Charities Act 2022; remedy defective appointment of trustees

20 July 2022

Our charity and not for profit team has been using the month of July to provide practical advice to charity trustees and those working with charities.

This week, in the penultimate article of our five-part series, Associate, Ellie Williams, examines more changes brought in by the Charities Act 2022, including power to remedy defective appointment of trustees and the rules around remuneration of trustees.

The final article in the series will follow on July 27.

Charity trustees

  • New power to remedy defective appointment of trustees: a new power will be introduced to enable the Charity Commission to make an order ratifying the appointment or election of a trustee where there is either:
  • uncertainty about whether they are properly appointed or elected; or
  • a defect in their appointment or election.

An order can only be made when the person who is the subject of them consents.  This provision is expected to come into force in autumn 2023.

This is a very useful introduction as it is common for a charity to inadvertently appoint its trustees incorrectly.  An invalid appointment has wide ranging consequences, especially for unincorporated charities.  Currently the Charity Commission can determine who the members of a charity are when this is not clear or there is dispute, but cannot determine trusteeship.

  • Remuneration of trustees for good or services: charities currently have the power to pay a trustee (or persons connected to them) for providing services to the charity as well as for goods supplied in connection with providing those services where certain conditions are met.  The Charities Act 2022 will amend this so that there will no longer be a requirement to supply goods in connection with a service, meaning goods or services or goods and services can be supplied.  For example, a trustees’ business could sell fence panels to their charity (the goods) or erect a fence (the service) or to do both.  This power will apply in addition to any other power, meaning trustees can rely on it irrespective of any express provision in their governing document.  This provision is expected to come into force in autumn 2022. 
  • Remuneration of trustees for work carried out: the Charity Commission will now have the power to order a charity to pay a trustee for work carried out for, or on behalf of, the charity (or to authorise them to keep any unauthorised benefit already received) where they consider it inequitable for them not to be paid or to retain the benefit.  There are various considerations the Charity Commission must bear in mind when making such an order.  This will mean charities will no longer have to apply to court to authorise such payments or benefits in this situation. This provision is expected to come into force in autumn 2023.
  • Rules on trust corporation status simplified: trust corporation status can be relevant when a charity incorporates (i.e. an unincorporated charity becoming a corporate structure such as a charitable company) and the new corporate charity is appointed as sole trustee of the old charitable trust. The old charitable trust might be retained to hold permanent endowment or to receive legacies.  Trust corporation status can be needed so that retiring trustees can be properly discharged from their duties as trustees, and so that the corporate trustee can properly deal with any land owned by the charitable trust.  This includes giving valid receipt for the proceeds of sale or other capital money when disposing of land.  At the moment an application would need to be made to the Charity Commission for a Scheme to appoint the corporate trustee, or to the Lord Chancellor.  The Charities Act 2022 will do away with this and trust corporation status will be automatic for any trustee of a charitable trust that is a body corporate (i.e. charitable company, CIO, Royal Charter charity, etc), a charity and the trustee of a charitable trust.   Any charity considering a restructure or merger should bear this in mind during their planning process. This provision is expected to come into force in autumn 2022.

Ex-gratia payments (expected to come into force autumn 2022)

At the moment charities have to seek prior approval from the Charity Commission, the Court or the Attorney General if they wish to make a payment which they feel morally obliged to make but there is no legal basis for (an ‘ex-gratia payment’).  This is particularly relevant for charities which receive legacy income and often leads to delays and has cost implications as legal advice is often needed.

The Charities Act 2022 brings in changes which will mean that charities can make small ex-gratia payments without requiring Charity Commission consent.  The size of the payment that can be made will depend on the gross income of the charity in its last financial year, as follows:

  • Gross income £25,000 or less in last FY - £1,000
  • Gross income over £25,000 but not over £250,000 in last FY - £2,500
  • Gross income over £250,001 but not over £1 million in last FY - £10,000
  • Gross income over £1 million in last FY - £20,000

This is a per payment threshold and not per financial year. Payments exceeding this will still need Charity Commission consent.

A charity's governing document will be able to expressly exclude or restrict the power.

Power to authorise ex-gratia payments: currently it is necessary for the decision to make an ex-gratia payment to be made by the trustees and cannot be delegated to staff.  Once the new rules come in the trustees can (but are not required to) delegate the decision to make an ex-gratia payment in accordance with the charity’s delegation functions within their governance structure, for example, to staff members.  The explanatory notes in the Charities Bill made clear, however, that ultimate responsibility for making ex-gratia payments will still rest with the trustees.  trustees should always be cautious about making ex-gratia payments as they involve the use of charitable funds for non-charitable purposes.  Charities should prepare to update any schemes of delegation to reflect the new rules in readiness for when these rules come into effect.  

Permanent endowment (expected to come into force spring 2023)

This is a technical area of law that often causes confusion and so the changes brought in by the Charities Act 2022 have largely been welcomed.  Broadly, permanent endowment refers to funds or assets that are subject to a restriction as to how they are spent or used. The Charities Act 2022 reformulates the definition of permanent endowment to remove inconsistencies and lack of clarity as property that is “subject to a restriction on being expended which distinguishes between income and capital”.

The Charities Act 2022 brings in various powers designed to increase flexibility in certain areas.  It widens the powers available to spend permanent endowment and introduces a new power to borrow from permanent endowment without Charity Commission consent and new rules around social investment.

Powers to release permanent endowment restrictions have been amended to confirm that corporate charities can use this power.

The rules around Charity Commission consent will be amended so that the requirement for consent to release permanent endowment will be determined by one financial threshold based on the value (and not the income) of the permanent endowment fund.  Consent will be required if the market value of the endowment funds exceeds £25,000.  This change is intended to enable more charities to access these powers without having to seek consent with the time and cost implications of doing so.  However, the threshold change will mean that some charities which wouldn’t currently have to seek consent will now have to, for example, large endowment funds which produce a low income. 

The time limit for the Charity Commission to respond to a request to release permanent endowment will be reduced from three months to 60 days. 

There will also be a new power for trustees to borrow money out of the permanent endowment without the need for an Order from the Charity Commission. Up to 25% may be borrowed but it must be repaid within 20 years.  This will be of use to charities which require short term access to additional funds rather than releasing the permanent endowment restrictions all together.

Charities should be cautious in applying these new provisions, however, as they are complex and technical.  Appropriate professional advice should be sought to ensure they are applied in line with the statutory provisions as there is significant risk if they are not followed correctly. 

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