LEGAL GUIDE TO CHARITY MANAGEMENT AND GOVERNANCE
How you govern and manage your newly-founded charity (or indeed any other third-sector organisation!) will be imperative to achieving its aims. Successfully running a charity means abiding by your responsibilities as a trustee, which means remaining legally compliant. In order to do so, you will need to take on administrative duties, costs, hire, train and manage staff too. Responsibility for the ‘governance’ lies with the board of trustees of a charity. They will oversee the organisation, make important decisions about its direction and strategic initiatives, answer to the governing body (the Charity Commission) and ensure it is legally compliant. The management side of the organisation, usually employees, is concerned with how these objectives are supposed to be met, which includes the allocation of resources. At the end of 2016, YouGov interviewed over 1000 UK SMEs and we had the stats analysed by the Centre of Business and Economics Research (CEBR). According to this research, the Charities Sector loses over £1.2 billion through not taking care of their legal business so now it is even more important to make sure you know your rights and obligations with regards to the law. So with that in mind, we hope you enjoy Part 2 of our Charity guides to the law.
Trustee Legal Duties – An Overview
In short, there are several very important legal obligations which must be observed in the way you govern and manage your charity. The Charity Commission explores each of these points in more detail in their guide ‘The Essential Trustee: what you need to know, what you need to do’.
- First off, make sure you are eligible to be a charity trustee. You must be 16 if the charity is a company or a CIO or 18 for any other kind. The Charities Act states that you can’t be a trustee if you have unspent convictions, are bankrupt or have been removed as a director or trustee before.
- Make sure your charity is carrying out its purposes for the public benefit. As explained in Part 1 of this guide, you would have set up your charity with a specific charitable purpose in mind. It is your legal duty to make sure you do not stray from that purpose e.g. by allocating funds wrongfully, which is set out in your governing document.
- Comply with your charity’s governing document and the law. This means knowing and understanding what is in your governing document (your Memorandum and Articles of Association, Trust Deed or constitution) and taking legal or financial advice from a professional where appropriate.
- Always make sure to act in your charity’s best interests. This means making balanced and well-informed decisions and not allowing any personal obligations, loyalties or interests to prevent you from doing this. Neither you or your family or people connected with you may benefit from the charity because you are a trustee without express authority.
- You need to manage your charity’s resources responsibly. This feeds back to the idea that you must ensure resources are directed towards achieving the charity’s purpose, without exposing the charity to undue risk so that it remains solvent.
- Act with reasonable care and skill. Essentially, you need to make sure you give sufficient time and use your knowledge and skills for the charity to be run effectively.
- Finally, you must ensure your charity is accountable. This is not just to official bodies such as the Charity Commission but includes your membership (if you have one) as well as making sure delegated duties are being executed to the highest standard.
Managing Your Charity’s Assets
Along with the governance of your charity comes the day-to-day running of it, which means utilising your Charity’s assets within the contours of the legal responsibilities set out above. If yours is a small organisation, as a trustee you are likely to be very hands-on with the management with little delegation. If you are larger and taking on a lot of staff (if you intend on having shops for example) you will be delegating an operational decision-making role and setting precedents for management. By ‘management’ we mean directing the organisation’s resources and assets effectively to carry out its overall charitable purpose and aims. This could be any property belonging to the organisation such as money – both receiving and investing – land, buildings, staff or even more intangible things such as its reputation or intellectual property such as its trademarks.
Below is some of the key legal guidance issued by the Charity Commission on your financial management and responsibilities, which you must abide by to remain legally compliant. For example, when making a financial decision, you must act in the best interests of the charity, manage resources prudently and responsibly and of course act with reasonable care and skill.
Using and managing your funds
There are a few important considerations you must take into account before you utilise your funds to further your cause. You must take these points into account as it is your legal obligation as a trustee.
- Trustees have a strategic role to identify what funds the charity needs, and where and when it can get these funds from.
- Some funds will have restrictions on their use, so you will need to make sure you are adhering to these rules. Broadly, charity funds (this could be other things aside from money e.g. property) are divided into ‘Restricted’ and ‘Unrestricted’ funds.
- Restricted: In general, these funds can only be used for the purpose stated by the donor. For example, if you were holding a charity event to raise money to support a specific project your organisation is undertaking like building a new school.
- Unrestricted: In general, these funds can be used according to how the board of trustees sees fit as long as it is in keeping with your stated charitable purpose.
Within these two categories there are in fact different types of restricted and unrestricted funds, which you should have a look at here.
- Establish and review your charity’s financial policies and procedures. Your staff and volunteers should be involved so they fully appreciate and understand what they need to do to comply with them.
- Budget. Set this annually and aim to stick to it. Detail how activities are to be resourced and the likely costs involved.
- Measure your financial performance. Once you have started activities you should be reviewing and evaluating your effectiveness i.e. your actual income against your spend. Change if necessary. Good financial control will soon reveal if you need to make any changes to your financial management.
- Map out what income is available now and what could be available in the future e.g. government grants. Try to diversify your funders.
- As a legal requirement you must prepare annual accounts and a trustees annual report as necessary to comply with the appropriate SORP (Statement of Recommended Practice) for your charity. If you think this might affect your organisation or you know you need assistance with this, you should check out this page here or speak to your financial advisor. This is part of your legal duty to make your charity ‘accountable’.
Investing your funds
Charities can make investments either to generate income such as a deposit account with interest which they can spend on their charitable purpose or to spend on items which directly further those aims, known as a programme-related investment, such as an unemployment charity making loans instead of grants and using the interest to help fund more loans or payment for an improved social outcome. Some investment routes might have elements of both and are known as mixed-motive investments, but either way trustees must do this with the best interests of the charity at heart as part of their legal responsibilities:
- As a legal requirement, you must be clear from the start about what you are trying to achieve. Are you seeking the best financial return or are you investing in a programme to further the organisation’s purpose or a mix of both. Different rules apply depending on the option you have chosen.
- Record and review your investment policy. This means establishing how activities are going to be resourced, how much risk you are ready to take plus your position on ‘ethical investment’.
- As another legal obligation, you must comply with the relevant powers that you have to make standard investments and also to observe anything in your governing document that limits or gives additional investment powers to trustees. Remember, you must comply with your charity’s governing document as part of your legal responsibilities.
- Legally as a trustee, you need to act to a high standard when exercising your power of investment. This also means considering the suitability of the investment for the charity’s requirements, diversifying your investments to reduce risk and periodically reviewing them. You must take proper advice if you do not have the skills to do this.
- Trustees should consider whether it is in the best interests of the charity to adopt an ethical approach to investing. For example, not acting in a way that might alienate donors or beneficiaries or conflit with the charity’s purpose.
- It is also a legal requirement that a programme of investment, must directly further the charity’s purpose, and that there is a way to end the investment. Any private benefit must only be incidental).
- There are special rules for investments in land which you can find here.
- Finally, did you know you can delegate the management of your organisation’s funds to a specialist? If you are a larger organisation, you might want to consider this if it is ‘in the best interests of the charity’.
If you would like more detailed guidance here, we would urge you to check out the Charity Commission’s ‘Charities and investment matters’ guide.
Protecting your charity’s assets
Because all trustees have a legal obligation to protect and manage the charity’s assets and resources responsibly, it is recommended you have strong internal financial controls. In order to do this you should:
- From the get-go put in place financial policies and guidelines which are understood across the organisation.
- Establish internal control systems using the charity’s organisational plan. This means everyone knows what they are responsible for and who they are reporting to. These controls will help protect you against liability when funds are misused.
- Carry out appropriate checks when you make grants to make sure they will be used for the intended purpose. If you delegate this task, make sure the member(s) of staff know what they are looking for and understand what the role entails. Ensure that any delegation is properly recorded.
- Look very carefully and critically at your areas of highest risk e.g. controls over payroll systems.
- Technology is your friend- we promise. Consider using it to make your life easier and to better track your incomings/outgoings.
- Seek professional advice. We can’t all be accountants/business experts/lawyers, but they are out there (and don’t have to cost an arm and a leg!).
As the subtitle suggests, as part of your legal responsibility to manage resources responsibly you should be setting funds aside in ‘reserve’; planning ahead for future resource needs and also leaving room if anything goes wrong. Therefore, as a trustee you should:
- Identify which of your funds are unrestricted in their use. Only funds without a restriction should be put into the reserve.
- Create a policy which sets out why reserves are needed to figure out how much should be kept back, based on the circumstances in which they’ll be needed.
- As a legal requirement, comply with annual reporting obligations of your organisation’s funds. This means reporting what your reserves are and why you have them.
- Make sure to review this policy on a regular basis when you change your operations or if circumstances demand it.
- Consider whether and how the funds should be invested if they are needed in the short and/or medium term. You should be able to readily access these funds as cash as and when you need it.
- Plan for future development and sustainability. Perhaps you are looking to open a shop or expand the charity abroad! Funding for specific activities should also be kept separate from the organisation’s ‘general’ reserve.
To find out more about managing your reserves here.
Trustee expenses and payments
Generally, charity trustees are ‘volunteers’, which means they do not get paid for their work to the charity (unless their governing document says otherwise) but they can claim legitimate expenses. Nevertheless, the Charities Act sets out circumstances where trustees can be paid for their services and goods. Therefore, as a trustee you should know:
- Of any provisions in your governing document regarding payments to you.
- That any payments to you as a trustee for being a trustee are permitted by your governing document, the Charity Commission or perhaps even the Courts.
- That you are only entitled to legitimate, which should be carefully written down in a policy. This applies to all staff too.
- the powers delegated to you in the Trustee AcT 2000 which allow payment of trustees in certain circumstances and which may be affected by the provisions in your governing document.
You should also; be open and transparent about payment of trustees, especially to your beneficiaries and the public.
- Disclose any payments in your charity’s accounts to comply with SORP (Statements of Recommended Practice) guidelines.
- Have a procedure in place which deals with conflicts of interest when payments are made to trustees.
- Put in place performance reviews of trustees especially those are being paid for their work as a trustee. This will ensure they are fulfilling their role in the most effective and efficient manner, which will be essential for delivering the charity’s purpose.
Trading as a charity
As a charity you can trade as a means to fund your activities, for example, you might have a second-hand clothes shop. Be wise to the types of trading and what their implications are. Here are some essentials things to think about:
- There are TWO types of trading: primary purpose trading, which is an activity which directly furthers the charity’s purpose (e.g. a performing arts charity charging a fee to see a show) and non-primary purpose trading, which is a means of simply raising funds. The distinction is important as generally charities do not have to pay tax on profits of primary purpose trading, but they may have to pay tax on non-primary purpose trading if it exceeds the ‘small-scale’ exemption. The small-scale exemption means that charities don’t have to pay tax on non-primary purpose trading turnover within the ‘annual turnover limit’, which is £5,000. Or, if your trading turnover is more than £5,000 the tax exemption is one quarter of the charity’s total income in that year, up to a maximum exemption of £50,000.
- Some one-off fundraising event activities such as a dinner dance, jumble sale or concert receive tax exemptions if they comply with certain requirements so be careful to check this.
- The Inland Revenue does not regard selling donated goods as ‘trading’ (e.g. charity shop) so you do not have to worry about paying tax here.
- There are complex rules governing buying and selling land which you should check.
- You should make sure to assess all the risks involved in non-primary trading activities – for example, you often have to lay down money and resources before you can sell something, so make sure you can cover your costs and turn a profit.
- Consider trading through a subsidiary body if there are risks to your assets and resources. The trading subsidiary can be a company limited by shares owned by the charity and profits are passed back to the charity. Furthermore, there could also be tax advantages. You have to be careful here to make sure that the interests of the charity are the primary concern of the subsidiary, as this is a legal requirement. All other requirements such as those of the subsidiary company, its employees or creditors are secondary so any conflicts of interest need to be properly and effectively dealt with.
- We would very much advise you seek professional advice before you begin trading to fully appreciate the charity laws which apply to you.
- For more information on trading as a charity see here.
You need to know how to best use and protect your precious assets and resources. This means drawing up a risk policy as a preventative measure. Larger charities have a legal obligation to report on their risk management in their account
Remember, there will be risk factors in both your governance and managerial operations. Getting to grips with the role trustees and anyone else working with your organisation plays will be essential to mapping out potential risks. You should review this policy regularly, particularly if circumstances change e.g. if new relevant legislation is passed. In general, trustees/directors set the parameters of the risk management process and then will delegate the implementation to other members of staff and/or outside professionals. This means making staff know what decisions can be made by them and what should be referred to trustees.
If you have a charity which is above the audit income threshold (as of 31st March 2015, this is £1million), as a legal requirement, you’ll need to make a risk management statement in your annual report – but you should do this anyway as good practice even if yours is below the audit income threshold.
Lastly, establish a sound recovery plan if something happens which means you are unable to carry out your usual duties to your beneficiaries.
As a charity you can buy and sell land but you must act within your legal duties. The Trustee Act 2000 imposes a statutory duty of care on trustees when investing in land. Therefore, as a trustee you must:
- Understand and comply with the powers the charity has to buy land, which could be used to achieve its charitable purpose or as an investment. You will need to consult your governing document. again, understand the laws around altering the use of the land, transferring parts of it, leasing or any other form of ownership responsibilities. The land might be held on trusts that require prior consent for any changes to its
- When disposing of land, comply with the law which means managing the transaction in the charity’s best interests.
- As with all other charity assets, you should monitor and record how the land is being used and implement a regular review and maintenance process.
If you can, you should try to get discretionary rating relief for the charity’s land from the local authority.
The acquisition, leasing and sale of land is quite complex and you should take appropriate professional advice if you are thinking of doing this.
The Charity Commission provides these points in more detail in its guides ‘Sales leases transfer or mortgages’ and ‘Acquiring land’ which, you should have a look at.
You might also have premises to manage in which case you need to be aware of your obligations under any commercial lease, for example;
- Rent Reviews
- Service Charges
- Dilapidations (making good when you leave the premises)
- Term (and break-clauses)
- Sub-letting prohibitions
- Change of use provisions
- Forfeiture provisions
Staff & Volunteers
The efforts of your staff and volunteers are the lifeblood of your organisation. Passionate and committed individuals, they will be essential to your organisation’s growth and development and, ultimately, the fulfilling of its purpose. However, like any resource you take on, you need to be aware of the risks and obligations they bring, as this is your legal duty as a trustee
As part of your legal duty of acting in the Charity’s best interests and acting with reasonable care and skill as a trustee, here are some key points of consideration:
- Make the best use of your staff by considering what skills and experience are needed for the role. Carry out performance reviews too as a way of ironing out any problems and inefficiencies whilst giving useful guidance in line with your overall strategy.
- Ensure diversity, equality and certainly consider flexible-working to make for a happy workforce.
- Make sure you are aware of your legal responsibilities as someone who is taking on staff and keep up-to-date with the most recent legislative changes. This will all depend on what kind of staff you take on.
In brief you can take on (and this list is not exhaustive):
Here are some of the issues to consider with employees;
- Have a contract in place which states the conditions of the employee’s employment e.g. rate of pay, other benefits, working hours, holiday, maternity/paternity leave, Term, notice period, location, confidentiality, any post-term restrictions etc.
- There is a raft of legislation affecting employees which you need to be aware of, including;
- Legislation on the National Minimum Wage (as of Oct 16, £7.20 for 25 & over and specific scales for under 15), but you can check for updates here.)
- The Equality Act 2010 which prevents discrimination on the basis of age, disability, gender, race, religion, sex, sexual orientation, marriage and civil partnership, pregnancy and maternity
- Legislation protecting against ‘wrongful dismissal’, when you are in breach of contract, or ‘unfair dismissal’ (including constructive dismissal). Certain dismissals are automatically ‘unfair’ including those in cases where you dismiss someone for a reason relating to Health and Safety, asserting a statutory right, pregnancy or maternity leave. Making people redundant or dismissing them for poor performance can also count as unfair dismissal if not properly handled. Generally, it is more difficult to dismiss an employee after two years of employment
- Legislation on holiday pay, flexible working, statutory sick pay
- The Working Time Regulations
- The Health and Safety at work Act 1974
- The Management of Health and Safety at Work Regulations 1999 (which govern risk assessments)
- Legislation on shared parental leave
New pension guidelines
- One point to highlight here would be that recent pension legislative changes affect charities too. Following on from the Pensions Act, 2008 ‘auto-enrolment’ means that you must now develop a pension scheme for your workers/employees (though employees can opt-out). You also have to contribute an amount up to 3% of their qualifying earnings to that pension. This has been a phased process since 2012 and it is now catching up with smaller charities too. Do not underestimate how much planning is needed to successfully do this. Importantly, you will have to account for the fact you are contributing into the scheme in your budgeting
- If you take on someone who is ‘self-employed’ they do not have a contract of employment with your organisation, but need their own agreement to provide a certain service. This will specify the length of time and for what fee they are working, and the nature of the task they are asked to carry out.
- They do not have as many automatic rights as an employee, but do have some legal protection. For example, they have the right to not be discriminated against and are entitled to a safe and healthy environment to work in.
IR35 – don’t get caught out!
We hear a lot about what IR35 is and who is liable for it. In short, it targets contractors who might be avoiding paying the tax they should be paying by presenting themselves as self-employed. Contractors are technically self-employed and as such are not taxed in the same way as general employees; they take dividends from their company and pay less in NI contributions. The HMRC sometimes sees these people instead as disguised employees who should be taxed in the same way as a general employee. The legislation looks here to stay and it is vital for contractors and charities to be aware of it and stay compliant to avoid financial penalties. Contractors need to stay within the all-important definition of ‘self-employed’ to beat the IR35 rules, but this is not always as easy as it sounds. So first of all, consider whether IR35 applies to you. You can do this on the government website here. In essence the more your contract looks like a contract of employment, the less likely your service-provider will be regarded as a contractor. Here are some give-aways;
- Is the person working exclusively for you?
- Do they have a choice of whether to do the work or not?
- Do they have a choice of how to do the work?
- Can they appoint a substitute?
- Do they receive employee benefits like paid holidays and sick pay?
- Are they on an indefinite or rolling term?
- Volunteers do not have the same contract of employment as an employee or worker, which means they do not have the same rights.
- Whilst it isn’t compulsory, you should put together a policy for volunteers and a volunteer agreement so that everyone knows what is expected of them. This will explain things such as the level of training and support they should expect to receive, how you’re covered under insurance, health and safety issues and whether expenses are covered (and if so, which).
- Remember, volunteers must not be paid for their time (although they can receive actual reasonable expenses for food, travel etc.). Paying volunteers for work done may mean they are classified as an ‘employee’ or ‘worker’. You need to be aware of this and manage the risk accordingly since once they are deemed ‘workers’ then the legislation mentioned above can apply to protect them and you may be forced to pay them the National Minimum Wage (retrospectively and prospectively) as well as be liable for a fine.
We recommend that you take legal advice when implementing a volunteer policy or agreement to ensure that your volunteers remain volunteers and do not become employees.
As a trustee you have a duty to safeguard your organisation’s assets and resources from loss or damage. Therefore, you must consider getting insurance. The type you get will depend upon the types of activities you carry out e.g. Employers’ Liability insurance is compulsory. Other insurances include Professional Indemnity insurance (to protect against negligent provision of advice or services), Public Liability insurance (to protect against members of the public being injured or having their property damaged by your charity), Directors’ and Officers’ Liability insurance, and Trustee Indemnity Insurance.
As another legal requirement, you need to be aware of the power under the Trustee Act 2000 which enables trustees to insure property owned by the charity against the risk of loss or damage and to pay the premiums out of the charity’s funds.
You should also make sure that your insurance cover is appropriate for all types of staff- workers, employees, contractors etc. If you’re unsure, speak to a professional advisor about which insurance is the most appropriate for your charity.
There are several important resources online that you should be checking out for more detailed guidance too. We would urge you to check out the ‘Good Governance Code’, which is accessible as a downloadable PDF. It is jointly owned and has contributions by charity organisations NCVO, ACEVO, SCC, ICSA & WCVA, and it is endorsed by the Charity Commission. Another important resource for trustees of a charity is provided by the government on their website in the detailed guide ‘The essential trustee: what you need to know, what you need to do’ or the shorter guide: ‘Charity trustee: what’s involved’.
We hope you’ve enjoyed our brief guide to governing and managing your charity once it’s up and running, keeping the organisation’s legal obligations in mind. Whether you decide to go down the official ‘charity’ route or not, you should (hopefully!) take some wisdom and heed the best practice guidance of the Charity Commission and all those other expert organisations that are mentioned through parts 1, 2 and 3. Finally, as this is only to be used as a guide, we would recommend you seek professional advice if you’re confused about any of the above- don’t get bitten. LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. If you’re unsure of what you need, we offer a free consultation too!
Clive Rich, Founder and Chairman
Gwynne Jarvis, Charity LawBrief (LawBite lawyer)