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
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.
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:
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.
If you need any further information or advice on these issues please contact the Charity and Not for Profit team at Higgs LLP who have extensive experience of advising charities on a wide range of legal and regulatory issues.
Contact Ellie Williams on 01384 327317 or ellie.williams@higgsllp.co.uk.
Higgs LLP is authorised and regulated by the Solicitors Regulation Authority number 819589.