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A B C D E F G H I J K L M N O P R S T V W Y

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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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.

Reserves

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.

Funding

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.

Summary

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

Associate
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.

Labour

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
Email: graeme.hughes@brabners.com


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.

Comment

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

 

Oil: The Long Game

Wednesday 28th January 2015

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Charities and Social Enterprise News - Issue 17

In our guest article, Bill Price, Investment Manager at Tilney Bestinvest, provides an update and his take on the oil market. Tilney Bestinvest has been helping charities make sound investment decisions since it first opened its doors more than 150 years ago. It has a large, dedicated charities team located across the UK.

At its semi-annual meeting in late November, OPEC resolved to continue supplying some 30m barrels per day into the world oil market. As a result, the price of oil continued to fall, Brent Crude finishing 2014 at $57 a barrel – almost half its opening level. The price has continued to weaken so far in the New Year and is back to levels last seen in 2009.

Such corrections in the oil price are not unprecedented, but it is the circumstances surrounding it, on this occasion, that are unusual. The problem lies in a mismatch between demand and supply of some 2m barrels per day: the largest since 1998, when crude prices fell by 30%. Usually such corrections occur during deep global recessions, when demand falls with activity levels. However, we are far from being in a global recession. What has changed is the supply situation. US shale oil has resulted in a new source of “cheap” oil, which now supplies some 9m barrels per day and was projected to grow by a further 1m barrels per day in 2015. As a result, during 2014, the global oil market reached a tipping point, when supply began to comfortably exceed demand.

For the previous ten years, OPEC, led by Saudi Arabia, have acted as the swing producer in the market, managing the oil price, which in more recent times has traded in a $90-$125 a barrel range, which suited all of the main interested parties. However, Saudi Arabia has now decided to cease managing the market, partly because it no longer can but also with an eye on the more strategic long term objective of maintaining OPEC’s market share and hence its economic and political influence.

The most obvious way to balance the market is to reduce the overhang of supply and allow demand to eventually catch up with capacity. Hence, OPEC has started a price war with the only other supplier that has the capacity to meaningfully reduce output – US shale. The result so far has been a halving of the price to a level that is painful for not only both parties, but also other market participants, such as Russia, Nigeria and Venezuela.

The Gulf states, who are the lowest cost producers and account for over half of OPEC’s output, instigated the no change in supply agreement in November and have so far ignored calls from its more peripheral ( and vulnerable) members for a meeting before the next one, scheduled for 5 June.

A sustained oil price below $55 a barrel is seen to leave around half of US shale oil production loss making, triggering the risk of eventual bankruptcy. However, in the short term, the upfront nature of the costs of drilling, followed by low subsequent marginal costs and the fact that many operators have sold forward output at more economic prices, suggests that, on a 3-6 month view, any reduction in output is likely to be limited. Beyond this timescale, however, there is growing evidence (via rig counts, well permits, cap ex budgets etc.) that previous expansion plans are now being reigned in.

Therefore, in the absence of an unforeseen event such as an increase in geopolitical tension materially reducing supply, the oil price looks set to languish – over the first half of the year at least.

The OPEC meeting in June is the first meaningful opportunity to crimp supply. Hopes centre on a 1.5m barrels per day reduction in output, in order to bring OPEC demand and supply into line. However, the decision is more a political one and so, by its very nature, difficult to predict.

The prospect of strengthening demand suggests that a modest squeeze in supply would be enough to propel the price back to the $80-90 a barrel level needed to restore industry profitability.

The wider implications of a low oil price should also not be ignored. Saudi Arabia is probably also looking to re-establish its importance to America by humbling Russia and Iran. In addition, the potential reaction of Russia to its largely oil based economic problems and/or the possibility of renewed turmoil in the Middle East, could trigger the sort of geopolitical event that would be the market’s salvation.

The oil market’s current predicament is one typical of the boom- bust cycle that most commodities experience on a periodic basis. $100 a barrel oil prompted the shale boom, which in turn sowed the seeds of the current production glut. A short term surplus will inevitably become a medium term deficit as capital spending is reigned in, triggering the cycle all over again. To move on, one side or the other needs to cut production. As we have seen this is unlikely in the first half of the year. Beyond then, it’s a matter of who can stand the pain the longest. This could run for some time.

If you have any questions concerning this article or charity investments please do not hesitate to contact Bill at bill.price@tilneybestinvest.co.uk or call 0151 556 9000.

Bill specialises in providing bespoke investment advice to a range of not-for-profit organisations and charities across the country, as well as advising high net worth and ultra-high net worth private clients, pension funds, companies and family trusts.
You can find out more about Tilney Bestinvest by visiting their website here.

For Charity Law advice please contact:
Stephen Claus
Head of Charities and Social Enterprise at Brabners
Tel: 0151 600 3341
Email: stephen.claus@brabners.com

 

 

Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change. Funds which invest in specific sectors may carry more risk than those spread across a number of different sectors. In particular, gold, technology and other focused funds can suffer as the underlying stocks can be more volatile and less liquid.


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