Charities and Social Enterprises Update

Ian Hempseed presents a round up of recent developments within the sector:

Fraud – Beware and Prevent

On 6 June 2013 the National Fraud Authority (NFA) published its Annual Fraud Indicator. This maps fraud across all sectors, not just for charities. As for charities, this year the NFA took samples of about 1500 charities with income over £100,000.

The NFA’s Annual Fraud Indicator shows that:

  • almost 1 in 10 charities reported that they had detected fraud in the last year;
  • the most common areas of fraud were banking (47%), accounting (14.8%), and identity (14.1%);
  • a point of particular concern was that 23% of the charities who had suffered fraud had experienced this via an insider of the organisation.
  • Charity trustees have a duty to protect the assets of their charity and, therefore, have the responsibility to take appropriate action to minimise the risk of fraud.
  • Following the NFA’s report, the Charity Commission have recommended the following “Top tips” to prevent fraud:
  • find out the identity and legitimacy of any organisation the charity works with;
  • ensure good financial controls and policies governing access, use and storage of electronic information;
  • get safe on-line, e.g. install anti-virus systems;
  • train staff and volunteers so they know how to report suspicions;
  • ask what other trustees and staff are doing;
  • report concerns to the relevant authorities, e.g. Action Fraud;
  • assess the proportionality of risk controls in relation to the size of the charity;
  • understand the nature of the charity’s activities and their area of operation that could affect risks;
  • develop a financial records system for both the receipt and use of funds

Consultation on social investment tax relief

Following the Chancellor’s announcement in the 2013 Budget that the Government would introduce a new tax relief for investment in social enterprise, HM Treasury has run a consultation which closed on 6 September 2013. One of the barriers often quoted by social enterprises, including many charities, to maximising their social impact is their ability to access affordable and appropriate capital. The next stage is for the Government to consult at the Autumn Statement 2013 on specific proposals for legislation.

Of the 35 questions raised, some looked at the caps on dividends and performance related interest applicable to community interest companies limited by shares and whether these have discouraged investors in CICs. The question was asked whether the cap should be raised or removed, but it was recognised that balanced against that there would be the need to protect the function of the permanent statutory asset lock to preserve a CIC’s assets for continuing community use.

Other questions were to draw out views as to what could be done to improve the flow of capital into charities. If tax reliefs are to be available for investment in charities, the consultation points out that there would need to be specific anti-avoidance rules to ensure investments do not obtain relief as both investments and Gift Aid as donations and that donations and investments should be accounted for separately. HM Treasury also acknowledged that the typical corporate structure for a charity, a company limited by guarantee with the option now of a charitable incorporated organisation, does not have shares and therefore prevents the raising of equity venture capital. Also, many social enterprises are themselves set-up as companies limited by guarantee. Thus, HM Treasury in the consultation asks whether it would be necessary to offer tax relief on investment instruments in charities other than equity, such as on loans or quasi equity loans where investors receive a performance related return.

“It’s Your Decision”

In July the Charity Commission published new guidance to help trustees understand the issues they need to consider when taking decisions on behalf of their charity. As charity trustees are ultimately responsible for decisions taken by their charity, one of the stated aims of the Commission is that the guidance should help to increase trustees’ confidence when making decisions and inform their processes.

The Commission in their summary state that, when making decisions about their charity, trustees must:

  • act within the charity’s powers;
  • act in good faith and only in the interests of their charity;
  • make sure they are sufficiently informed, taking any advice they need;
  • take account of all relevant factors;
  • ignore any irrelevant factors;
  • manage conflict of interests;
  • make decisions that are within the reasonable range of decisions that a reasonable trustee body could make in the circumstances.

The guidance expands on what trustees would need to consider to comply with the steps. It also has useful practical tips on what stance boards should take in particular scenarios. A not uncommon situation for many boards is where a dissenting trustee does not feel compelled to abide by a majority decision which has been taken properly by the trustees. Once a decision has been properly made, all the trustees must abide by that decision. The Charity Commission state “a trustee who disagrees because of personal motives or prejudices rather than genuine belief about the interests of the charity is not complying with the principles in this guidance or their duty as a trustee”.