UK: Keep Holding On – Charities June 2009

Last Updated: 17 June 2009
Article by Matthew Maneely

In this edition, we discuss total return as an investment strategy, highlight a trustee's responsibilities and give tips on how to keep employees focused and happy.


For many charities, an economic downturn will mean lower revenues from their traditional sources. One natural compensatory reaction may be to seek higher income levels from investment portfolios.

In the past it was relatively easy to make a small shift from equities into cash or fixed interest securities to make up any income shortfall. No more. At the risk of misquoting the prime minister, Gordon Brown, "desperate needs mean desperate measures". Trustees could adopt a high risk/high income policy by chasing poorer quality investments which offer greater income yields. While this strategy may be appropriate in the short term, caution is warranted against taking an overly aggressive approach given that trustees need to demonstrate a duty of care over both the near and long term.

We have been here before

Ten years ago, the problem was somewhat different. Income was again under pressure (although at least cash was giving a reasonable return), but high levels of capital growth were common. Those with free access to capital had no restriction on its use and could make the most of these gains, but permanently endowed funds did not have this luxury. Charities were becoming increasingly asset rich and income poor, but may have been prevented from accessing these capital gains to make up any shortfall.

A total return

This dilemma was recognised and the Charity Commission allowed permanently endowed charities to apply to adopt a total return approach to investment. The Charities Act 2006 has made this process even easier (subject to the size of charity).

However, trustees should take careful advice before going down this route and the Charity Commission offers useful guidance on this (see Operational Guidance 83). The aim is to allow trustees greater flexibility by moving away from a rigid approach of seeing returns as either 'capital' or 'income'. A simple illustration shows how this can work.



A charity needs to target an annual return of 6%, preferably in the form of income. It can reasonably achieve a 4% income yield from its balanced portfolio, yet also achieves an average annual capital growth of 4% over the long term. It could therefore apply to the Charity Commission to allocate part of the investment gain to the trust for application (income).

However, trustees need to be aware of a potential nasty risk. If there are no accumulated gains, the ability to achieve your overall target figure may be greatly reduced. The stock market turmoil of 2008 acts as a salutary reminder in this respect.

It is also worth revisiting the specific rules over trustee responsibilities that apply here (see our article on trustee responsibilities). A key requirement to total return investment is that trustees must be even handed. They have a responsibility to protect the interests of both the present and future beneficiaries. The aim of allocating only part of an investment gain is to help meet present needs while retaining sufficient income to meet those of future beneficiaries.

Could the concept of total return be applicable today?

Thankfully, the falls in equity prices are now offering some attractive yields and, by increasing their equity exposure, investors may achieve a suitable near-term/longterm 'balance': good income yields now, with the prospect of capital growth for future beneficiaries.

However, caution is again warranted. The stock market falls of the last 12 months reflect concerns over the health of the corporate sector, and this in turn suggests that the dividend income stream is likely to be volatile. A bias towards equities which can demonstrate a more robust earnings (and hence dividend) profile is sensible, given the risk to dividend cuts overall in the UK market.

The industry norm is moving towards investment performance data being calculated on a total return basis, and we have adopted this process for the majority of our charity clients. Timing is everything, and clearly the concept of total return is easier to apply in bull market conditions rather than during the current bear market phase. However, it can help ensure that investment strategies remain well balanced to meet short and long-term needs.

Are you a trustee?

A trustee is defined as any person with responsibility, in accordance with a charity's governing document, for "the general control and management of the administration of a charity" (Charities Act 1993, s97).

The following can also be regarded as trustees:

  • members of the management committee
  • council members
  • board members
  • governors
  • members of the executive committee.

Furthermore, any full voting member of a management committee is a trustee, irrespective of his/her title.

So what do trustees do?

A trustee's overriding responsibility is to ensure that the charity carries out its purposes lawfully, and in accordance with its governing document.

The Charity Commission sets out the responsibilities of trustees under three headings.

  1. Ensure compliance with relevant legislation, the regulatory requirements of the Charity Commission, and the charity's governing document.
  2. Duty of prudence – ensure that the charity remains solvent, protect the assets of the charity, and ensure assets are applied for charitable purposes.
  3. Duty of care – formulating strategies and policies to ensure the charity delivers against its charitable objectives, acting in the best interests of the organisation, always putting the interests of the charity first and avoiding conflicts with personal interests.

It will be assumed that the charity has benefited from any relevant personal skills, experience and knowledge that the trustee possesses. Trustees may delegate certain management functions but they must monitor performance and retain ultimate responsibility. The responsibility of trustees for the activities of the organisation is joint and several and may also be personal.

Trustees should think about...

  • Does the trustee body exhibit the right mix of skills?
  • Is the body an appropriate size to deliver a mix of skills but remain effective in decision-making?
  • Are roles and responsibilities clearly defined?
  • How do trustees ensure their knowledge of regulatory requirements is up to date?
  • How is trustee performance and the performance of the organisation measured?
  • Is performance measurement appropriate to the object of the charity and aligned to the needs of its stakeholders?
  • Does the charity have a clear strategic plan that is derived from its object?
  • Are the objectives of the charity clearly defined so that resources can be allocated appropriately?
  • Is financial information available to the trustees adequate, timely, reliable and relevant?
  • Is information regarding current and future solvency of the organisation readily available?
  • Do trustees have enough relevant information about the charity's objectives, activities, management structure and financial status to enable them to participate to the full extent of their ability in the collective decisionmaking process?

How can we help?

We can help you to develop processes to critically review the composition of your trustee body, its performance and the effectiveness of the available management information.


HM Revenue & Customs (HMRC) has introduced a new penalty regime for all taxes which will affect VAT returns with a due date on or after 1 April 2009. As many charities are registered for VAT it is important that charity trustees, and those responsible for the preparation of charity VAT returns, are aware of, and understand, the new regime.

Penalties under the new system are 'behaviour based'; HMRC's objective being to influence behaviour and encourage improved tax compliance. The new system does not penalise errors made in VAT returns where 'reasonable care' is taken. However, 'careless' errors, where reasonable care has not been taken, may be subject to penalties of up to 30%, higher penalties applying if errors appear to be deliberate or hidden.

Exposure to penalties may be reduced if errors are disclosed to HMRC; the more charities disclose, help and give access to HMRC, the more likely it is that potential penalties can be mitigated.

Errors may be corrected on subsequent VAT returns up to a maximum of £50,000 if the net errors are less than the greater of £10,000/1% of turnover. However, if careless errors are corrected in this manner the trustees should consider submitting a separate disclosure to HMRC, otherwise the error will be treated as undisclosed and could still expose the charity to penalties.

Trustees of a charity are responsible for the accuracy of its VAT returns. We recommend that they ensure the charity's VAT return preparation procedures are reviewed to minimise the risk of future careless errors being made. In particular, we suggest trustees ensure the charity's accounting systems are well controlled and that:

  • comprehensive VAT return records are maintained, clearly supporting the VAT returns submitted to HMRC
  • particular attention is given to complex VAT issues that the charity faces, e.g. business and non-business activities, partial exemption and grant funding
  • documentation obtained, in support of a VAT treatment applied, is retained
  • returns are submitted on a timely basis
  • credibility checks are performed on the VAT return figures
  • further advice from professional advisers is obtained where in doubt.

These checks should be documented to provide evidence that reasonable care has been taken. We can assist you with this and help you review and assess your processes.


Top tips to keep your staff motivated and focused in uncertain times

How can charities send the right messages to their staff about the future?

Many employers back away from staff communication in difficult times because of concerns about difficult questions. Employees need to be reassured to stay focused when things are difficult. Trustees need to think carefully about how they can motivate individuals and teams to keep performing well.

But how can they make this happen when they are unsure of what will happen next?

  1. Keep the team focused on what they can do, and the service they are providing. Remind them of your values and service standards, and model these values in your behaviour towards them and stakeholders.
  2. Take time to speak with each individual in your team. You may not be able to answer all of their questions, but you can make them feel supported and valued in the work that they do.
  3. Agree work priorities with each individual, so that people are clear about what they need to do and how their work makes a difference.
  4. Provide as much information as you can on changing circumstances, and make sure that they don't have to rely on the internal grapevine to find out what's happening.
  5. Encourage your team to think creatively about new or different ways of raising money and delivering services. Work through each idea and let the team see quick results wherever possible. If an idea is a success, give credit where it's due and promote the idea to other teams.
  6. If you do have to make redundancies, make sure that you do everything that you can to treat leavers with respect, and to recognise the contribution they have made to your organisation. This is important for both those who leave and those who are left behind – a compassionate approach will make a world of difference.

Make sure that you and your team are aware of how the changes in your organisation are affecting the charity's supporters, stakeholders and users. They will also be worried, and you may need to give your team extra support so that they can, in turn, support those involved with the charity.

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.

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