Charity And Philanthropy Update - Summer 2024

Welcome to our charity and philanthropy update, in which we discuss issues affecting charities and philanthropy and highlight some recent developments which impact the third sector.

In this edition we comment on:

• the Charity Commission's (the Commission) revised investment guidance (CC14), its practical implications following the judgment in Butler-Sloss & ors v Charity Commission and the Commission's new guidance on accepting and refusing charitable donations;
• the phased implementation of the Charities Act 2022, in particular the introduction of phase three of the reforms, which have taken effect from this March;
• the removal of tax reliefs from non-UK charities, now formally in force for all relevant charities, following announcements made at the March 2023 Budget;
• the Commission's new guidance on social media use and why this is a welcome development;
• HMRC's clarification that cryptoassets are not eligible for Gift Aid; and
• the Commission's new guidance on campaigning and political activity in the general election lead-up.

If you would like further information or advice on any of the topics mentioned in this update, please contact a member of the charities team.

Charity Commission's new investment guidance and the post Butler-Sloss landscape

In a previous update, we discussed the High Court's decision in Butler-Sloss & ors v Charity Commission [2022] EWHC 974 (Ch), which clarified the extent to which charity trustees may allow their objects and wider moral considerations to influence their investment policy. Trustees and advisors may already be aware that the Commission has published updated investment guidance (CC14) in August 2023 (replacing an earlier version of the guidance first published in 2011). We discuss a couple of the key takeaways (reflecting the Butler-Sloss decision) below.

• Financial investments: clarification of principles for trustees to follow when making investment decisions
  In exercising their powers, charity trustees must always further the purposes of their charity and where the trustees identify that an investment could potentially conflict with the charity's purposes or harm its reputation, this is a relevant factor in making investment decisions (this directly follows Butler-Sloss). As well as taking into account whether a given investment might directly conflict with the charity's purposes – e.g. an environmental charity might choose to avoid investment in fossil fuels – trustees are also able to take into account "secondary" factors, such as whether a company's ESG policies are sound, when deciding whether to invest in them (the rationale being that taking this approach might enhance investment value over time or encourage delivery of the charity's purposes more directly).
• Social investments: new definition and wider investment classes
  "Social investment" is defined as an investment with a view to both (i) achieving the charity's purposes directly through the investment; and (ii) making a financial return. This term replaces the previously used labels of "programme-related investment" and "mixed-motive investment". In contrast to financial investments, a social investment can be made where a charity only expects to receive back some (not necessarily all) of the money invested, with no capital growth or income. Social investments can encompass arrangements not found in a traditional investment portfolio, such as making loans which are not investment grade corporate bonds, giving guarantees and buying shares in a private company. An example might include a homelessness charity guaranteeing to pay a tenant's rent if the tenant is unable to pay it.

In CC14, the Commission clearly aims to interpret the legal principles discussed in Butler-Sloss practically. The examples of when and how trustees may take wider considerations, such as reputational risk, into account when making investment decisions are welcome, as is the reduced length of the guidance (shortened from 61 to 31 pages) and the simplification of terminology.

The guidance also makes it clear that (as set out in Butler-Sloss) trustees must not allow their "personal motives, opinions, or interests" to affect their decision-making: this must always be based on the charity's best interests and how its purposes will best be fulfilled.

Interestingly, this ties in with recent comments made by the Commission's chair, Orlando Fraser KC, as echoed in the Commission's new guidance on "Accepting, refusing and returning donations to your charity" (published March 2024). Both make it clear that the starting point should always be to accept a charitable donation and that a trustee must, similarly, not allow their or others' "personal motives, opinions or interests" to affect the decision. As when making decisions about investments, the key factor is what would be in the charity's best interests and trustees may reject a donation if there is a potential conflict between the donation and the relevant charitable purposes; for example, a cancer research charity may reject donations from tobacco producing companies. This aspect of the Butler-Sloss decision therefore has implications beyond investment decisions.

We would also mention that the Charity Finance Group has launched a new Charity Investment Governance Principles project, which aims to develop a set of best practices for charity trustees to use when making investment decisions. A public consultation is currently being held, with the publication of principles estimated this summer. It may therefore be that further guidance in this area (albeit not directly from the Commission) is forthcoming.

Phased implementation of the Charities Act 2022

Following the implementation of phases one and two of the Charities Act 2022 (CA 2022) in October 2022 and June 2023 respectively - which effected changes, including, regarding the remuneration of charity trustees and relaxing the requirements on charity land disposals - phase three of the changes are now in force as of 7 March 2024 (delayed from autumn 2023).

The impetus for the reforms is to save charities time, reduce administrative burdens and simplify processes, following the Government's response in 2021 to the Law Commission's Report, "Technical Issues in Charity Law" (published in 2017). The changes largely work by making amendments to the Charities Act 2011 (CA 2011). Whilst phase three of the changes are not particularly ground-breaking, they could prove helpful practically, depending on the charity's activities. The key changes of note are as follows:

Charity land transactions

• There is now an exemption for a "liquidator...receiver, mortgagee or an administrator" from having to comply with some of the restrictions on dispositions and mortgages of land contained in CA 2011 (including the requirement to obtain a designated advisor's report), which should make such processes administratively more straight-forward and simplify property transactions.
• Changes have also been made to the statements that must be included when disposing of or mortgaging charity land. For example, charity trustees of corporate charities are now no longer required to give a separate personal compliance statement. Instead, a charity will confirm compliance through statements in the transaction documents.

Charity constitutions

• CA 2022 introduces a new statutory power, allowing unincorporated charities (including trusts) to change their governing documents more easily: they may alter any provision of a governing document by trustee (and, where applicable, member) resolution, except for certain prescribed "regulated alterations" (for example, relating to a charity's purposes and dissolution) which require the Commission's consent. This, together with other changes introduced relating to charitable companies and charitable incorporated organisations (CIOs), aligns the Commission's approach to all three types of charities in this regard. It also applies the same legal test to all types of charity when deciding whether to authorise changes to a charity's purposes. The Commission has updated its template CIO constitutions accordingly and the updated relevant wording should now be used for any CIO governing documents submitted to the Commission for registration.

Charity trustees

• The Commission has new powers to ratify the appointment of a charity trustee where they may have been appointed invalidly. Defects in the appointment of trustees are often encountered (particularly where legal advice has not been taken at the time the appointment was intended to take effect) so this is welcome.
• The Commission can now direct that a charity trustee be remunerated (or authorise an unauthorised benefit already received by them) where it would be equitable to do so (for example, where a trustee may have already carried out a specific service for the charity and it would be inequitable for them not to receive payment).

Charity merger simplification

• New rules are introduced which aim to preserve legacies that may otherwise be invalid following a charity merger: these work by allowing gifts made to a charity which has since merged to take effect as a gift to the merged charity (provided it is on the Register of Mergers).

As well as the Commission altering certain of its model charitable governing documents to reflect the above changes, it has also updated many of its guidance notes accordingly.

Phase three now marks a substantial implementation of the CA 2022 reforms. However, other proposed changes, relating to ex gratia payments (i.e. those made by trustees under moral rather than legal obligations), have yet to be implemented and are due to be given effect later in 2024. Under current rules, charity trustees must always obtain the prior authority of the Commission, the court or the Attorney-General to make an ex gratia payment. However, under the proposed changes, charity trustees will have the power to make small ex gratia payments without prior authorisation from the Commission (with the permitted size depending on the charity's gross income). Originally, it was also proposed that new provisions would create a standalone power for the Commission, court or Attorney-General to authorise ex gratia payments by any charity, including charities governed by statute or Royal Charter whose governing Act or documents contain a general prohibition on the charity's assets being used otherwise than for the charity's purposes. This would have allowed museums and similar institutions, whose governing documents or legislation may disallow the restitution of objects in their collections, to apply to the Commission for permission to make an ex gratia payment involving the restitution of an object. However, given the potential for unintended consequences, it is now proposed that national museums and galleries are to be excluded from the scope of the amendments (to ensure that such charities continue to be bound by the rules in their governing legislation that preclude them from resolving to restitute objects from their collections, except in very limited circumstances), as well as any ex gratia payment where the recipient is outside the UK (to ensure that any transfer of legal ownership of an object to its country of origin outside the UK by way of ex gratia payment is subject to Commission approval, even when the amounts involved are small).

Removal of tax reliefs from non-UK charities

It has now been just over a year since the Chancellor announced in the March 2023 Budget that only UK charities would qualify for UK charitable tax relief. Previously, it was possible (although not necessarily straightforward) for EU charities (and those in Norway, Iceland and Liechtenstein) to qualify for UK tax relief, in compliance with the UK's obligations under EU law.

In most cases, the change (which was included in Finance (No 2) Act 2023) came into effect immediately on Budget Day (15 March 2023). However, we have only recently reached the end of the "transitional period" for EU charities which had already "asserted their status" as a charity for UK tax purposes. Those charities were allowed a "transitional period" to prepare for the change but, (depending on the specific tax in question) the "transitional period" ended on 1 or 6 April 2024.

In practice, the end of the "transitional period" is likely to be of limited relevance. Given that it had always been administratively difficult for EU charities to register with HMRC for tax relief in the UK, the change will affect a limited number of charities. However, now that the window for UK tax relief for EU charities has formally closed, it seems a good time to consider the options for donors with UK tax liabilities who wish to give to non-UK charities in a tax efficient manner.

If the proposed donation is substantial or the non-UK charity is looking to attract more UK donors it could establish a UK charity, so that UK donors could claim UK tax relief. This is a relatively familiar structure; plenty of international charities have set up UK "friends of" charities to channel UK donations to international charities. Nonetheless, it is important that the non-UK charity is aware that the UK charity cannot simply act as an unthinking "conduit" for donations. The UK charity would have to be run independently and put in place appropriate grant agreements and restrictions to ensure that the funds were only used for charitable purposes under English law.

However, establishing a UK charity may not be feasible within the timeframe for the donation, or may not be efficient for a one-off or low value donation given the costs of establishing and running a UK charity. In that case, the donor could donate to a Donor Advised Fund, known as a "DAF". This is a UK registered umbrella charity, which receives funds from donors and can distribute them to international charities. The donor would receive UK tax relief (on giving to the UK DAF) and the non-UK charity would ultimately receive the funds. The DAF would have the same obligations to make grants only for English charitable purposes, and to monitor grants to ensure they are used as agreed. This inevitably means some level of fees to the DAF provider, but the costs are likely to be substantially lower than establishing a new UK charity.

This is relatively straightforward for donors with only UK tax obligations, but the position becomes more complex where the donor is also subject to tax in another (non-UK) jurisdiction. For example, a non-UK resident donor might be subject to inheritance tax (or equivalent) in the UK because they have assets in the UK or remain domiciled in the UK (under current rules) but might also be subject to a similar tax in the jurisdiction in which they are resident.

There is no easy solution in this instance; donors with both US and UK tax obligations can donate to DAFs (or other charities) which are dual qualified for both US and UK tax relief, but there are no DAFs with similar dual-qualified structures for EU jurisdictions.

In those cases, one option for charitable giving may be to donate assets which are only subject to tax in one jurisdiction – perhaps because they qualify for a relief in one jurisdiction or where a treaty gives taxing rights to only one jurisdiction. It may also be worth investigating with local lawyers whether the EU state is willing to recognise a UK charity for tax purposes, either under its own local law or in compliance with EU freedom of movement obligations.

The case of Routier and another v HMRC [2019] UKSC 43 is also worth a passing mention. Here, the Supreme Court held that HMRC's refusal to grant inheritance tax relief on a gift of UK assets to a Jersey charity (with exclusively charitable purposes under English law) was incompatible with EU principles on the free movement of capital. The treaty rights relied on in Routier continue to apply in the UK, despite its withdrawal from the EU and, as such, there may be an argument that the Routier principles remain relevant for non-UK charities. However, we would not expect HMRC to accept this and legislation that has since been passed relating to the revocation of EU law post Brexit may affect the application of Routier. As this updated position is, to our knowledge, untested, it is more prudent to rely on one of the other gifting options outlined above.

Charity Commission publishes guidance on social media use

The Commission has, in September 2023, released its new guidance for charities when using social media (the Social Media Guidance).

As acknowledged by the Commission, "social media can be a powerful communication tool for charities, to raise awareness and funds and to better engage beneficiaries. It can help charities reach a much wider audience, much more quickly, than traditional methods of communication".

Social Media Guidance

The key takeaways from the Social Media Guidance are the following:

• If a charity uses social media, the charity must have a social media policy in place that regulates the conduct of trustees, staff and volunteers when using social media on behalf of the charity and which sets out, among other things:
  
  • how social media is used to help deliver the charity's purposes;
  • the individuals responsible for the day-to-day management of the charity's social media and the protocols involved if things were to go wrong; and
  • how the charity will engage with the public on social media.

The Commission has published a checklist to help trustees and senior employees consider what their policy should include.

• Appropriate training should be given for trustees, staff and volunteers responsible for managing the charity's social media channels to ensure that content which is harmful, inconsistent with the charity's purpose or breaches the law is not posted or shared on social media.
• There is a risk of an individual's (e.g. trustees, employees etc.) personal use of social media having a negative impact on the charity. To mitigate such risks, individuals should make clear on their personal social media accounts that their views are their own and not the charity's.
• If the charity's social media platform facilitates comments from supporters, beneficiaries or the wider public, there is a risk of inappropriate or illegal content being shared. To avoid this, among other things, the charity should consider using tools to moderate content before publication and settings to hide or delete comments by certain users.
• When charities wish to engage with emotive issues, the charity should consider, among other factors, the risks it faces, including its reputation, and actions the charity can take to mitigate such risks. These include informing key stakeholders of the charity's plans and thinking about how the charity's conduct on social media may help manage potential criticism.
• If the charity is engaging in any campaigning or political activity on social media, it should be mindful of the existing rules and Commission guidance on campaigning and political activities. This is particularly in point currently, with the upcoming general election on 4 July. Accordingly, the Commission has recently produced new guidance (see further below), which stresses the importance of charities having a social media policy in place at this time.
• The Fundraising Regulator's Code of Fundraising Practice applies to fundraising on social media platforms. The Code outlines both the legal rules and the standards designed to ensure fundraising is open, honest and respectful.

Reporting requirements

Charities which are required to complete an annual return must now confirm whether they have a social media policy in place (as well as other types of policies) via the Commission's new digital service for filing annual returns.

When things go wrong

The advantages of social media use must be weighed against the potential risks for charities. There have been recent examples of charities issuing public apologies, following the potential for misinterpretation of wording used in social media posts and concern raised by readers.

A mis-handled social media post has the potential to affect a charity's reputation and the perception of supporters given negative press. It can also have an impact on whether donors wish to donate. Any social media output by a charity should therefore be handled carefully and its implications properly thought through, before going "live". As such, the Commission's guidance is timely and welcome in an age where social media usage is very much part of the everyday.

HMRC confirms donations of cryptoassets are not eligible for Gift Aid

HMRC has now clarified, via an update to Chapter 3 (Gift Aid) of its detailed charity guidance notes, that cryptoasset donations will not qualify as charitable donations for Gift Aid purposes. This is because HMRC does not consider cryptoassets to be currency or money, which makes gifting them directly ineligible for both (i) Gift Aid (arguably the most well-known tax relief applicable to charitable cash gifts from individuals); and (ii) qualifying charitable donations (i.e. donations by companies which are capable of attracting tax relief) status. HMRC advise that to benefit from Gift Aid, the donor first converts the cryptoassets into "money" and that "money" can then be donated to charity, under the Gift Aid scheme.

Note, however, that any conversion of cryptoassets to cash by the donor could result in a capital gains tax charge, whereas a gift of the cryptoassets themselves to the charity (which could then be sold by the charity following the donation) would be exempt from capital gains tax (including on a subsequent sale of the cryptoassets by the charity, assuming any gains produced on the sale are used for charitable purposes). This aspect should therefore be borne in mind by donors when considering how to give.

Charity Commission issues guidance on political activity and campaigning in the general election lead-up

The Commission has issued new guidance (on 29 May) – Campaigning and political activity: general election lessons learned – which sets out key issues for charities to consider in the general election lead-up, based on its experience during previous election periods (this guidance, and other relevant material, is linked from the Commission's new landing-page: Charity campaigning in a general election period).

As a starting point, the guidance reiterates that charities cannot have political purposes and political activity is only allowable where this furthers a charity's existing purposes. For example, a charity may give its support to or criticise policies promoted by political parties, if this will help achieve its charitable purposes, but in so doing, a charity must always maintain its independence from any political party.

The guidance highlights eight key areas which charity trustees should bear in mind – ranging from handling situations in which a trustee or employee stands for election to the use of a charity's premises by political parties – with questions which trustees should ask themselves in each scenario. Interestingly, the guidance flags that at previous general elections, one of the main areas for the Commission's involvement was relating to visits to charities by prospective candidates. Trustees should therefore be particularly vigilant if this issue arises in practice and take steps to preserve the charity's neutrality; for example, trustees should be able to justify why the visit took place, how it furthered the charity's purposes and how the trustees ensured the visit did not lead to a perceived endorsement for that candidate.

Whilst much of what is raised is common sense, the guidance (and landing-page) is clearly worth reviewing by trustees in the run-up to 4 July.

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.