The act of charity: an Elizabethan tradition

One of our clerks, Annie Vickers, outlines some of the changes trustees can expect to see in the Charities Act 2022.

Some background…

This country has a long history of charitable giving. In fact, ‘charity’, as a legal concept, was first defined in English law in 1601. Over 420 years later, we are still determining what charity means. Just last month the Charities Act 2022 received Royal Assent. This is an update from 2011. It has simplified existing legislation making it easier, and potentially more cost effective, for charity trustees to make key strategic decisions. Put simply, charities now have greater freedoms, and trustees a broader range of powers, to manage a charity’s assets.

Previously, the legislation around charity law was bound up in various legal frameworks: chiefly the Charities Act 2011, but also, depending on the nature of the charity, other legal frameworks too, which meant that trustees could be hidebound by legislation which was, in some cases, nearly 100 years old.

The Charities Act addresses these technical difficulties by giving trustees increased powers to be able to make changes to a charity’s governing documents, to give them greater flexibility in the disposal of charity land, and to provide clarity on what a permanent endowment is, including how it can be used for social investment, not just financial return.

How might this affect you as a trustee?

New and updated guidance will be issued by the Charity Commission in due course. In the meantime, the provisions of the Act will be implemented in stages to enable the Charity Commission to share this information and for trustees to be able to understand the impact. Below are some highlights of key changes.

Making best use of a charity’s permanent endowment

If you are a trustee of an almshouse or grant-making organisation, you will no doubt have had conversations about how to make best use of your charity’s permanent endowment. The Charities Act has simplified the definition of what a permanent endowment is and, in certain circumstances, permitted trustees to borrow up to 25% of the value of the charity’s permanent endowment for the furtherance of the charity’s mission. This includes the ability to make social investments where the returns may be uncertain, or even negative. In other words, the Charities Act is as much concerned with the social return on investment a charity makes as it is with generating income.

Changing or updating a charity’s governing documents

The last couple of years have brought home to many the need to consider changes to how charities operate. Under the Act, trustees have increased powers to make various changes to their charity’s governing documents, especially when it comes to the decision of whether to incorporate or not. Here at The Trust Partnership, we are noticing that trustees are increasingly considering whether they should become incorporated organisations. The Charities Act makes it easier for unincorporated trusts to become incorporated if they so wish.

Procuring goods and services cost effectively

In the same vein, the Act seeks to make it easier for charities to be able to procure goods and services from a trustee, when to do so would mean that the charity would get such goods and services at a reduced rate. The Act also acknowledges that trustees might potentially be eligible for ‘an equitable allowance’ if it can be shown that ‘it would be inequitable for the trustee not to be remunerated for that work (or not to retain the benefit received in connection with that work)’. Of course, when it comes to trustee remuneration, the usual safeguards and caveats apply. Many (if not most) governing documents expressly prohibit the remuneration of trustees (except in very specific circumstances).

Greater flexibility

The Charities Act also provides greater flexibility in obtaining advice on the disposal of charity land, making it potentially less financially burdensome for the charity, as well as creating greater certainty for any purchaser. There are other areas of simplification too: in the treatment of failed fundraising appeals, the issuing of ex gratia payments and in the allocation of donations to charities which have merged.

Our view

Here at The Trust Partnership, we welcome these changes. They reduce the potential need for expensive legal fees, thus making it easier for charities to release funds to spend on the furtherance of their charitable purposes.

In turn, this might mean that the regulator’s time is also freed up, meaning that in theory the Charity Commission can better use its resources to enforce regulations where needed, thereby giving it more ‘bite’.

With this streamlining of charity law, such changes might even encourage more people to become trustees. In a world where charities are needed more than ever, that would be welcome news indeed.

If you are a trustee and would like help or advice on any governance-related query, please do get in touch.