Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 In this issue Be GDPR Ready: upcoming training The House of Lords Select Committee on Charities: “stronger charities for a stronger society” Charity legacies and the importance of testamentary freedom SITR: a brief guide for charities and social enterprises Charity Trustees censured for selling property for £15m less than it was worth Spotlight on Charity Land Answering your questions Trustee Induction & Refresher Training: upcoming dates LinkedIn: Birketts LLP Twitter: @birkettsllp @CharityLegals Welcome to the June 2017 issue of Essential Trustee This newsletter has been written with charity trustees and senior management in mind. It provides you with need-to-know updates on hot topics within the sector. In this edition, we tell you about our forthcoming national programme of General Data Protection Regulation (GDPR) training for charities, delivered in partnership with the Institute of Fundraising. We look at the governance issues raised by the House of Lords Select Committee report on “stronger charities for a stronger society”, the outcome of the landmark case of Illot v Mitson, and we provide a brief introduction to Social Investment Tax Relief (SITR) and how it might be used to help you with your fundraising goals. We have also added some new features in response to your feedback on the first edition. There is a new section dedicated to answering your questions, and we have also added a “spotlight” feature to tell you a bit more about the various services we can offer you. This edition’s spotlight is on charity land and includes an introduction to Gavin Acheson, a new Partner in our commercial property team with over 25 years’ experience advising charities on all aspects of their property interests. We also summarise a recent Charity Commission investigation, which provides an important reminders about the duties of charity trustees in relation to arrangements involving land. Finally, by way of reminder, we will be running our Trustee Induction and Refresher Training in Ipswich on 13 June. There is still time to sign up if you have not already done so. More information about our rolling programme of Trustee Training and how to book your place can be found here. This newsletter is available via subscription. To receive future issues automatically please sign up. We welcome any questions that you might have, or if there are issues on which you would like us to comment please do get in touch. Our aim is to provide a regular newsletter, but if you would like to see news stories as they happen, please follow us on LinkedIn and Twitter. Essential Trustee Sara Sayer Senior Associate, Solicitor-Advocate, Head of Charities and Social Enterprise Team 01223 326763 [email protected] Liz Brownsell Senior Associate, Charities and Social Enterprise 01473 406383 [email protected] Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 Be GDPR Ready: upcoming training In the last edition of Essential Trustee, Kitty Rosser (Associate in Birketts’ corporate team), outlined the steps to prepare for the new general data protection regulation, which comes into effect in May next year. We have been inundated with requests for our GDPR booklet and have a busy schedule lined up providing training on the subject. In June and July, we will be providing tailored training to the charity sector in partnership with the Institute of Fundraising, delivering seminars across the country, starting in Bristol on Monday 5 June. A full list of the training sessions can be found here: http://www.institute-of-fundraising.org.uk/events-and-training/iofevents/half-dayevents/. Prices are £49 for Institute of Fundraising individual members and £79 for non-members. We hope to see you at one of the training sessions we are delivering with the Institute of Fundraising. Of course, if the dates and/or locations don’t suit you, we also have tailored GDPR training under the Birketts Shaping Excellence programme: http://www.birketts. co.uk/services-for-business/training-shapingexcellence.aspx. If you haven’t requested your free GDPR booklet and subscribed to updates on data protection, please email [email protected] to request your free copy and sign up to our mailing list. The House of Lords Select Committee on Charities: “Stronger Charities for a Stronger Society” The Select Committee on Charities was appointed by the House of Lords on 25 May 2016 to consider issues related to sustaining the charity sector and the challenges of charity governance. On 26 March 2017, it published its report, Stronger Charities for a Stronger Society, following a review of findings after its public call for evidence in July 2016. The report is lengthy, running to 154 pages and including 100 conclusions and recommendations across a wide range of issues, including how to improve the governance of charities, how to support charities bidding for public services contracts, issues relating to the sustainability of the sector (including fundraising, volunteering, infrastructure bodies and support, and mergers), the challenges and potential for charities as a result of developments in digital technologies, alternative forms of finance such as social investment, and the role of government and the Charity Commission. This article does not cover all of the recommendations, but focuses specifically on some of the recommendations made regarding governance and the importance of training for charity trustees. The report begins by emphasising that “charities form a vital part of civil society in the United Kingdom”, and that “no understanding of the country can be complete without an understanding of how charities operate and the challenges and opportunities they are likely to face now and in the future”. We all know only too well the challenges faced by the sector, the difficulties arising from a reduction in grant funding and an increased emphasis on contract commissioning (including, in some cases, “payment by results” funding), and the recent high profile fundraising scandals that have detrimentally affected public trust and confidence in the sector. The report highlights the impact of these challenges on charities, including “greater expectations of professionalism and the ability to demonstrate measurable outcomes from their work” and “greater expectations of charities in terms of their governance, accountability, transparency and demonstration of impact”. The report also highlights the particular difficulties that the changing landscape creates for small and medium-sized charities, which are described as the “lifeblood of the sector”, and explains that the report focusses primarily on their interests, “as they comprise the overwhelming majority of the charity sector, and because recent inquiries have tended to focus on issues that are more relevant to larger charities”. In relation to governance, the Select Committee supported the work to introduce a revised Charity Governance Code, and welcomed the decision of the Charity Commission to refer to it as the benchmark for the sector (the Commission intends to withdraw its ‘Hallmarks of an Effective Charity’ guidance and instead refer charities to Kitty Rosser Associate 01603 756559 [email protected] Liz Brownsell Senior Associate 01473 406383 [email protected] “The Select Committee also emphasised the importance of induction training and ongoing development for charity trustees..” Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 the new Code). The Select Committee also emphasised the importance of induction training and ongoing development for charity trustees, describing it as “essential for charity trustees in order for the sector to work effectively” and explaining that “Trustees need to feel confident and well-informed in order to provide strategic direction, oversight and challenge”. It was acknowledged that there is a lack of provision of local support for smaller and medium-sized charities in the provision of programmes of Trustee Induction training. Contributors commented that training offered by infrastructure bodies within the sector was “disproportionately London-based, which imposed prohibitive costs for organisations based elsewhere in the country” and that training is “not always affordable for charities”. Birketts offers a rolling programme of Trustee Induction and Refresher Training, which provides a cost effective solution to these issues for charities in East Anglia. We offer our training at a cost of only £50 plus VAT per delegate. It is a half-day workshop, designed to provide charity trustees with essential legal training to enable them to comply with law and best practice in fulfilling their duties and furthering the success of the charity. We provide our training four times per year, rotating around each of our office locations in Ipswich, Norwich, Cambridge and Chelmsford. If you are interested in finding out more about our programme of Trustee Induction and Refresher Training, and to book your place, please visit our website. The report is very interesting and covers a very broad range of issues. We have only touched on one of the points raised by the report. If you would like to know more, you can read the full report online. Charity legacies and the importance of testamentary freedom Many charities rely on the generosity of benefactors who choose to donate during their lifetimes or after they die or both. So, for charities and benefactors alike the case of Illott v Mitson has been of great concern, as it called into question the importance of testamentary wishes when a person chooses to leave a substantial amount to charity whilst cutting children out of their will. The case made it all the way to the Supreme Court and the outcome of the case has been anxiously awaited, as we discussed in our previous article. The concern has been that, if the Supreme Court upheld the decision of the Court of Appeal, this might result in a surge of claims against estates where substantial sums have been left to charity. The long awaited judgment was finally handed down by the Supreme Court on 15 March 2017, and will provide comfort to many charities and those who wish to leave legacies to charities. The Supreme Court reversed the decision of the Court of Appeal and endorsed the importance of testamentary wishes. The Supreme Court stated that the claims of the charities were not on a par with that of the disinherited daughter (Mrs Ilott), but rather they were ranked higher as ‘fundamentally these charities were the chosen beneficiaries of the deceased.’ They also acknowledged that ‘charities depend heavily on testamentary bequests for their work, which is by definition of public benefit and in many cases will be for demonstrably humanitarian purposes.’ The charities would suffer if Mrs Ilott received any sum from the estate and that had to be taken into consideration. Although there remains a lack of consistency in this area of law, and any claim made against an estate will always need to be considered on its individual merits, the importance placed on testamentary freedom in this case will be welcomed by charities who rely on the generosity of their benefactors, and will give great comfort to those who wish to leave their estate to charity. For full facts and details about the case, please see our case report. Our specialist Charities and Social Enterprise Team advises on all aspects of charity law and regulation, including contested legacies. If you have any questions or concerns about a legacy left to your charity, please get in touch with Bernadette Baker or Marie Batchelor or another member of our team. Bernadette Baker Senior Associate 01603 756406 [email protected] “...the importance placed on testamentary freedom in this case will be welcomed by charities who rely on the generosity of their benefactors” Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 “..we believe that social enterprises, operational charities directly engaged in primary purpose trading, and charities which have social enterprise subsidiaries engaged in trading activities, are more likely to benefit from the relief.” SITR: a brief guide for charities and social enterprises Social Investment Tax Relief (SITR) was introduced in 2014 to encourage individuals subject to UK tax to invest in charities and social enterprises (CSEs) through equity investment or unsecured loans in a tax efficient manner. Further improvements to the scheme have been announced to widen its approach, albeit subject to certain conditions. Due to the nature of the conditions, SITR is likely to be particularly attractive to social enterprises and operational charities (i.e. those engaged in some form of primary purpose trading activity) seeking investment. If all conditions are satisfied, an individual who makes a qualifying investment can deduct 30% of the amount invested (up to a maximum annual investment of £1m) from their income tax liability in that tax year. There is no Capital Gains Tax (CGT) on gains arising from the disposal of an SITR qualifying investment. Furthermore, the reinvestment of gains, which would otherwise be chargeable and that arise during the period 6 April 2014 to 5 April 2019, into SITR investments can defer a CGT charge until the SITR qualifying investment is sold, cancelled, redeemed or repaid. Any deferred gain will also crystalize if the CSE ceases to meet the requirements of the scheme. To obtain these tax advantages both investors and the CSE must satisfy a number of conditions. We have set out some of the key features below, but please note that this list is not exhaustive and expert advice should be sought on your own particular circumstances. Investor conditions Three year holding requirement: tax relief is withdrawn if the individual investor does not hold the investment for at least three years. No connection: investors and their associates (which includes a business partner, a spouse, parent, grandparent or child (amongst others)) must not: • be a partner or trustee of the CSE or any of its subsidiaries, an employee of the CSE or any of its subsidiaries or a paid director of the CSE or any linked company; or • control or hold more than 30% of the ordinary share capital, voting rights or loan capital of the CSE or any company which is or has, at any time during that period, been a 51% subsidiary of the CSE, during the period from the date on which the CSE was incorporated or established or, if later, one year before the investment is made until the end of the three year mandatory investment period. CSE conditions 1. Qualifying CSE: the CSE must be a charity (including a charitable trust), a community interest company, a community benefit society or a company limited by shares that has been accredited as a social impact contractor. 2. Not listed: the CSE must not have securities listed on a recognised UK exchange or designated overseas exchange. AIM listed companies may qualify as AIM is not a recognised exchange. 3. Maximum gross assets: the CSE must have no more than £15m in gross assets immediately before and no more than £16m after the investment is made. 4. Maximum number of employees: it was announced that the CSE must have 250 or fewer employees (not including volunteers) from the 6 April 2017 (reduced from 500). However, due to the upcoming election the legislation making the change has not become law at this stage although we assume that it will do if the government remains the same. 5. Qualifying purpose: the investment must have been made to raise money for a qualifying trade, which must be run on a commercial basis with a view to profit and not consist of any excluded activity (see below) to a significant degree. The qualifying trade must be carried on by the CSE or its 90% subsidiary, provided that the subsidiary is also a qualifying CSE. This requirement means that charities that are not engaged in any primary purpose trading activities themselves and either do not have a trading subsidiary or have a trading subsidiary that is structured as a normal company (rather than a community interest company, for example) will not be able to qualify for SITR. For this reason we believe that social enterprises, operational charities directly engaged in primary purpose trading*, and charities Karl Pocock Senior Associate 01603 756544 [email protected] Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 which have social enterprise subsidiaries engaged in trading activities, are more likely to benefit from the relief. 6. Excluded activities: include, amongst other things, finance, property development and energy generation activities. 7. Independence requirement: the CSE must not be a member of a partnership nor be controlled by, or be a 51% subsidiary of, another company or another company and persons connected with it. 8. Qualifying subsidiaries: the CSE must not control any company that is not its 51% subsidiary from the date when the investment is made until the end of the mandatory investment period of three years. 9. Maximum investment qualifying for SITR: it was expected that the Finance (No. 2) Bill would introduce from 6 April 2017 that a CSE can receive £1.5m over its lifetime if its first investment is raised no later than seven years after trading commercially for the first time. This amendment has now been removed from the bill however we expect this change to be introduced in due course if the government remains the same after the election. The current maximum amount that a CSE can receive in SITR investments therefore remains at the previous level of €344,827 in any three year rolling period. A CSE can seek advance assurance from HMRC that it satisfies the necessary conditions. When seeking advance assurance it is important to provide full information and, if the situation is likely to alter, you should notify HMRC of such proposed changes before putting them in place. We have been informed by HMRC that due to the election next month they are limited with regard to the assurances that they can provide as they too are waiting on the outcome. Further guidance on SITR is available on the HMRC website. Charity Trustees censured for selling property for £15m less than it was worth On reading a headline like this about the Charity Commission’s recent Inquiry Report into the sale of The Spiritualist Association of Great Britain’s headquarters in Belgravia you might think that the Trustees of this charity had committed an obvious gross error of judgment and such a scenario could not happen to sensible Trustees. The case however provides a timely reminder of how easy it is for charity Trustees to slip up when they fail to take appropriate professional advice on the management of a charity’s assets. A closer look at the circumstances of this case shows this error of judgment was not necessarily quite as obvious as the headline suggests. In 2010 the charity sold the property to a commercial company for £6m. The purchaser sold the property on shortly afterwards for £21m. The Charity Commission began investigating in 2013, after negative press reports about the disposal which emerged a few years later. The charity owned a leasehold interest in the property which was due to expire in 2047. There was some financial imperative to dispose of the property because the landlord wanted to hold the charity to a full repairing obligation in the lease which the charity could not afford to meet. The lease was also subject to an unusually restrictive covenant limiting the use of the property to “the headquarters of a non-profit learned or charitable or cultural association or society, or as an embassy.” The Trustees had been told that it would be difficult to sell the property on the open market with this restriction in place and when ‘the gift horse’ came along, they seem to have genuinely concluded this sale was their best option. Whilst the Trustees did have a ‘property adviser’, this person did not meet the statutory qualification criteria nor was an independent surveyor’s report complying with the Charities (Qualified Surveyors’ Reports) Regulations 1992 (SI 1992/2980) commissioned prior to the Trustees entering *Primary Purpose trading is trading (i.e. providing goods or services on a commercial basis) that directly furthers the charitable purposes of a charity, and can therefore be carried out by the charity with the benefit of exemptions from tax on the trading profits. Examples of primary purpose trading include a charitable independent school charging pupils, or a theatre charging for admission to its performances. Louisa Saunders Senior Associate 01473 406331 [email protected] Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 into a lock-in agreement with the purchaser. In fact, when the first solicitor appointed by the Trustees raised concerns about this, the charity Trustees dispensed with his services and engaged a second firm of solicitors who were happy to complete the sale without looking into the first solicitor’s concerns. Following its acquisition of the property the purchaser was able to negotiate a release of the restrictive user covenant and sold the property on shortly afterwards for the increased sum of £21m. The Charity Commission’s report criticises the Trustees for failing to comply with the restrictions on disposals of charity land imposed by sections 117-122 of the Charities Act 2011. The Commission said these breaches “were not minor or technical in nature” but “amount to basic and serious mismanagement.” The Trustees had breached their fiduciary duty of care and duty to promote the success of the charity. A suitably skilled independent surveyor would look at how to extract maximum value from the disposal for the charity and this would have included advice on how the charity could benefit from a post-sale increase in the value if a change of use was secured. The Charity Commission also criticised the Trustees for not instructing specialist charity solicitors. The Commission stated that the charity Trustees should have realised that a commercial company would only purchase the property if there was some prospect of obtaining change of use and criticised the Trustees for not considering putting overage in place to secure a share of any future increase in value for the benefit of the charity. A lay person might not be aware of how the overage mechanism works, which is precisely why the Charities Act makes professional advice mandatory. The Charity Commission said: “The case highlights that disposing of charity land can involve complex arrangements which charities need to be careful about and obtain proper professional advice on.” For further information see the Charity Commission’s full report of its statutory inquiry and guidance for Trustees on dealings with charity land. Spotlight on charity land In this edition, we are introducing a new feature to highlight areas of our practice of particular interest to our charity clients. Here, we put our spotlight on Property and announce the arrival of a leading commercial property partner within our Charities and Social Enterprise practice. Whether your interests in property are operational, functional or investment-led, a thorough understanding of your mission and objects and of the regulatory framework within which you operate is always going to be key to providing you with effective, valuable and economic advice in your dealings with them. With long-established experience of advising large operational and grant making charities, independent charitable trusts, leading charitable investment funds, ecclesiastical bodies and higher education institutions, we have extensive expertise over time and across the not for profit sector of marrying the property and charity interests of our clients in a collaborative and cohesive way. We are therefore delighted to announce that Gavin Acheson has recently joined our practice, as a commercial property partner in our Cambridge office. Gavin joins us from Farrer & Co, where he gained over 25 years’ experience of advising major national and regional charities and charitable institutions with large and diverse property portfolios and endowments of all kinds. Gavin joins one of the best regarded and largest dedicated commercial property teams within any firm outside London, numbering over 100 lawyers, including specialist teams with extensive experience acting for charity clients on the acquisition, funding, development, active management, letting and disposal of commercial property of all kinds. Of current topical interest is our involvement in the charity retail environment. We will be exhibiting at the upcoming Charity Retail Association conference in June, where we will be delivering seminars on Gift Aid for charity shops. The seminars will be given by Liz Brownsell, who was involved in the consultation process with HMRC when the new scheme was launched, has delivered a number of practical training sessions on the topic, and drafted the Charity Retail Association’s template documents for the new scheme. If you are attending the conference and would like to come and speak to us on the day, please get in touch with Louisa Saunders or Liz Brownsell. Gavin Acheson Partner 01223 326697 [email protected] “The Trustees had breached their fiduciary duty of care and duty to promote the success of the charity.” Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 Answering your questions Question: Please could you provide some guidance on changes in the law affecting fundraising? Answer: We are conscious that our charity clients are keen to stay informed and up to date about the rapidly changing regulatory landscape for charity fundraising. To help with this, June will see the launch of the Birketts’ Guide to Charity Fundraising. The guide has been written to assist those who are responsible for managing fundraising within their charities. The guide is intended to provide an overview of recent changes in law and regulation affecting charity fundraising, and to identify specific actions that charities should take to ensure compliance with legal requirements. Of course, further changes to the regulatory landscape will be made in the future, and subscribers to Essential Trustee can be sure they will be kept up to date. To request your free copy of the guide, please email [email protected] In the meantime, you might like to take a look at some of the articles on our website, which have provided updates on the changes to the law and self-regulation of charity fundraising as they have unfolded. Articles include: the new rules affecting contracts with commercial fundraisers, the plans for the soon to be launched Fundraising Preference Service, and the regulatory alert about compliance with data protection requirements (which was also covered in our first edition newsletter in February 2017). Question: What are exempt charities and how do their obligations and responsibilities differ to non-exempt? Answer: Exempt charities are charities that are not required to register with, and are not regulated by, the Charity Commission. However, this does not mean that they are exempt from compliance with charity law. Exempt charities are required to comply with charity law, and charity trustees of exempt charities have the same general duties and responsibilities as trustees of other charities. However, there are certain provisions of the Charities Act that do not apply to exempt charities (or that only apply to charities with a ‘principal regulator’). Significantly, the restrictions on disposals and mortgages of charity land set out in Part 7 of the Charities Act do not apply to exempt charities. Some exempt charities have a ‘principal regulator’, which is responsible for promoting compliance with charity law by the charities it regulates. Examples of exempt charities with principal regulators include academy trusts (whose principal regulator is the Department for Education), most universities (whose principal regulator is HEFCE), and Further Education Corporations (whose principal regulator is the Department for Business, Innovation and skills). There are other categories of exempt charities, such as charitable community benefit societies (including some social housing providers), where no principal regulator has yet been appointed. This is because changes are gradually being made pursuant to the Charities Act to improve the regulation of exempt charities. Eventually, all exempt charities will either have a principal regulator or lose their exempt status. Where a principal regulator has been appointed, the regulator must promote and monitor compliance with charity law, but does not have the power to enforce charity law. However, principal regulators can ask the Charity Commission to investigate the charities it regulates and are expected to work with the Commission to ensure that exempt charities are publicly accountable. The Charity Commission has published useful guidance on exempt charities, which can be found here, and includes a full list of exempt charities and their principal regulators (where one has been appointed) at Annex 1. “June sees the launch of the Birketts’ Guide to Charity Fundraising .” Clear Legal Advice Cambridge Chelmsford Ipswich Norwich www.birketts.co.uk/charities Essential Trustee June 2017 Training for Trustees: Charity Trustee Induction and Refresher Training Do your trustees: • understand the nature and extent of their role within your charity? • have a good understanding of their legal duties and responsibilities as charity trustees? • know the extent of their potential liabilities and how to effectively protect the charity from risk? • understand how charity law and regulation affects the charity’s operations and financial success? • know and understand their responsibilities in relation to staff and volunteers? Aim This course provides charity trustees with essential legal training to enable them to comply with law and best practice in fulfilling their duties and furthering the success of the charity. It is vital that all charity trustees and senior managers within charities know and understand the role, duties and responsibilities of trustees. The Charity Commission expects all charities to include in their Annual Report the steps that have been taken to ensure that all trustees have received appropriate training. This course provides a cost effective way to achieve this, as it is aimed at providing trustees with the essential training required to effectively carry out their roles. The course is run four times per year in each of the office locations to allow you to plan ahead and ensure that all incoming trustees (and any other trustees wanting a refresher) are trained, so that your charity may comply with best practice and fulfil its annual reporting obligations. Learning outcomes The objective of this half-day workshop is to ensure that delegates: • understand the key elements and make-up of their charity’s governing document and why it is important • appreciate the extent of their legal duties and how to comply with them in accordance with best practice • understand personal liability and how best to manage risk • are aware of the main reporting obligations and regulations with which the charity must comply • have a basic understanding of financial reporting and how the law affects matters such as investment and reserves • understand the extent of the role of a charity trustee in relation to staff, including in respect of recruitment, management and dismissals • are able to distinguish between employees, workers and volunteers and understand the key pitfalls to avoid when dealing with volunteers Book your place 13 June 2017 - Ipswich 21 September 2017 - Norwich 23 November 2017 - Chelmsford 13 March 2018 - Cambridge Birketts also offers various in-house training modules for charities. Please visit our Shaping Excellence web pages for further information. Introducing the trainers Liz Brownsell Liz joined Birketts in October 2016 and leads on non-contentious work within the firm-wide charities and social enterprise group. Liz has over six years of experience as a charity law specialist, following five years as a corporate lawyer in the City. She is an experienced public speaker and has delivered trustee training for many years. Her expertise and experience in advising on all nature of governance issues, coupled with her involvement and interest in sector development and her experience as a charity trustee, means that she has a high level of specialist knowledge and can ensure that delegates leave our training workshops feeling informed and prepared for the important role of running their charity. Sonya O’Reilly Sonya is a Legal Director in our employment team. She provides specialist employment advice to employers and senior executives in all aspects of employment law. As part of the firm-wide charities and social enterprise group, Sonya advises our charity clients on the full range of employment issues. Sonya also provides both in-house and public training on many employment-related topics through Birketts’ Shaping Excellence programme. She has an excellent reputation as a public speaker and can make difficult concepts sound easy.