief executive who is responsible for the day to day operation of your charity?
  • You are part of a group structure, perhaps with a parent charity?

If your answer to some or all of these questions is yes, then it is very possible that your charity is caught by new rules introduced by the Small Business, Enterprise and Employment Act 2015 that will require you to keep a Register of People with Significant Control (“PSC Register”).

The new requirements only apply to charitable companies and trading subsidiaries. Therefore, unincorporated charities (trusts and associations) and charitable incorporated organisations (CIOs) (along with less common legal forms of charities such as Royal Charter bodies and statutory corporations) are not caught by the new rules – unless they have a trading subsidiary.

The PSC Register must record the details of individuals and legal entities with significant control over the company, along with a note about the nature of their control.

People with significant control

So who are people with significant control (PSC)?

Only an individual can be a PSC. However, where the owner or controller of a charitable company or trading subsidiary is a legal entity, such as a company or LLP rather than an individual, that legal entity will need to appear on the PSC register, if it is a registrable relevant legal entity (RRLE).

The tests for identifying PSCs or RRLEs are the same. A person has significant control if they meet any one of the following conditions:

  • Directly or indirectly holding more than 25% of the shares in the company or trading subsidiary – this test would not apply to a charitable company limited by guarantee on the basis that no shares exist, but it will apply to a wholly owned trading subsidiary;
  • Directly or indirectly holding more than 25% of the voting rights in the charitable company or trading subsidiary – this will apply to a charitable company limited by guarantee;
  • Directly or indirectly holding the right to appoint or remove a majority of the trustees / directors of the charitable company or trading subsidiary;
  • Otherwise having the right to exercise, or actually exercising, significant influence or control over the charitable company or trading subsidiary; or
  • Having the right to exercise, or actually exercising, significant influence or control over an arrangement such as a trust, which is not a legal entity but which meets any of the above conditions in relation to the company, or would do so if it were an individual.

The first three tests are relatively straightforward. This is perhaps best demonstrated in the following examples:

Scenario 1  

Charity X is a company limited by guarantee with three trustees. The three trustees are also the only members of Charity X (all with equal voting rights).

Each member can exercise 33.3% of the voting rights and therefore each is a PSC by virtue of the second test. The PSC Register will need to list the three members.

Scenario 2

Charity X appoints two additional trustees. The two new trustees are also admitted as members of Charity X and so in total, Charity X has five trustees and five members.

Each member now only has 20% of the voting rights and as such the members are no longer PSC’s. Charity X is still required to keep a PSC Register but this will simply state that there are no PSCs in relation to Charity X.

Scenario 3

Charity X establishes a trading subsidiary to carry out some non-charitable trading activities. The trading subsidiary is a company limited by shares and the shares are wholly owned by Charity X.

As 100% of the shares in the trading subsidiary are owned by Charity X, the trading subsidiary’s PSC Register will need to list Charity X as a RRLE.

Significant influence or control

The tests that relate to significant influence or control are much more difficult to apply.

The fourth test is whether a person has the right to exercise, or actually exercises, significant influence or control.

If someone has such a right, then they will need to be entered in the PSC Register, even if they have not exercised the right as yet. Examples are where a person has absolute rights over decisions relating to the running of a charitable company or trading subsidiary, e.g. adopting or amending a strategic plan, changing the nature of its activities, or making additional borrowings.

Absolute” means that a person has such rights without reference to or collaboration with anyone else.

This particular test raises questions as to whether it applies to the chief executive of a charitable company. It is noted that the employees of a charitable company are “excepted roles” and that they do not in themselves automatically mean a person has a right to exercise or actually exercises significant influence or control. However, this does not prevent an individual from being a PSC if “the role or relationship differs in material respects from how the role or relationship is generally understood”.

If a charitable company’s chief executive regularly or consistently directs or influences the trustees, or is regularly consulted on and influences trustee decisions they may be considered to be a PSC.

The general consensus is that the chief executives of charitable companies will not be captured under the rules. However, trustees will need to consider their own circumstances. Whilst a chief executive might not be captured, active patrons or founders who are not trustees may be.

Scenario 4
So for example, if Charity X’s founder attended meetings of the trustees in an advisory capacity and the trustees were always minded to follow the founder’s directions, the founder may be a PSC of Charity X.

The fifth test is most likely to apply in cases where the trustees of unincorporated charity (or CIO, Royal Charter body or statutory corporation) have rights to appoint the trustees of a charitable company, or where an unincorporated charity sets up a trading subsidiary.

Scenario 5

If the trustees of Charity Y an unincorporated charitable trust, had rights to appoint and remove the trustees of Charity X, the trustees of Charity Y will each be a PSC in respect of Charity X, by virtue of the fifth test.


From 6 April 2016, all companies including charitable charities and their trading subsidiaries will need to keep a PSC Register (subject to some very limited exceptions which are very unlikely to apply). All companies are under a duty to investigate whether they have PSCs.

The PSC Register cannot be empty. So, even where a charitable company has no PSC (as in Scenario 2), it will need to keep a PSC Register containing specific wording stating that there is no registrable person.

Details of the information on the PSC Register must also be filed with Companies House. From 30 June 2016, charitable companies and trading subsidiaries will need to supply Companies House with the information on their PSC Register along with a Confirmation Statement, which will replace the Annual Return.

A PSC Register will be accessible to any member of the public provided they have a proper purpose.

The new rules are intended to ensure greater disclosure by commercial organisations, creating a full picture of both the legal and beneficial ownership of such organisations, with the aim of preventing money laundering, tax evasion and other illegal activities.

It is therefore a little surprising that steps have not been taken to exempt charities in some way from these new rules. Charities are not “owned” in the same way as commercial organisations and it may be the case that charities are excluded from this new regime in the coming months.

However, for the time being, charities affected by the new rules should examine their own arrangements and take steps to establish whether any PSCs exist and what information should be included in the PSC Register.

The PSC regime itself is quite complex and to assist in its interpretation the government has released both statutory and non-statutory guidance. The non-statutory guidance (in summary and long form) offers detailed guidance and useful examples to cover the more common scenarios and can be found here.

If you have not already been in contact with us in relation to the PSC regime and you are concerned about your position, please do not hesitate to contact us.

Head of Charity & Social Enterprise
Tel: 0151 600 3341
Associate, Charity & Social Enterprise
Tel: 0151 600 3079


Paralegal, Charity & Social Enterprise
Tel: 0151 600 3064

The range of services offered by the Charities and Social Enterprise team can be viewed here

The future of charity fundraising

Wednesday 24th February 2016

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Charities & Social Enterprise News - Issue 20

2015 was another difficult year for the voluntary sector.

Charities have come under fire for campaigning activities in the lead up to the general election, the collapse of Kids Company has brought charity governance very firmly into the spotlight and the Charities Behaving Badly documentary that appeared on ITV raised issues of extremism within charities.

The crisis in charity fundraising has been equally damaging to the sector and a number of stories have appeared in the national press heavily criticising the fundraising practices of some of the country’s best known charities. This has led to two urgent reviews of charity fundraising and a number of proposals for reform that could significantly change the regulatory landscape in 2016.


Concerns about fundraising were first highlighted in May last year following the tragic death of Olive Cooke, a woman who had dedicated 76 years of her life to raising money for the Royal British Legion, selling an estimated 30,000 poppies.

Mrs Cooke had told newspapers in 2014 how she was being inundated with letters from charities and it was reported that she may have been receiving in excess of 250 letters a month from charities and other organisations seeking donations at the time of her suicide.

It was suggested that the fundraising practices of the charities involved may have contributed to Mrs Cooke taking her own life (a suggestion that was subsequently dismissed by the family) and Chris Grayling, the leader of the House of Commons, described it as a “shocking case” and an example of “wholly inappropriate behaviour”.

The case did however bring fundraising practices under the microscope and a number of other stories emerged, including instances of vulnerable people’s data being sold on to third parties for fundraising purposes.

The Daily Mail also carried out some undercover investigations and found that the telemarketing companies and charities engaged in fundraising would routinely ignore the Telephone Preference Service, make it near impossible for donors to opt out of receiving calls and target vulnerable and elderly people.

In addition to this, the Information Commissioner’s Office reported on a number of serious data protection issues with the Alzheimer’s Society. This is discussed in further depth in Michael Winder’s article here.

William Shawcross, the chair of the Charity Commission described the situation as a whole as a “crisis for the charity sector”.

The Etherington review

In response to the crisis, the government asked Sir Stuart Etherington, chief executive of NCVO, to lead a review into the regulatory framework that applies to charity fundraising. Its recommendations are summarised below:

  1. A new fundraising regulator – The review recommended a new, single regulator and criticised the systemic weaknesses in both the design and implementation of the current system. The new regulator would replace the Fundraising Standards Board (FRSB) and would be required to report regularly to parliament.
  2. A “three lines of defence” model – This model would see the trustees of charities as a first line of defence adopting more responsibility for charity fundraising being carried out in compliance with the law. The second line would be the new fundraising regulator and the third line would see the Charity Commission act as the backstop in cases that raised regulatory concerns on issues that fell within its remit.
  3. Increased responsibility for fundraising taken by trustees – trustees should take primary responsibility and regularly review compliance with the code of fundraising practice. Trustees should also report upon the steps the charity has taken to protect vulnerable people and others from undue pressure in their fundraising.
  4. One code of practice – The Public Fundraising Regulatory Association’s (PFRA) rulebook should be merged with the Code of Fundraising Practice published by the Institute of Fundraising (IOF). The new fundraising regulator should enforce the new code.
  5. A recommendation that the IOF and PFRA merge.
  6. A new Fundraising Preference Service – The establishment of a fundraising preference service to supplement the Telephone Preference Service. This would allow individuals to opt out of charity appeals.

Etherington’s report was welcomed by the sector as providing firm proposals for positive reform that would protect donors and provide charities with a much clearer framework within which to operate.


The Etherington review was swiftly followed by a report of the House of Commons Public Administration and Constitutional Affairs Committee (PACAC). Its substantial report was published on 25 January 2016.

The PACAC report was quite scathing in its criticism of the charities and particular blame was laid at the door of charity trustees. A selection of criticisms from the report appear below:

Last summer’s controversies were evidence of a failure of governance by trustees…Managing reputational risk is central to this role, for without good reputation, no organisation can be effective. In this role they failed

Trustees were either negligent, or wilfully blind to what was being done in their names

This sorry episode has damaged the reputation of charities across the board, including those who have behaved properly, and hindered their ability to raise essential funds

Government must…use its reserve powers if needs be, but it would be a sad and inexcusable failure of charities if statutory regulation becomes necessary

PACAC has supported the majority of the recommendations made in the Etherington report save for the establishment of a new telephone preference service. A working party has been established to consider the viability of such a service and its conclusions should be published later in the year.

PACAC has also emphasised the role of that trustees need to play in monitoring and enforcing fundraising standards and it has very clearly stated that charities are now drinking in the last chance saloon in respect of the self-regulation of fundraising.

Should the new regulatory landscape fail to rein in poor fundraising practices, a statutory regulator of fundraising is very likely to be created.

The future?

Steps have already been taken to establish a new regulator, to be known as The Fundraising Regulator. On 11 February, Lord Grade, the new regulator’s chair, announced eight people who will make up its first board.

The Fundraising Regulator is to be funded by large fundraising charities – that is charities who spend £100,000 or more on fundraising activities – and it has been reported that each will be asked to pay an annual levy of £1,300.

The new regulator is expected to be up and running by the summer and will have between 15 and 20 staff.

A revised Code of Fundraising Practice is to be published including elements of the PFRA’s rulebook and charity trustees whose organisations are involved in public fundraising should ensure that they familiarise themselves with its contents as soon as it is available.

It seems highly likely that the new Fundraising Regulator will be more active and visible than its predecessor and, following criticism in the PACAC report, it is possible that the Charity Commission will seek to increase its profile in respect of the regulation of fundraising. Indeed, the Commission’s guidance on charity fundraising (the CC20) has been revised and the draft new guidance was until very recently out for public consultation.

In addition to this, the Charities (Protection and Social Investment) Bill contains new provisions to further regulate the conduct of fundraising. The Bill, which is soon to become law, contains reserve powers to introduce statutory regulation in the event the this last attempt at self-regulation falls short.

Whilst the fundraising crisis of 2015 was brought about as a result of the activities of a very small minority of charities (and mainly very large national charities), the effect on the sector as a whole has been profound. Trustees have been criticised for a laissez faire attitude to fundraising activities, entrusting fundraising managers and partner organisations with responsibility for this area without carrying out any effective monitoring or exercising an appropriate degree of control.

The bad press generated could feasibly see a reduction in the amount of funds charities are able to raise from the public and it will be important for the trustees of all charities to ensure that their fundraising policies and procedures are reviewed in order to ensure compliance with the revised Code. Similarly, charity trustees will need to ensure that the fundraising practices of its staff and volunteers are properly monitored and assessed.

Charity trustees who fail to respond to will be an easy target for the new Fundraising Regulator.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Stephen Claus

Head of Charity & Social Enterprise
Tel: 0151 600 3314
Email Stephen

Is the Freedom of Information Act to be extended to charities?

Wednesday 24th February 2016

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Charities & Social Enterprise News - Issue 20

It is perhaps not too surprising that following the Kids Company and fundraising crises, charities have found themselves under increased parliamentary scrutiny.

This has resulted in a proposal to extend the Freedom of Information Act (FOI) to “social enterprises and charities contracted to carry out work for public authorities”.

The proposal has two origins. Firstly, an independent cross-party commission was set up in December 2015 tasked with reviewing the existing Act, including whether to extend it to charities carrying out public sector work. Secondly, a Ten Minute Rule Bill to extend the reach of the Act (the ten minute rule allows a backbench MP to make his or her case for a new Bill in a speech lasting up to ten minutes) was introduced in the House of Commons by the Liberal Democrat MP, Tom Brake.

The Freedom of Information Act gives individuals the right to ask organisations that are covered by the Act whether particular information is held, and also provides a right for individuals to be given that information, unless one of the exemptions applies.

If the FOI regime was extended to charities, a charity could find itself obliged to release information that was otherwise considered to be internal or confidential to the trustees. FOI requests must be responded to within 20 working days and small charities in particular could find this to be a quite significant administrative burden.

The proposals have been met with strong opposition in the charity sector. Sir Stephen Bubb, the chief executive of ACEVO (Association of Chief Executives of Voluntary Organisations), in particular has been very vocal describing the proposals as “a blunderbuss that would do nothing for transparency but ultimately harm good causes”.

Further developments are expected in the coming weeks and months and we will keep a close eye on this, reporting on any significant developments in our blogs.

If you would like to discuss any of the points raised in this article please do not hesitate to contact Stephen Claus.

Information Commissioner’s Office issues enforcement notice to the Alzheimer’s Society

Wednesday 24th February 2016

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Charities & Social Enterprise News - Issue 20

On 5 January 2016, the Information Commissioner’s Office (ICO) issued an enforcement notice in respect of a number of serious failings in the way the Alzheimer’s Society handled sensitive personal data.

The failings primarily concerned a group of volunteers who were recruited to help sufferers and their families (or carers) to seek NHS healthcare funding. The 15-strong group handled 1,920 cases over a period of seven years, and in doing so they had access to sensitive personal data of such dementia suffers and their families/carers. The data included information used in drafting reports about the medical treatment, care needs and mental health of the dementia sufferers.

The ICO discovered among the failings that:

  • Volunteers were using personal email addresses to receive and share information about people who used the Alzheimer’s Society;
  • Volunteers stored unencrypted data on their personal home computers;
  • Volunteers failed to keep paper records locked away;
  • The Alzheimer’s Society had not trained the volunteers in data protection matters;
  • The Alzheimer’s Society had not explained its data protection policies and procedures to volunteers; and
  • There was a lack of supervision of staff.

The issues had been originally identified in late 2014 and required the charity to make improvements. While the Alzheimer’s Society has gone some way to make the necessary changes, the ICO remained concerned that more needed to be done. This, coupled with a separate breach in respect of a website hack in 2015 which put personal data of service users at risk, led to the issue of the enforcement notice.

In the enforcement notice, the ICO specifically noted that the failings amounted to a breach of the fifth and seventh data protection principles, relating to the length of time personal data should be kept and appropriate security measures respectively.

The ICO has given the charity six months to comply with the remedial steps set out in the enforcement notice, which include: the provision of secure email accounts and storage, appropriate organisational and technical measures against unauthorised staff access, provision of checking to ensure the security of the website and the provision of mandatory data protection training.

If the Alzheimer’s Society does not comply with the notice, it could face prosecution.

The Alzheimer’s Society has apologised for the failings and has issued reassurance that internal checks have shown that no personal data has ended up in the public domain as a result of the lapses. It also said that it was strengthening existing procedure to ensure training is passed to all volunteers and that compliance will be monitored.

This enforcement notice demonstrates that the ICO is not turning a blind eye to charities and whilst it will work with organisation, it will not shy away from issuing an enforcement notice if it does not consider improvements are being made fast enough. All organisations, including charities, who process personal data should ensure they are complying with the provisions of the Data Protection Act 1998. If there are any queries or concerns as to the nature or extent of your duties, or compliance with them, legal advice should be sought.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Michael Winder

Associate, Commercial
Tel: 0151 600 3085

Kids Company: Lessons for trustees

Friday 18th December 2015

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Charities & Social Enterprise News - Issue 19

In August, Kids Company closed its doors amid a mass of controversy, claim and counter claim.

Allegations of child sex abuse, financial mismanagement and the misuse of charitable funds have all been features of the charity’s dying days and the manner in which the charity was funded by the government has been subject to intense scrutiny. The fallout has continued into December with Alan  Yentob, the charity’s Chair, resigning from his post as creative director at the BBC after having been accused of seeking to interfere with the BBC’s coverage of the charity’s collapse.

This article discusses the collapse of Kids Company and some lessons charity trustees might draw from this controversial episode.

Founders and trustees

It is very common for a charity’s founder to play a very prominent role in the life of a charity. In some cases, a founder may take up a role of trustee and over time, morph into the role of chief executive. It is even possible in some cases, provided the arrangements and process can be properly managed (this usually requires authorisation from the Charity Commission), for charities to benefit from having a founding trustee becoming a paid employee and driving the charity forwards with a passion and determination that cannot otherwise be matched.

Camila Batmanghelidjh, the founder of Kids Company, has been the focus of much attention following the collapse. It has been suggested that Batmanghelidjh operated with too free a hand in her role as the charity’s chief executive and that the charity’s trustees allowed their judgment to be impaired by what is perceived to be an extravagant, charismatic and dominant personality.

The extent to which this was the case with Kids Company is not under consideration here. However these allegations do highlight some lessons for trustees in relation to the delegation of day to day activities to staff.

The trustees of many charities delegate the day to day operation to staff, such as a chief executive. In many cases, such delegation is necessary due to size and range of activities of a particular charity. However, the trustees cannot delegate their overall responsibility and will always remain responsible for decisions that are made and actions that are taken.

It is important therefore that trustees do not allow themselves to become detached from the activities of their charity’s chief executive (or other senior members of staff) and maintain clear lines of reporting and proper processes for supervision. It is common for example for the chief executive to report to the trustees at each trustee meeting and for there to be at the very least an annual appraisal of the chief executive carried out by the trustees. Such processes (allied with very clear terms of delegation) should ensure that the trustees remain in touch with the day to day operation of the charity.


It has been widely reported that Kids Company adopted a policy of spending money according to need and that this policy overrode any policy relating to the building of an appropriate level of reserves. This was despite the charity receiving in excess of £90 million of unrestricted funds since its establishment.

The Commission’s guidance on reserves states that deciding the level of reserves that a charity needs to hold is an important part of financial management and forward financial planning.

Charities should not maintain reserves levels which are higher than necessary, indeed charity law requires any income received by a charity to be spent within a reasonable period of receipt. However, trustees are permitted to hold an appropriate level of reserves that takes into account the charity’s financial circumstances and other relevant factors. If reserves are too low then the charity’s solvency and its future activities can be put at risk, as was the case with Kids Company.

Reserves should be sufficient so as to cover normal running costs and any unexpected costs. Such reserves can ensure that a charity is sustainable and in turn capable of advancing its objects on a long term basis.

In the case of Kids Company, its reserves were insufficient to cover even one month’s worth of employment costs and taking into account the quite unique means by which the charity was funded (discussed below), this level of freely available unrestricted funds was very clearly too low.


During the financial year ending 2013, Kids Company received funding to the tune of £4.5 million from government. Over the course of its lifetime, the charity received £46 million of public funding, including £42 million in central government grants.

In addition to this, the charity also received donations from a number of celebrity backers.

Charity’s that rely too heavily on one source of funding and fail to diversify their income streams will inevitably risk significant financial difficulty in the event of a drop in the main source of funding.

Charity trustees should continually keep their income streams under review in order to properly monitor and assess any areas of concern. An over-reliance on one source of funding should be counterbalanced by exploring alternative sources with a view to ensuring that a charity’s financial position is as robust as possible.

In the case of Kids Company, a range of issues contributed to the ever increasing concerns held by its principal funder as to the way in which the charity was run and this resulted in a reduction in the grants the charity received and ultimately its collapse.


In addition to the areas highlighted in this article, there are a number of other lessons that trustees can draw from what has been a very high profile episode. As the weeks and months passed, more claims emerged concerning the operation of Kids Company, including allegations of the misuse of funds and the fabrication of beneficiary records.

The Insolvency Service was appointed as liquidator for Kids Company by the High Court on 20 August. The following day, the Charity Commission opened a full statutory inquiry.

The Commission’s inquiry will address concerns about the administration, governance and financial management of the charity, and identify wider lessons for other charities and trustees. The inquiry report will make interesting reading and should provide trustees of all charities with further guidance as to the fulfilment of their duties and responsibilities.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Graeme Hughes

Tel: 0151 600 3079
Email Graeme

Charities and the Autumn Statement

Friday 18th December 2015

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Charities & Social Enterprise News - Issue 19

On 25 November 2015, Chancellor George Osborne delivered his Autumn Statement.

The main headline that was welcomed universally by charities was that the previously planned £4.4 billion tax credit cuts will no longer go ahead.

In addition to this, there were a number of other announcements relating to the voluntary sector. These are set out below:

  • The Government has stepped back from its planned £320 million raid on Big Lottery Fund’s funding.
  • The operation of the Gift Aid Small Donations Scheme is to be reviewed by the Government. This applies to the top-up payments that eligible charities and CASCs have been able to claim on small cash donations of £20 or less without having to obtain a Gift Aid Declaration. The effectiveness of the Scheme is to be considered.
  • Funding for museums and galleries will be maintained in order to ensure that they remain free to the public. The Government also intends to explore a new tax credit for museums and galleries to encourage new exhibitions and access to a wider audience.
  • Women’s health charities and areas such as mental health are to be allocated extra funding.
  • Funding for the Charity Commission will be frozen over the next four years. This is likely to result in a cut in real terms. However William Shawcross, the Charity Commission’s chair has commented that the settlement is “recognition of the importance of the Commission’s work. The recent high profile charity crises and the damage these have done to trust in charities show the importance of an effective charity regulator”.

Another announcement that has largely gone unnoticed is the introduction of an exemption to provide relief from the loans to participator rules for certain charity transactions.

The loan to participator rules apply where loans or advances are made by close companies (broadly companies owned by five or fewer shareholders) to their participators. Some of the transactions caught by these rules resulted in a tax charge being applied even where advances were made by close companies to trustees of charities for charitable purposes.

The Government has recognised (after consultation) that charities should not be adversely affected by these rules which are designed to deter the extraction of value by individuals from close companies.

The measure announced in the Autumn Statement introduces an exemption for charities from the tax charge on loans or advances made by close companies to their participators where it is clear that the loan or advance is being made for wholly charitable purposes, and therefore that individuals are not benefitting personally from such loans. This will allow charities to use the money to further their charitable objectives.

Whilst the Government’s U-turn on tax credits was a victory for charities who have campaigned against the cuts to tax credits and the Big Lottery Fund, the Autumn Statement was a relatively uneventful one for charities. However, these small measures have been of interest. The review of the Gift Aid Small Donations Scheme in particular is something to keep an eye on as this should provide information as to the effectiveness of the Scheme and, possibly, its extension.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Stephen Claus

Head of Charity & Social Enterprise
Tel: 0151 600 3341
Email Stephen


Charities and the General Election – A look at what charities might expect over the next 5 years

Friday 24th April 2015

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Charities and Social Enterprise News - Issue 18

With the General Election fast approaching, each party has now launched its manifesto providing a small insight into what charities might expect over the next five years.

In this article, we consider the main points relevant to charity law and the voluntary sector arising from the manifestos of the principal political parties; the Conservatives, Labour and the Liberal Democrats. The manifestos of the other parties also contain issues relevant to charities but they are outside the scope of this article.

The Conservatives

Headlines from the Conservative party’s manifesto included a proposal for new laws requiring public sector employers and companies with more than 250 employees to give staff up to three days’ paid volunteering leave.

The manifesto claimed that volunteering is now at a ten-year high, with over three million more adults giving their time last year than in the year to March 2010 and these proposed measures are intended to build upon this.

The manifesto also sees the Conservatives reiterating their aims for a Big Society, giving more people the power and support to run a school, start their own social enterprise, and take over their own local parks, landmarks and pubs. Since the last election, we have seen a number of “community asset transfers” and more may follow should the Conservatives retain power.

The expansion of the National Citizen Service scheme is also planned with the stated aim that it becomes “a rite of passage for young people”.

David Cameron also announced that his party plans to extend the Right to Buy to housing association tenants. This particular proposal has been met with disapproval amongst housing associations who have already suggested that they would mount a legal challenge to any attempts to implement this. The extent to which this could be applied to charitable registered providers would require significant consideration given the rules that apply to charities when disposing of land.

Other points affecting charities in the Conservative party’s manifesto include:

  • Scaling up the use of social impact bonds and payment-by-results, focusing on youth unemployment, mental health and homelessness.
  • Supporting the #iwill campaign operated by Step up to Serve which aims to make social action part of life for as many 10 to 20 year-olds as possible by the year 2020.
  • Positive comments about the role of charities in delivering public services and in the running of foodbanks, helping the homeless, and tackling debt and addictions.
  • Building on the use of the voluntary sector in providing schemes such as the Work Programme.


The Labour party has reiterated its commitment to repealing the deeply unpopular Lobbying Act.

The Lobbying Act came into force in 2014 and provides a set of rules to govern the activities of “non-party campaigners”, being people and organisations that publicly campaign on issues in the run up to general elections but are not standing as a political party or candidate.

The Act requires charities that engage in certain campaigning activity (or “regulated activities”) to register with the Electoral Commission if they are planning to spend more than £20,000 in England or £10,000 in each of Scotland, Wales and Northern Ireland on such activities.

The Act has been reported as having caused charities to spend significant resources complying with new administrative burdens and many in the voluntary sector have bemoaned the “chilling effect” of the new legislation, with many organisations being reluctant to engage in campaigning activity following the uncertainty caused by the Act.

Moving on, when it brought in the Charities Act 2006, the last Labour government brought public benefit to the fore leaving it to the Charity Commission to try to ensure that independent fee paying schools provided sufficient public benefit to justify their charitable status (and the tax advantages that go with it). This led to the very high profile legal challenge of the Independent Schools Council against the Charity Commission. The case concerned the Charity Commission’s guidance on the extent to which independent fee paying schools provide public benefit and the emphasis placed by the Commission on the provision of bursaries. The Charity Tribunal ruled that determining public benefit must rest with the trustees and the decision was hailed as a victory for independent schools.

In its manifesto, the Labour party has reignited this argument proposing to strip independent fee paying schools of charitable status if they don’t “form a meaningful partnership” with institutions in the state sector. This is potentially a very controversial issue, should Mr Miliband become prime minister.

Other points affecting charities in the Labour party’s manifesto include:

  • Increasing young people’s volunteering and social action, specifically through supporting the #iwill campaign operated by Step up to Serve.
  • Support for charities and social enterprises in creating social value and supporting the social economy.
  • Extending the Freedom of Information Act to all organisations carrying out public services – this could result in more charities being subject to FOI requests.
  • An “English New Deal” that might result in charities being afforded the opportunity to be more engaged in the design and delivery of public services.

Liberal Democrats

An interesting proposal in the Liberal Democrats manifesto is to permit non-profit local media to apply for charitable status when they are demonstrating clear public value.

An obvious obstacle to this would be the rules around political activity by charities. For example, a local paper that aligns itself with a particular political party will be in breach of the principle that a charity must not give its support to any one political party. Whilst charities can support a policy of a particular party where that policy contributes towards the furtherance of the charity’s purposes, outright support for a party is not permissible.

In addition, the Liberal Democrats have confirmed that they will consider Lord Hodgson’s review of the Lobbying Act before deciding what, if anything, to do about it.

The Liberal Democrats also state that they will strengthen the community right to buy, supporting organisations including charities to run local public services. The manifesto states that support will be given to local libraries and ensuring any libraries under threat of closure are offered first for transfer to the local community.

Other points affecting charities in the Liberal Democrat’s manifesto include:

  • Supporting social investment, ensuring charities and social enterprises can access the support and finance they need to develop and deliver innovative, sustainable solutions to challenges in their communities.
  • Encouraging health services to link up with local authority social care teams and voluntary services.
  • Working with charities to raise awareness of the signs and symptoms of diseases such as cancer.
  • Working with religious and community leaders and civil society organisations to combat extremism.

As always, the General Election is an interesting but uncertain time for charities.

The impact of the Lobbying Act on charities and their campaigning activity will be particularly interesting to assess once the dust has settled and the results are in.

In addition to this, there are a couple of interesting legal points concerning charitable status that might arise depending upon which way the result goes and the ongoing involvement of charities in the delivery of public services and their relationship with government looks set to continue to be a prominent theme moving forwards.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Graeme  Hughes
Solicitor, Charities and Social Enterprise
Tel: 0151 600 3079

The Charity Commission: On the Road to Recovery?

Wednesday 28th January 2015

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Charities and Social Enterprise News - Issue 17

The Charity Commission has had a very difficult time of things over the past few years. Budget cuts imposed as a result of the coalition government’s austerity measures have taken their toll and the Cup Trust affair raised serious concerns over the Commission’s effectiveness as a regulator.

The Charity Commission was the subject of very public and critical reports from the Public Accounts Committee and the National Audit Office.

The reports were equally scathing and amongst their conclusions it was said that the Commission:

  • Does not do enough to identify and tackle abuse of charitable status;

  • Uses its information poorly to assess risk and often relies solely on trustees’ assurances; and

  • Where it does identify concerns in charities, makes little use of its powers and fails to take tough action in some of the most serious cases.

In a nutshell, the Charity Commission was considered unfit for its purpose.

More recently however, there has been some good news for the Commission. Extra funding to the tune of £8 million has recently been announced to improve regulatory functions and a draft bill is currently being consulted upon that proposes to strengthen its regulatory powers. You can read more about this in our blog here.

In addition to this, the Charity Commission has been buoyed this week by a follow up report from the National Audit Office that William Shawcross, the Commission’s chair, has described as a “vote of confidence” in the Commission and its staff.

The follow up report has considered the progress made by the Commission against the recommendations contained in the previous critical reports and has concluded that there are signs of “good early progress”. The report also describes the Commission’s current change programme as “a credible high-level business plan”.

However, the follow up report also identified that there is a long way still for the Charity Commission to go, identifying a number of areas where further improvements need to be seen.

For example, the Commission’s registration processes have slowed considerably in recent months and according to the report, the Commission has failed to meet targets for the registration of new charities for some time. In addition, the report recommends that the Commission increases the sharing of data with other agencies and establishes a greater understanding of how much each of its functions cost.

Perhaps more seriously, the Commission has also been warned about the board’s involvement in executive matters pointing out that “the chief executive is now established in her role and in our view there is a risk that the board’s continuing close involvement in executive matters could become the norm”. Many commentators quite rightly point out that this could impact upon the independence of executive versus non-executive functions.


The Charity Commission now appears to be upbeat.

William Shawcross has said: “I am delighted that the NAO has recognised our ability and determination to transform the Commission into the robust, effective regulator the public and charities expect” and that “the findings will spur us on to maintain the momentum of change”.

The report does however highlight areas that we have in practice found concerning. The delay in charity registrations for example is very apparent. This is often accentuated by the delay that often arises when a new charity is attempting to open a bank account in order to satisfactorily demonstrate that it has an income sufficient to meet the registration threshold.

The Commission’s stance as the sector’s “policeman” is also something that continues to attract comment. The Directory of Social Change (a research charity with an office base here in Liverpool) is particularly concerned by the ongoing use by the Commission and others of the term “robust” when describing regulatory functions.

Jay Kennedy, the DSC’s Head of Policy states there is no “clear explanation of what this means”. He said that the DSC assumes this to “mean an emphasis on the Commission as a ‘policeman’ and little consideration of its crucial role as a provider of regulatory advice, information and support".

The Charities Act 2006 (now consolidated in the Charities Act 2011) introduced a greater degree of self-regulation to charities, allowing charity trustees to independently carry out certain actions that would previously have required input from the Charity Commission. In our experience, the Commission now expects trustees to use the self-regulatory powers rather than seek its assistance.

This “do it yourself” approach can be helpful and efficient in assisting charities with governance issues but on the other hand, the Commission’s stance as a “robust” regulator offering little by way of advice, information and support could dissuade charity trustees from self-regulation through a fear of what the consequences might be should they get things wrong. Whilst some trustees have the resources to seek legal advice on such matters, many charity trustees are not in a position to do this.

If you would like to discuss any of the points raised in this article please do not hesitate to contact:

Stephen Claus

Head of Charity & Social Enterprise
Tel: 0151 600 3341
Email Stephen