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Briefing on the Charity Commission’s guidance for charities with a connection to a non-charity

  • United Kingdom
  • Corporate
  • Education - Briefings

31-10-2019

1. Introduction

1.1 The Charity Commission has recently released detailed guidance for charities on their connections to non-charities, highlighting that whilst such connections can bring benefits they can also present risks and challenges. Common situations where charities have connections with non-charities include:

1.1.1 the charity has set up and owns a trading subsidiary;

1.1.2 the charity has been set up by a non-charity (including a corporate in the case of a corporate foundation);

1.1.3 the charity receives regular funding or support from a non-charity;

1.1.4 the charity gives regular funding to a non-charity;

1.1.5 the charity works regularly with a non-charity to deliver services or further its purposes;

1.1.6 the charity has a non-charity as a corporate trustee; and

1.1.7 the charity has a non-charity as its sole or a significant member.

1.2 The guidance is clear that trustees must ensure that the resources of the charity are not used to fund or support non-charitable purposes when carrying out joint projects or when giving, or receiving, funding. Any benefit to the non-charity must be “incidental”, which means that it must be a necessary by-product of carrying out the charity’s purposes (often referred to as objects) as set out in the charity’s governing document.

1.3 Charities must only provide grant funding for outcomes that will further the charity’s purposes, and for no other reason. There is specific Charity Commission guidance on this issue, available here.

1.4 It is important to note that the guidance acknowledges that connections with non-charities can bring a number of benefits to charities; the relationships just need to be managed appropriately. Our recent experience in relation to applications for charitable registration is that the Charity Commission is giving significant weight to this guidance where non-charities are involved, in any way, with charities. Charities should think about developing their own policy or guidance document if they have significant involvement with non-charities.

2. Information gathering

2.1 In advance of funding or partnering with a non-charity, trustees must be satisfied that the organisation is a suitable one to be associated with. The questions to ask include the solvency of the non-charity and whether its reputation could damage that of the charity. The Charity Commission advises that such due diligence checks should be made even if the non-charity is familiar to the charity.

2.2 Trustees should ensure their checks are proportional to the risk of the connection. Such checks should be more thorough if the connection concerns children or vulnerable persons, or if the non-charitable partner works overseas or if significant charitable funds are involved.

2.3 Additionally, it can be good practice to ensure that the proposed partner organisation has completed filing requirements. If it is a company, the Companies House register can be searched online. Failure to deal with filing requirements can be evidence of poor corporate governance.

3. Charities and their subsidiary (non-charity) trading companies

3.1 The guidance sets out that a charity should only use its funds to set up a non-charitable trading subsidiary where:

3.1.1 the purpose of doing so is to benefit the charity by providing a return on investment; or

3.1.2 the trading subsidiary is carrying on activities which the charity itself could carry out to further its objects (typically “primary purpose” trading).

3.2 It is also permissible to set up a non-charity subsidiary in order to manage the administration of the charity.

3.3 That said, trustees should be aware of the potential tax implications of investment in non-charitable trading subsidiaries. Particular consideration should be paid to the risk that HMRC could deem any such investments as non-beneficial for the charity and categorise them as non-charitable expenditure with the attendant tax risk. There is a useful checklist for charities operating with a non-charity as a subsidiary at the end of the Charity Commission’s guidance note.

4. Charities funded/set up by non-charities

4.1 The guidance stresses the importance of the independence of charities. In essence, independence means that the charity exists only to further its charitable purposes for the public benefit; its trustees must only act in the interests of the charity.

4.2 In situations where non-charities provide the main source of funding for charities, the trustees of the charity must have a choice about accepting any funding and any terms attached to the funds. It is considered prudent for charities to diversify their income streams so that they are not overly-reliant on one funder; this is a consistent theme in Charity Commission guidance.

5. Conflicts of interest

5.1 Charities must have systems in place to identify and properly address any conflicts of interest or duty. These are commonplace when charities are connected with non-charities and may arise in situations where a trustee is also on the board of the non-charity or simply works for the non-charity and owes a duty to that entity. A conflict also arises when a trustee is benefitting in some way from the charity’s arrangement with the non-charity.

5.2 Charities must have adequate authorisations in place to address any trustee benefits and a system to enable them to properly decide whether the conflict should be removed in entirety or managed. Given that non-charities often appoint one or more trustees to the charity to which they are connected, it is important that charities and the non-charity appointing bodies are aware of the Commission’s guidance on this; “Conflicts of interest: a guide for charity trustees” (link). Appointed trustees should make decisions only in the interests of the charity regardless of the interests or wishes of their appointor; they are not a delegate of their appointor.

6. Written Agreements

6.1 It is a recommendation, but not a mandatory requirement of the guidance, that dealings with connected non-charities are codified in written agreements. The level of detail in any written agreement will be dependent on the amount of money and risk involved in the connection. For simple or low-risk arrangements the guidance recommends the use of a letter which specifies the terms that have been agreed upon. For more complex arrangements, a formal agreement or contract should be drafted. Trustees must be prepared to enforce agreements if required, and provisions should be included to allow the parties to exit the arrangements.

7. Reporting

It is inevitable that there will be risk involved where a charity enters into dealings with a non-charity. As always, where problems arise, any serious incidents should be reported to the Charity Commission. A serious incident will include any incident which involves or risks loss or misapplication of a charity’s money or assets or risks harm to the charity’s work, beneficiaries or reputation.

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