UK: Charities - A Briefing For Charitable Organisations – Summer 2011

Editor's comment

Is the way forward clear?

We live in an ever changing world and that is as true for charities as for any other organisation. Without change, there is the threat of stagnation, but too much change gives rise to instability and makes it difficult for us to plan ahead.

Sometimes apparent changes are not what they seem. The Chancellor's announcement of 'big help' for charities is to be welcomed, particularly by those charities suffering from reductions in Government income, be it a sudden cessation or a more gradual erosion. However, looking behind the rhetoric, the changes happening now are quite minor and the proposed consultations which might give rise to more significant changes in the future do not help now. Similarly, the changes to the VAT regime will have limited impacts on most charities. VAT on shared services is a significant barrier which prevents charities working together – unfortunately the only response has been a number of promises to consult on the issue.

Sometimes change doesn't come fast enough: almost five years after the passing of the Charities Act 2006, charitable incorporated organisations are still not available in England and Wales.

But there is some good news. On balance, we welcome the Charity Commission's draft guidance on incorporating ethical considerations into investment policies. And likewise updated guidance on governance, particularly when written in an accessible form, can only benefit the sector.

Adrian Wild

The Chancellor outlined several proposals in his recent Budget speech claiming to provide a 'big help' to charities.

In his second Budget speech the Chancellor, George Osborne, said that he was giving a "big help to the Big Society" and stated "do the right thing for charity, and the Government will do the right thing by you". So we look into the detail of the proposals to see what the Chancellor promises.

A HELPING HAND FOR CHARITIES

By Luke West

Help for the smallest

From April 2013, charities receiving small donations of £10 or less will be able to apply for a gift aid repayment without the need to obtain gift aid declarations from each donor. This scheme is capped to donations totalling £5,000 per annum per charity and charities will need to be recognised by HMRC as having a successful three-year track record of good tax compliance. Further details will be consulted on over the summer. This is a welcome simplification, but it remains to be seen whether the red tape requirements will negate the benefits for most charities.

Help for the biggest

Under current rules, if an individual or company donates more than £10,000 to a charity, the benefit which they can receive from the charity (while preserving tax relief on the donation) is capped at £500.

From April 2011, for individuals and corporate donors, this benefit limit will increase to the smaller of £2,500 or 5% of the donation. We are also promised new guidelines to help clarify what constitutes a 'benefit'.

It is felt that the majority of charities and donors will be unaffected by these changes. However, this change will be particularly beneficial for charities who like to be able to give a 'thank you' of sufficient worth, be it in membership or complimentary tickets, to recognise gifts made by large donors. So a donation of £50,000 could be reciprocated with a benefit worth £2,500 from the charity.

Help to simplify self-assessment

Since 2005 taxpayers completing selfassessment tax returns have been able to direct that a tax repayment may be made to a specific charity of their choice. Such amounts can also qualify for gift aid.

The amount donated to charity by this system is rather low at £400,000 per annum. Indeed, it seems to have cost HMRC approximately £150,000 per annum to operate the system, so the cost-benefit ratio is difficult to justify. There is a further issue in that the system is vulnerable to fraud. The scheme will therefore cease for repayments made after 6 April 2012.

In place of this system, HMRC will utilise the available resources to introduce:

• an online claims system for charities to register their details for gift aid and to make gift aid claims. As a first step, HMRC intends to publish four 'intelligent' forms, containing automatic checks to improve the accuracy of completion
• a supporting electronic gift aid database for gift aid declarations.

Help to be consulted on

The Chancellor announced that over the summer consultations would take place on various measures to encourage charitable giving. These include:

• reducing the rate of inheritance tax (IHT) from 40% to 36% where someone dies after 5 April 2012 and leaves 10% or more of their wealth to charity (after deducting IHT exemptions, reliefs and the nilrate band)
• a proposal to encourage donations of pre-eminent works of art or historical objects to the nation in return for a tax reduction. We will await these consultations with great interest in the coming months.

CLARITY OR CONFUSION? - A REVIEW OF INVESTMENT GUIDELINES

By Adrian Taylor

The previous guidance on investment (CC14) was set out in the Trustee Act 2000 and a review of the advice in this area is therefore appropriate.

It is important to note that the new guidelines are still in the proposal stage, and the following comments are therefore subject to change once the final version is published. However, it is clear that the Commission is keen to promote greater clarity over how charities can incorporate an ethical stance should they wish it.

While an ethical investment approach has always been respected as part of an investment strategy, many charities have adopted the guidelines that followed the so-called 'Bishop of Oxford' case, where the judgement stated that "most charities need money, and the more of it there is available, the more the trustees can seek to accomplish". The aim of investment was to make money, with any ethical requirements only being accommodated if certain hurdles were cleared (e.g. that not adopting an ethical stance may restrict the charity's ability to carry out its objectives). The Commission has acknowledged that this position now needs further clarification, particularly with the increasing emphasis on the duty to demonstrate public benefit.

The latest draft guidance suggests that investments will fall into one of four categories, and the rules which apply depend on which category the investment falls into. The good news is that the first three use the same investment rules and only the fourth category is different. The proposed categories are as follows.

1. Financial investment Simply aim to achieve the best financial return possible. This is the closest in terms of adherence to the Bishop of Oxford case: follow the rules for financial investment.

2. Ethical investment Acknowledging an ethical requirement by aiming for the best financial return which also reflects the charity's ethos and does not run counter to its aims: although it is classified as social investment, follow the rules for financial investment.

3. Mission connected investment This category moves further along the ethical road. Although there is a requirement to make the best financial return, there is also an objective to further a charity's aims. In effect this could be seen to appeal to trustees wishing to adopt a positive screening approach rather than a negative screening process which would normally apply under ethical investment above: although it is classified as social investment, follow the rules for financial investment.

4. Programme related investment (PRI) Here the prime investment objective is to further the charity's aims. Potentially some financial return will also accrue: again classified as social investment, but follow the rules for programme related investment.

While these categories may appear similar, it is perhaps easier to look at the list in descending order in terms of placing less emphasis on financial return and more on achieving charitable aims. It could well be, however, that most charities will still want to follow the first of the categories, as in most cases better financial returns will allow objectives to be more easily met.

It is important to note the appropriate investment rules that apply. The first three categories (financial, ethical and mission connected) share a common main purpose which is to secure the best financial return. There is a need to exercise necessary care and skill (the statutory duty of care) which entails an appropriate balance between risk and return, along with a requirement to review investments on a timely basis. In addition, an ethical approach needs to be justified in terms of not conflicting with the charity's aims and a belief that supporters and beneficiaries might be alienated if another approach was adopted. Finally, in both ethical and mission connected investment, trustees need to target a strategy that will not result in significant financial detriment.

The rules under the PRI approach are different. Although there are similarities with both an ethical/mission connected approach, the main purpose here is to further the charity's aims rather than securing the best financial return. As such there is a need to demonstrate that this would result in public benefit and that any private benefit is incidental or recoverable to the charity.

As some charities try to aim for both a financial as well as a charitable return it can be difficult to decide which category is applicable. It is proposed that some may wish to follow a 'mixed purpose' investment with part of the funds allocated to financial/ethical/mission connected investment and part to PRI. Any such split should be clearly indicated at the outset and the appropriate investment rules applied accordingly.

The above may appear confusing and many will feel that the Commission has not added the clarity it intended. However this is probably an unfair conclusion. If one looks beyond the initial guidance, the process is logical and gives help to those who want to incorporate differing levels of charitable objectives. The Commission is keen to emphasise the importance of an appropriate investment policy statement. Given the potential opacity that these new investment guidelines propose, this is surely sensible advice.

Although these guidelines are still in the consultation phase and some changes are likely in the final version, trustees may welcome this early call to start considering whether the broad aims of the proposals will affect their charity's investment approach.

RISKY BUSINESS

By Jennifer Hotston

Are you covered?

If your charity occupies property under a lease, you might want to check whether the lease deals with what would happen if the property is damaged or destroyed by a risk not covered by insurance. You might be surprised to find out that many leases do not deal with this possibility.

Flooding has always been an issue in the UK. However, it is predicted that over the next century flooding will become even more severe due to the effects of climate change. Stories have appeared in the press recently indicating that insurers are refusing to insure properties with inadequate flood defences. If insurance is not available for flood risk because of the area in which the property is situated, flood damage would be an uninsured risk.

Who should pay?

If a lease doesn't cover what would happen if a property is damaged or destroyed by an uninsured risk, the landlord could charge the charity the cost of repairing such damage through the service charge. The charity may also remain liable for paying rent for the property during the period that it cannot use it.

To repair or not to repair

Charities should make sure that their lease addresses this situation. The lease should include a right for the landlord to decide whether or not he/she wants to repair any damage caused to the property within a certain time period. If the landlord does wish to repair the damage, this should be at his/her own cost. If the landlord does not want to fix the damage, then either the charity or the landlord should be able to bring the lease to an end.

Avoid a double blow

The charity and landlord will also need to decide whether the charity should pay rent for the period that it is unable to make use of the damaged property. The charity might prefer to move to alternative premises rather than pay rent for a property it cannot use. However, if the property is in a good location, or the landlord will be able to repair the damage quickly, it might be better for the charity to pay rent during this time instead of incurring the cost of relocating to alternative premises. Either way, it is important to make sure that provisions are included within a lease to deal with this occurrence, as without them, the charity may have to deal with the double blow of paying to repair the damage and paying rent for a property that it cannot use.

The above is a general overview and we recommend that independent legal advice be sought for your specific concern.

ADOPT OR EXPLAIN - THE CONCEPT OF GOOD GOVERNANCE IN THE THIRD SECTOR

By Kim Sanders

The Good Governance Code: Code for the Voluntary and Community Sector (the Code) has been updated with the publication of a second edition.

The new edition is based on feedback received from the sector in relation to the previous publication and new thinking on governance, which has evolved following the economic downturn and the duty to report on public benefit.

The second edition of the Code is to be commended in that the language is simple and it's easy to read, concise and relatively jargon free. While each of the six principles are necessarily vague (due to the diversity of the sector it is addressing), each principle is subsequently broken down and examined in detail with an explanation of why the principle is important and what issues boards should/ must consider in relation to the principle in question.

The Code should be considered as a useful working document, not only for all boards operating in the third sector, but also for employees, volunteers and service users as it demonstrates what they should expect from a well-governed board, and the issues that should be considered.

The Code operates on the concept of adopt or explain; while a board may consider a principle does not apply to its particular organisation, it is not acceptable to ignore it and the board must be willing and able to explain why it does not apply to it. While the six principles will apply to all third sector organisations, it is the means by which they are applied in practice and the procedures that are adopted to ensure their execution that will differ.

As with the first edition, a useful summary version of this publication is available. This, along with a separate code being published in the near future for small, unstaffed voluntary and community organisations, means that there is no excuse for any board, no matter how timepressured, not to take on or at the very least consider the six principles.

"The central importance of good governance to all sectors of the economy is now clearer than ever. The crisis which beset our financial system has highlighted how dangerous a tick-box approach can be. Truly good governance has to be lived. Each and every trustee and board member needs to embrace its values, and apply them to the particular needs and circumstances of their organisation."

Dame Suzi Leather, foreword to the Code.

SPOTLIGHT ON VAT

By Ian Stinson

Share the costs – but avoid the VAT?

Many charities and not-for-profit organisations are attempting to reduce establishment costs by setting up arrangements with other charities to share management costs such as finance, HR and estate management.

Unfortunately, the provision of administration services between members of the cost-sharing association might give rise to significant VAT costs under UK VAT law as HMRC has not adopted a VAT exemption available under EU VAT law.

Last summer, HMRC announced it would carry out a consultation with a view to implementing the cost-sharing VAT exemption already in place under EU law. In this year's Budget, it was announced only that the consultation was ongoing.

The exemption allows members of a costsharing association to buy and sell certain services between themselves free from VAT, thus reducing management costs without creating an irrecoverable VAT cost.

Because the cost-sharing exemption is a provision of the EU Principal VAT Directive, there is a strong argument that this has direct effect in the UK. Charities should therefore be entitled to rely on the EU rules even though there is no equivalent measure under UK VAT law. However, it may yet be some time before the cost-sharing VAT exemption is enacted in UK VAT legislation.

VAT recovery for academy schools – the hidden costs

New rules for independent academy schools will require claims to be submitted to HMRC to reclaim VAT on expenditure for non-business activities. This replaces the additional grant funding that academies previously received to compensate them for their irrecoverable VAT.

Subject to the Finance Bill receiving Royal Assent, the new VAT reclaim rules will come into force retrospectively from 1 April 2011, but as the previous VAT grant funding will continue until 31 August 2011, we understand that academies will be given the option to reclaim VAT under the new rules from 1 April and to repay the relevant grant funding.

Academies will need to review their VAT registration position as HMRC intends to treat academies the same as local authorities, which do not have a VAT registration turnover threshold. Those that are or become VAT registered, will submit VAT returns in the usual way in order to reclaim VAT on allowable expenditure. Those not required to register will need to submit special claims, similar to those submitted by local authorities, for a refund of VAT on their non-business activities.

The most significant financial impact is that academies may not be able to reclaim VAT on expenditure relating to their exempt business activities. Under the grant system academies would be compensated for all irrecoverable VAT, but under the 'normal' VAT recovery rules, VAT on expenditure relating to exempt activities (classroom and sports hall hire or adult education classes) would only be reclaimable if below a de minimis threshold level.

Academies will be required to itemise VAT costs and to attribute them to the separate activities that permit or disallow VAT recovery; they will also need to apportion general overhead costs and may suffer a partial VAT recovery disallowance on general overhead and property costs.

The change in rules will require academies to maintain detailed VAT accounting records and will involve them in potentially complex VAT refund claim calculations. We understand that detailed VAT guidance may be issued to academies affected by this change.

Charity buildings – change of use VAT charge

HMRC has updated its guidance on how charities must calculate the change of use VAT charge in respect of certain VAT-free buildings from 1 March 2011.

Under specific circumstances charities are able to claim zero-rating for the purchase or construction of any new building intended to be used solely for a "relevant charitable" or a "relevant residential" purpose, although HMRC does allow charities to ignore non-qualifying use if it is less than 5% of total use (previously 10%). If zero-rating is claimed, but the building (or part thereof) is subsequently put to a non-qualifying use within ten years of completion, the charity may be liable to pay a VAT charge on the non-qualifying use. The change of use charge can arise from a sale or lease of the building or from the way in which the building is physically used by the charity.

In December 2010 HMRC announced it was to simplify the way in which the change of use VAT charge should be calculated, as there were separate adjustment mechanisms in place depending on whether the charge arose out of a lease or sale, or from a change in qualifying occupational use by the charity.

In January this year HMRC issued an updated information sheet (04/11) detailing the revised adjustment mechanisms and confirming that the new adjustment mechanism will only apply to buildings completed on or after 1 March 2011, and also in respect of a change in use taking place on or after 1 March 2011.

RESCUING CHARITABLE GIVING FROM THE BOTTOM OF THE PILE A DISCUSSION OF THE SERVICES OFFERED BY PRISM

By Anna Josse and Sophie Paquot

With today's busy, stressful lifestyle we often do not have time to manage all the areas we wish to be involved with. One such area that often goes to the bottom of the pile is charitable giving. This sometimes plays on our conscience as we wish we did more or had the time to focus on our giving.

This problem is exacerbated by red tape; many of even the best-intentioned donors are puzzled – sometimes even put off – by bureaucratic difficulties. This may simply be problems with completing forms, even the simple ones relating to gift aid, or struggling to understand the inevitably more complex tax arrangements which are intended to make giving easier. It is also often a matter of dealing with personal tax reclaims after a donation has been made.

UK charity law has become more rigorous, and many individuals, corporations and even charity trustees are unaware of the fine details. In addition, managing numerous donations, securing the tax benefits and establishing a charitable trust with all its significant legal burdens is a painstaking process.

Help is at hand for the sophisticated donor who would like assistance in administering donations. You can put your money into a donor-advised fund administered by Prism the Gift Fund. This enables investors to make one contribution into the fund to receive all resulting tax benefits. Donors can top up their money whenever they wish and can also suggest which charities will receive their donations and when. Anonymity can also be arranged if desired.

Some people take their philanthropy a step further and establish a foundation. Prism offers a 'back office' for those that don't have the capacity themselves, dealing with the significant administrative burden that this entails. This can include the processing of grants to charities, board meeting administration, submitting accounts and more.

Prism and the Social Investment Appeal

Social enterprises are surplus-generating businesses that put social impact at the heart of their objectives. Well-known examples include the Big Issue, the Fifteen Foundation, the Eden Project and Café Direct. Social enterprises need access to long-term capital to be able to grow. Most, due to their legal structures and liquidity constraints, cannot raise equity and longterm financing.

Prism the Gift Fund has recently joined forces with the Big Issue Invest (BII) to set up an initiative called the Big Issue Invest Social Enterprise Investment Appeal. This initiative offers Prism clients an opportunity to invest in innovative businesses that create social impact as part of their charitable giving.

BII offers creatively-structured, 'equitylike' investment to social enterprises. Investees must have a robust business model, strong management and the potential for significant social impact. BII targets social enterprises that aim to prevent or cure social problems. It will invest in the areas of employment, education and training, health and social care, community-driven renewable energy and environment, financial inclusion and community development. A proprietary social impact assessment tool is used to measure and report on social performance.

How does it work for a donor to Prism the Gift Fund?

Prism the Gift Fund has negotiated with the Big Issue Social Enterprise Appeal to provide their clients with an opportunity to pool their charitable donations. The donation by the client would remain of a charitable nature, with any returns made from investment in the underlying social venture returning to the donor-advised fund within Prism, which would administer the returns for charitable purposes agreed with the client. Prism the Gift Fund/the Big Issue Social Enterprise Investment Appeal will then report back to the client on the social and financial returns from the investment.

CIOS ARE FINALLY HERE! (BUT ONLY IN SCOTLAND)

By Kim Sanders

Charitable incorporated organisations (CIOs) are a new form of legal entity. In England and Wales, a CIO will be created when it is registered by the Charity Commission and the act of registration will also confer charitable status. A CIO will be able to enter into contracts in its own right and its trustees will normally have limited liability.

Slow progress

CIOs were introduced by the 2006 Charities Act, although secondary legislation is needed before they can actually be used. This legislation was promised for spring 2010, but the General Election dashed these hopes. The Coalition Government has now picked up the baton and in November 2010 Nick Hurd, minister for civil society, announced that CIOs would be available in the spring of this year. But, as spring merges into summer, the legislation has not been forthcoming.

However, the Charity Commission has been making progress. It has made guidance notes and model CIO constitutions available on its website for those who may be considering a CIO as an option. Although the documents may be subject to change (to make sure that they are consistent with the final regulations passed by Parliament), they provide a good basis for planning for the future.

Scotland streaks ahead

Meanwhile, the first Scottish charitable incorporated organisation (SCIO) has been incorporated. South Seeds, a charity based in Govanhill, Glasgow was incorporated on 12 April 2011.

The SCIO has been available to those applying for charitable status in Scotland since 1 April 2011 and for charitable trusts converting to SCIO status. (The legislation for companies converting to SCIOs does not come into force until 1 January 2012.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.