Charities – A Briefing for Charitable Organisations

AT A CROSSROADS? - BE WARY OF BIASING INVESTMENTS STRONGLY IN ONE DIRECTION

By Adrian Taylor

Adrian Taylor looks at volatility in the investments arena.

We all like the idea of having 20/20 vision to allow us to look to the medium and long-term to invest with confidence. However, when even the short-term horizon is difficult to define, we can experience periods of increased volatility – making charity trustees understandably more nervous.

Throughout 2010 we have argued that investors will soon reach an economic crossroads, but it was hoped that, by that time, the best direction to take would be adequately signposted. The following factors suggest we face a choice of two roads.

The high road

• Investors have grown confident that the co-ordinated global quantitative easing programme, brought in as a result of the financial crisis, has succeeded. We may have entered a mild recession in the later part of 2009, but a repeat of the 1930s style depression has been avoided.
• The new Coalition Government's Emergency Budget was well received, as it sought to calm global investors by reassuring them that austere deficit reduction measures were balanced and manageable and would lead us into a healthier and more productive future.
• The likelihood of a double dip recession has diminished, and although the UK economy is not expected to sparkle in 2011, investors have become more confident and risk tolerance has increased marginally. This has led to a rally in the bond markets, and more recently in equities, as company profits have met expectations and analysts have upgraded growth targets for 2011.
• This has led to an improvement in the dividend outlook. At the same time, income yields on much of the UK FTSE Index are at historically high levels and exceed those available for government bonds.
• If the economic recovery can be sustained, company profitability will rise, suggesting higher capital values. Capital growth and attractive income seems an easy option.
• Inflation may not be a major threat at the moment but if all these factors are played out then these pressures will rise in the future and the current low interest rate policy may have to be tightened sooner than many expected.

The low road

• Recent data suggests the economic recovery is anaemic and may not provide sufficient momentum to become self fulfilling in 2011. While this potential problem could be alleviated with further government stimulus (the so called QE2) there is concern that the authorities are running out of ammunition.
• The Government's upcoming autumn Spending Review was always going to be carefully monitored, but cracks may already be appearing with resistance to spending cuts mounting and forecasts of tax receipts lowering as economic growth expectations are trimmed.
• Given that the impact of the initial public sector cuts have yet to be felt, many observers believe that the outlook for the consumer sector is still too optimistic and that unemployment is set to rise, affecting both the discretionary spending market and the property sector. The Government is hoping that cuts in the public sector will be cushioned by new investment in the private sector. There is no real evidence that this is being seen and there is talk of imposing greater public sector cutbacks in coming months.
• If the evidence from the USA is a guide, then we need to be concerned. In the first few months of 2010 the US economy emerged strongly from the 2009 recession offering hope of sufficient momentum to allow the authorities to ease back on its fiscal stimulation. Recent data however all but confirms that the recovery has fizzled out and suggests the threat of a double dip recession is a real possibility.

Where to from here?

We are now at the crossroads, but regrettably the signposts are not that helpful. Trustees should be aware of the risks associated with biasing their investments strongly one way or the other. Volatility has increased during the year which reflects investors switching between the two sets of factors described above. In the very near term we see this continuing to be a feature of investment markets.

There is no merit in taking a big gamble in a game where the factors determining the outcome are so unclear. There are many good economists and strategists whose opinions we value strongly, but when their views are polarised into two opposing but well argued camps this sends a strong message. It may be better to take the prudent approach and look to reduce the increasing pressure of volatility (risk) rather than chasing gains. Perhaps we should consider travelling in two cars and try to pick the best options from both routes away from the crossroads

TRUSTEE BOARDS - DOES YOURS GLIDE EFFORTLESSLY

By Kim Sanders

What makes an effective trustee board? Kim Sanders of White Stone discusses.

The effectiveness of the board is paramount to the success of the organisation. This is even truer in the third sector as most organisations do not have the resources to 'buy' in expertise as and when needed and are much more reliant on the skills of the board. The board should lead the organisation's delivery to its stakeholders and ensure that public benefit is achieved.

So what makes for an effective board?

An effective board is not born: as with every partnership, whether professional or personal, it takes work and evolves over time. It is a team that needs to work together to achieve its agreed objectives. Successful and effective boards demonstrate a number of common traits, which we explore here.

Chairman

The role of chairman is pivotal to ensuring the board delivers and is the link between the board and the executive management. A good chair can make all the difference between an effective and ineffective board. The chair should be a good communicator and listener and have the ability to bring people together. Jeremy Harmer, chairman of an AIM-listed company said: "The chairman is the collector of everyone else's views; but he's the man who brings the differing strands of ideas together in a cohesive decision. He's a co-ordinator, a facilitator – but he's not the fountain of all knowledge."¹

All chairs have their own style, but it is generally agreed that less is more: they act as the captain steering the ship to meet its strategic objectives.

Diversity and skills

It doesn't matter how good the chair is if the skill sets of the board are poor. A board can only perform effectively if its members have the skills to carry out their tasks to meet the objectives of the organisation. Diversity is important to ensure the board reflects the stakeholders' needs. The goal is to achieve the organisation's objectives by using the boards' skills through team work.

For instance, if a new strategic plan has been adopted do the board members collectively have the necessary skills to oversee the implementation of the plan?

A regular skills audit of the board is a useful exercise and can help the board plan ahead and recruit the necessary skills required. One of the signs of an effective board is that its membership changes as the organisation grows and faces different challenges.

Communication

Between all members of the board there must be openness, frankness and respect with constant communication.

Board papers are used to communicate the issues the board must consider. These must be concise, contain all the relevant information, set out the objectives and summarise the action required. This allows meetings to be focused and not bogged down by detail. Setting the level of detail for inclusion in the papers is a skill and also depends on the attitude of the board.

However, communication is a two-way process. The board should be clear and united on its strategy for the organisation and should clearly communicate this inwardly and outwardly.

HAPPY NEW YEAR - UNHAPPY NEW VAT RATE

By Kim Sanders

Don't pay more VAT than you have to. Ian Stinson offers tips on how to achieve this.

On 4 January 2011, the standard rate of VAT goes up to 20%. If you are unable to reclaim VAT in full or in part, here are a few suggestions to help you make the most of the 17.5% VAT rate.

• Bring forward any planned purchases of goods or services so that they are received and invoiced before 4 January.
• If you receive goods or services before 4 January but your supplier invoices you after that date, request that the delivery date 'tax point' is used so that the 17.5% VAT rate can be applied.
• If you are ordering goods or services for delivery/completion after 4 January, request that an invoice is raised in advance so that the invoice creates a tax point before the VAT rate increases. It may be necessary to 'pre' pay for goods or services before 4 January, to ensure the lower VAT rate is applied. But, be cautious of the anti-avoidance rules (discussed below).
• If you receive any services which start before 4 January, but finish after the VAT increase, ask the supplier to apportion the fees and charge 17.5% on the services performed before 4 January (and 20% thereafter).

Beware anti-avoidance

Anti-avoidance rules will in certain circumstances prevent suppliers raising invoices in advance of the delivery of goods and services to take advantage of the lower VAT rate.

The anti-avoidance rules may apply if you cannot recover all of your VAT (which is common for many charities) and one of the following applies.

• You and your supplier are connected.
• The value of the supply exceeds £100,000.
• The supplier or someone connected to him funds your purchase.
• Payment of the relevant supply is not due in full for six months or more.

Be practical

In the New Year, check that your suppliers (especially suppliers of services) have charged you the correct VAT rate – HMRC only gives suppliers 45 days in which to issue credit notes if they have incorrectly charged the new 20% VAT rate.

The special rules that allow suppliers to apportion services provided before and after the VAT rate increase, and to use the pre-4 January delivery date tax point rather than the post-4 January invoice date, are only optional and some suppliers might not be aware of them. You may want to point them towards the guidance note issued by HMRC: www.hmrc.gov.uk/vat/ forms-rates/rates/rate-increase.htm

Don't put off looking at these ideas until the last minute. Over Christmas and the New Year suppliers will probably not be thinking about VAT

Re-evaluating and energising

A good board can be likened to a river: no matter what changes occur in the environment, the river continues to flow, never stopping. The same can be said of an effective board – it continues its work, no matter what is thrown at it. A sign of an effective board is one that can bounce back by re-energising itself, having re-evaluated its position and having the confidence to change course, to achieve the objectives it has set.

For example, the board of BP decided to ask its chief executive Tony Haywood to step down following the oil spill in the Gulf of Mexico. The board had evaluated the situation and decided that it needed to change course, re-energise and evolve by appointing a new chief executive whom the board perceived had the skills to rebuild public confidence in the company.

Like so many activities, an effective board appears effortless and easy to achieve. But the reality is that such a board relies on the continual, hard work of its members. When these traits are brought together an effective trustee board can be likened to a swan that glides effortless on the water, but if one looks under the water it is paddling furiously.

A QUESTION OF LOYALTY? - CONFLICTS OF LOYALTY

By Sarah Chiappini

Sarah Chiappini of Charles Russell LLP looks at conflicts of loyalty, and how trustees need to deal with this.

The final provisions of the Companies Act 2006 (the 2006 Act), which came into force on 1 October 2009, have changed the way in which directors of charitable companies must deal with conflicts of loyalty. A conflict of loyalty will occur, for example, where a person is either both a director of a charity and a director of the charity's trading subsidiary or a director of two charities which have a contractual relationship, i.e. there is a landlord/lessee relationship or one charity makes grants to the other.

Duty to avoid conflicts of interest

Section 175 of the 2006 Act, as modified pursuant to section 181 in relation to charitable companies, provides that a director of a charitable company must avoid a situation in which he/she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of his/her charity.

The reference in the 2006 Act to 'indirect interest' is interpreted as including an interest of those connected to a director, for example members of a director's family and companies controlled by a director. Consequently, any relevant interests of those connected to a director will also need to be addressed.

The duty to avoid conflicts of interest is not, however, infringed in certain situations as set out in section 175. For example, in the case of a conflict of loyalty the conflict is, subject to certain conditions, authorised by the directors.

The practical consequences of the new law

Before the implementation of section 175 of the 2006 Act, when a conflict of loyalty arose it was acceptable practice for directors to vote on a matter on which they had such a conflict but to remember 'which hat they were wearing' when making decisions on behalf of the relevant organisation.

However, pursuant to the 2006 Act, where directors have a conflict of loyalty they must now either:

• abstain from voting on the relevant matter, provided that there are sufficient directors who are not conflicted to achieve a quorum to enable those unconflicted directors to vote on the matter, or
• obtain authorisation to vote on the matter from those directors who are not conflicted, subject to prescribed conditions, and only if the charity's memorandum or articles of association permit such conflicts to be so authorised (see below).

In other words, conflicted directors can no longer simply rely on the notion of remembering 'which hat they are wearing' when voting on a matter in which they have a conflict of loyalty.

Prescribed conditions for authorising a conflict of loyalty

The number of unconflicted directors needs to be such that they would constitute a quorum to enable them to authorise the conflicted director to vote. However, many charities will not have a sufficient number of unconflicted directors and/or a sufficiently low quorum (a quorum of two is considered, as a matter of good governance, the minimum number) to enable the conflict to be so authorised.

So, charities that do not have a sufficient number of unconflicted directors to achieve a quorum for the purposes of authorising a conflict of loyalty will need to appoint one or more unconflicted directors. Of course, recruiting charity directors/trustees is often easier said than done. Therefore, in some circumstances, it might be possible/ appropriate simply to reconstitute the boards of a charity and its trading subsidiary or the boards of two charities which have exactly the same directors. Consideration should also be given as to whether it will be necessary or appropriate to reduce the quorum provisions for meetings of directors to, say, two for the purposes of authorising conflicts of loyalty.

One final point on the issue of authorising conflicts of loyalty is that those directors who are not conflicted should be aware of their own duties as directors when giving authorisation for a conflicted director to vote: in particular, their duties pursuant to the 2006 Act to promote the success of the company and to exercise independent judgement.

Memorandum and articles of association: required provisions

To enable a conflict of loyalty to be authorised, the charity's memorandum and articles of association must specifically permit conflicts of loyalty to be authorised in the manner prescribed in section 175 of the 2006 Act. Consequently, many charitable companies will now need to take steps to insert the relevant provisions in the articles of association.

Non-charitable companies

So far as non-charitable private companies are concerned (i.e. a charity's trading subsidiary), section 175 of the 2006 Act provides that unconflicted directors can authorise a director's conflict of loyalty provided that there is nothing in the company's constitution to the contrary. In other words, unlike charitable companies, there is no need to include express provisions in the company's constitution. However, when updating a company's articles of association generally in the light of the 2006 Act we have, for completeness, been inserting the section 175 procedures that need to be followed.

Companies in existence before 1 October 2008

A transitional provision provides that any company, including a charitable company, in existence before 1 October 2008 (when section 175 came into effect) would need to pass a standalone members' resolution before it could authorise conflicts of loyalty pursuant to section 175.

The question then arises whether a company, including a charitable company, which adopts new articles incorporating revised directors' conflicts provisions under the 2006 Act, still needs to pass a separate members' resolution. There appears to be a divergence of opinion on this issue amongst practitioners. Consequently, as a 'belts and braces' measure, we are advising that when companies are revising their articles of association a separate members' (ordinary) resolution is passed conferring authority on the directors to approve conflicts pursuant to section 175.

Steps to take regarding the authorisation of conflicts of loyalty

• Amend the articles of association to include provisions allowing conflicts of loyalty to be authorised (this is mandatory for charitable companies).
• For charitable companies and their trading subsidiaries which were in existence before 1 October 2008, arrange for the members to pass an ordinary resolution conferring authority on directors to approve conflicts of loyalty pursuant to section 175.
• If necessary, appoint new director(s) to ensure that there are at least two unconflicted directors.
• Consider whether it is necessary or appropriate to reduce the quorum provisions for meetings of directors for the purposes of authorising conflicts of loyalty

MAKE EVERY GIFT COUNT

By Luke West

Luke West considers some of the income tax issues arising when charities hold fundraising activities.

From cake sales to black tie events to white water rafting, the ideas used by charities to attract people's interest to participate in raising funds for a worthwhile cause are many and varied.

Black tie and gala events

Charity trustees should ensure that, where possible, the funds raised during events will qualify for Gift Aid relief in the hands of donors, thereby maximising the funds. HMRC is happy to repay to the charity the resulting basic rate tax relief on qualifying contributions. But how do trustees ensure that contributions qualify for Gift Aid? The underlying premise is that a qualifying Gift Aid contribution must be a voluntary donation. It cannot be a compulsory payment linked to attendance at an event.

The voluntary/compulsory aspect needs to be negotiated with care, and comply with HMRC's guidelines. In addition, the words shown on the tickets should be chosen carefully as this can also dictate the relief available. This is best explained by example (table 1). In each case the donor may pay the same amount of £100, but it is only the last option that will maximise the Gift Aid relief.

Table 1: Ticket wording

Having considered these possibilities, trustees sometimes conclude that they will hold a 'donation only' event, where there is no ticket price, and people can attend regardless of what they give (even those who pay nothing at all). In this case, all donations would qualify for Gift Aid. However, trustees are legally obliged to take proper care of charity funds and should not put them at risk. If an event loses money, the trustees may be personally liable for the loss. A donationonly event may still be possible but professional advice should be sought.

Negotiate those rapids

Kayaking white water rapids and cycling thousands of miles up and down impossible climbs can really capture the imagination of many fundraisers and their supporters. But will the participant receive a 'benefit' from the charity? For example, will they receive free or subsidised accommodation, travel costs and meals? If so, the value of the benefit to the participant is the cost of the event, less any reimbursement he/she makes. Where the Luke West considers value of the benefit exceeds the permitted levels, Gift Aid will not be available on donations made by the participant. The permitted benefit levels can be found at www.hmrc.gov.uk/charities/gift_aid/ rules/adventure.htm

Furthermore if the participant is caught by the 'benefit rule', then donations made by persons 'connected' to the participant (typically a spouse, sibling, lineal descendant, their spouses, or a company under similar control) will similarly not qualify for Gift Aid.

Where it is possible that participants are receiving a benefit from an event, HMRC expects trustees to ensure that the event literature includes adequate narrative to explain that donations from persons 'connected' to the participant will not qualify for Gift Aid relief.

If a participant pays the full advertised cost of taking part in an event, then while that payment does not qualify for Gift Aid, all other donations made by the participant and persons 'connected' to them will qualify for Gift Aid relief. Clearly this maximises the Gift Aid relief possibilities.

But I must dash – my freshly baked cakes have cooled, leaving me just enough time to change into my dinner jacket. Now where did I leave that kayak paddle?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.