What can we learn from the Brotherhood of the Cross and Star Inquiry?

28/03/2012

There’s no denying that the situation faced by the the Brotherhood of the Cross and Star (the ‘Charity’) is not one which will be faced by many charity trustees.

However, before Liverpool City Council applied to the court to make the Charity insolvent because of an unpaid debt of approximately £385,000, and the charity came to the attention of the Charity Commission for a second time, the Charity had a governance issue which is not as infrequently found as it should be.

How did the Charity wind up almost being wound up?
The Charity first came to the attention of the Commission in 2001/02, when it was alleged that funds were being misused abroad. There was also a conflict between two groups of individuals within the Charity, with each group complaining that it was the true ‘Council of Management’ (i.e. board of charity trustees). The Commission opened an Inquiry, came to the conclusion that the funds of the Charity were safe, and advised the two groups to enter into mediation to find a way to resolve their difference of opinion about the Charity’s management.

When the Commission opened its second inquiry into the Charity, as a result of the threatened court action by Liverpool City Council, it became clear that this issue over the trusteeship of the Charity had not been resolved.

In fact, the confusion over the management of the Charity had resulted in the bank which held the Charity’s cash removing the funds from the reach of both of the purported Councils of Management. This in turn meant that the cash could not be used to settle the debt owed to Liverpool City Council, prompting the council’s bid to wind up the Charity.

So, which group was the true Council of Management?
Neither of them, as it turned out.

The constitution of the Charity stated that the members of the Council of Management should be elected by the members of the Charity. However, this had not happened for many years, and it had become standard practice that members of the Council of Management should be selected and removed by the Brotherhood of the Cross and Star in Nigeria.

A disagreement as to the leadership of the Brotherhood of the Cross and Star in Nigeria brought about the existence of the two purported Councils of Management.

However, no member of either of the purported Councils of Management had been validly appointed and with no valid appointments, no-one at the Charity was legally entitled to manage the assets of the Charity…

What did the Commission do?
It is the Commission’s policy not to involve itself in disputes between trustees of a charity, unless the assets of the charity are at risk. This would explain why, in 2002, once the Commission had ascertained that the assets of the Charity were not being misused, it merely encouraged the members of the two Councils of Management to take part in mediation to resolve the issue of the management of the Charity.

Initially, at the start of the second Inquiry in 2008, the Commission still tried to work with the members of the Councils of Management to deal with the Charity’s problems. It offered to assist with the conduct of a satisfactory electoral process.

However, it became clear that the two Councils of Management could not agree on a way in which a new Council of Management could be appointed and the Commission was finally forced to appoint an Interim Manager (a lawyer specialising in charity law) to deal with the issues threatening the Charity, before the court dealing with the insolvency petition for the Charity lost patience and wound the Charity up.

The Interim Manager was given administrative control of the charity for just over one year. Thankfully, the Interim Manager was able to deal with the bank account issue, and stop the Charity from being made insolvent. He also recommended an administrative restructuring of the Charity, which members of each of the two Councils of Management would be invited to join.

One simple lesson from this tale of two Councils of Management
Every charity should make sure that its trustees are correctly appointed!

First step for appointing a new trustee: check the charity’s constitution for how trustees should be appointed. If it says new trustees are elected by the members at a quorate general meeting, the trustees should make sure this happens. If it says the existing trustees appoint the new trustees by resolution or by deed, then the trustees should do that instead.

They also need to make sure the appointment is documented correctly, as organisations such as banks which hold assets for the charity will need to see evidence that the appointments were made correctly before they will be prepared to update their records.

If trustees are unsure about how trustees should be appointed, or how the appointment should be documented, despite having checked the charity’s constitution, they shouldn’t just guess. Instead, they should seek advice.

Obviously, not all failures to appoint trustees correctly will result in the kind of cataclysmic situation faced by the Charity. However, lesser problems can be encountered – like banks refusing to recognise the authority of new charity trustees, for example. And, as the appointment of a charity trustee can be so straightforward, there seems little reason to get it wrong.

So, what can be learnt from the Inquiry into the Brotherhood of the Cross and Star? The answer may be: more than you might initially have thought.

The full Inquiry can be found here.

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The Gift Aid Question

14/03/2012

How the Gift Aid Question arose
The simple answer is: Rob and I went on a holiday for the weekend, to Harrogate.

Harrogate is a beautiful spa town, with a fascinating historical enthusiasm for all things curative, especially (at the start of the 20th century) the curative power of electricity. For any illness you might care to name.

There was actually a ‘treatment’ which would involve the patient lying in a wooden bath full of peat, which would then be electrified. Who on earth wakes up one day and thinks, “Well, a peat bath is good – very soothing. But it’s missing something… perhaps a live current?” Thank goodness that doesn’t happen any more. After all, we need to preserve our peat bogs.

Anyway, the countryside around Harrogate is very different to that around my home in Willingham, containing many strange natural features which are simply not to be found in the Fens. Mostly, hills. For those of you from the north Cambridge area, if you can, imagine something like the cycle bridge across the A14 from next to the St John’s Innovation Centre to Milton, but huge, and with stones and grass tussocks to trip you up instead of the miniature sleeping policemen on the pedestrian side of the bridge.

To witness more of these strange things, we struck out on foot, and stumbled upon a number of local and national conservation charities operating in the area. This meant that, in a relatively short period, I was exposed repeatedly not only to hills (my legs are still complaining now) but also to the Gift Aid Question. You know the one – it goes “So, that’s two tickets for two adults… Now, would you like to Gift Aid that?”

My experiences over the weekend have brought me to an unpleasant conclusion. I have been labouring under a misapprehension that normal people, not just charity law specialists, know what Gift Aid is. In fact, it turns out that there are not only people out there who not only do not know what it is, but there seem to be a number of reasonably large charities with staff or volunteers who cannot explain how it works when asked.

At this stage, given Rob’s comments about my approach to solving this problem over the weekend, I would like formally to apologise to all the charity staff and volunteers, and visitors in front or behind us in queues, who may have been confused or annoyed by a talkative, surprisingly knowledgable visitor, inexplicably keen to share her understanding of the mechanics of Gift Aid.

As Rob pointed out, he has grown used to a steady flow of charity related news and information from me. Others are unlikely to be. Therefore: I am sorry for any confusion caused. I shall try to restrain myself in the future.

Although, actually, I’m pretty sure that my helpful information persuaded at least one man to Gift Aid his entrance fee when he wouldn’t have done so otherwise. Or, I suppose Rob might suggest, he may just have agreed to stop me from talking to him about it. But, in any case, the charity got its Gift Aid.

A quick guide to Gift Aid
If a donor to a charity has paid or will pay the right amount of income or capital gains tax in the UK in the tax year in which a donation is made, and makes an appropriate Gift Aid declaration, the charity can reclaim the income tax on the ‘gross’ equivalent of the donation (i.e. its value before income tax was deducted at the basic rate) from HM Revenue & Customs (HMRC).

As a simplified example, let’s say that one of my friends, Julie, is paid £25,000 each year for her work as an administrative assistant. After her personal allowance is taken into account (presently £6,475), she will pay income tax at the basic rate of 20% on her remaining pay. This will amount to £3,705 of income tax on £18,525 of pay. Her ‘net’ pay will be £14,820.

Julie decides that she would like to make a donation of £20 to Jimmy’s Night Shelter. Julie is asked whether she would like her donation to be subject to Gift Aid, and, being familiar with the concept (as she has a friend who cannot stop going on about such things), she agrees to this. She knows that she will have paid income tax on at least £25 this tax year. In fact, she will be paying income tax on a gross amount of £18,525 of her pay, so more than enough to cover the Gift Aid on this donation and all her other donations to charity this tax year.

The charity takes her details, and applies to HMRC to reclaim the income tax which Julie paid previously on her £20. HMRC repay the sum of £5 to the charity (25p for each pound donated). As a result of Julie agreeing to Gift Aid her donation, the value of Julie’s gift to the charity has been increased by a quarter, to £25, at no cost to Julie.

This is why Gift Aid is great. The only person who ‘loses out’ in any way is HMRC. And it actively promotes the scheme, so we shouldn’t feel too bad on its account.

I should mention that if Julie had been a higher rate payer of income tax, at present, the situation would be even better from her perspective. The charity would still get to reclaim the basic rate of income tax paid by Julie on the amount given, but Julie should also get to reclaim from HMRC the difference between the basic rate and higher rate of income tax paid for herself. Anyone whose financial affairs involve higher rate income tax and gifts to charity should talk to their tax advisor about this.

Recent changes – charities beware!
On 24 February 2012, without fanfare, HMRC changed some of its online guidance on Gift Aid. The two key changes are:

1. The phrasing of the donor declaration.
Donors have previously had to declare that they had or would pay an amount of income tax and/or capital gains tax in the tax year of the donation at least equal to the amount of tax which would be reclaimed by the charity to which the ‘Gift Aid-ed’ donation was being made.

Now, the amount of income tax and/or capital gains tax must at least equal the amount of tax to be reclaimed by all charities to which they make ‘Gift Aid-ed’ donations that tax year. The new model declaration for a single donation can be found here, and the model declaration for a specific donation and all past qualifying donations / future donations can be found here. Charities should update their declarations as soon as possible.

2. The retention of Gift Aid records by a charity.
The time that a charity must retain its Gift Aid records has increased in the new guidance, from 4 years to 6 years. Charities will have to adjust their record-keeping arrangements accordingly.

I don’t know how many charities regularly check HMRC’s online guidance. However, I suspect they are few in number. Charities which are unaware of the changes may be in for an unpleasant surprise come their next Gift Aid audit. If you’re involved in a charity, make sure the person in charge of Gift Aid knows about the changes. If your charity produces its own Gift Aid forms, there’s a new checklist of the information which must be included in your version of the declaration. You can find this here

How should the Gift Aid Question be asked?
My experiences with charities near Harrogate suggest the need for those ‘on the door’ to have a better understanding of Gift Aid, or to be better trained to explain how it works.

Charities who are revising their declarations and checking their record retention complies with the new guidance may want to revisit the issue of training at the same time. Perhaps they could provide a flow chart to those tasked with asking the Gift Aid Question at the entrance. If we assume the entrance fee is £7, off the top of my head, it could go something like this:

1. We participate in the Gift Aid Scheme, which means you can increase your donation by a quarter at no cost to you personally. Would you like to know more about this? If yes, go to 2. If no, go to 7.
2. Will you pay income tax and / or capital gains tax in the UK this tax year? If yes, go to 3. If no, go to 6.
3. The value of your gift to the charity today is £8.75, if you are able to take part in the Gift Aid scheme, rather than £7. Will you pay income tax on an amount at least equal to £8.75 and the value of all other donations you have made or will make to charity this tax year? If yes, go to 4. If no, go to 6.
4. Would you like us to be able to reclaim 25p from HMRC for each pound you donate today, increasing the size of your donation by a quarter at no cost to you? If yes, go to 5. If no, go to 7.
5. Would you please read and complete this Gift Aid declaration for your donation today? Go to 7.
6. Unfortunately, you are not eligible to take part in the scheme. Go to 7.
7. Thank you for your time.

Question 3 will be the tricky one. I can’t help but wonder how many individuals will be able to keep track of the amount they give to charity in any tax year. However, presumably the fact that most people only give a small amount to charity (compared to their earnings on which they pay income tax) will give people the confidence to answer ‘yes’ to this question.

So, I think that such a series of questions should do the trick for most people, but any comments or suggestions as to how it could be simplified or improved are welcomed.

Update
Good news from HMRC – charities have until 31 December this year to update their Gift Aid declarations, and donors who have completed the old form enduring declarations will not have to complete new declarations.


Charities Act 2011: all change on 14 March for prescribed statements in charity dispositions of land?

05/03/2012

Briefly, it appears that the answer to this question is: no.

The Charities Act 2011 consolidates the existing charities legislation, and repeals the entirety of the Charities Act 1993. It comes into force on 14 March 2012.

It does not change the law for charities on the disposal or acquisition of land, but the numbering of the existing provisions in the Charities Act 1993 (CA 1993) which relate to such dealings with land will change. The provisions of sections 36 – 40 CA 1993 will appear at sections 117 – 129 of the new Act.

Prescribed statements (which refer to the appropriate section numbers in CA 1993) must be used in the documents completed by charities to effect the transfer of land, and guidance on the statements to be used can be found in Land Registry Practice Guide 14 (LRPG 14)

Guidance issued by the Land Registry has now indicated that it will rely on the transitional provisions of Schedule 8 of the new Act, rather than update the Land Registration Rules 2003 (LRR 2003) immediately. The transitional provisions mean that the repeal of the sections of CA 1993 under which the LRR 2003 were made does not affect the validity of the LRR 2003. In addition, there is no need for the LRR 2003 to be amended to refer to the relevant sections of the new Act.

The Land Registry has said, however, that it is going to update Land Registry Practice Guide 14.

In the meantime, trustees with transfer documents sitting on their coffee tables containing prescribed statements which refer to CA 1993 need not panic, as, thanks to the transitional provisions, new documents will not need to be prepared. However, solicitors are being encouraged by the Land Registry to start referring to the new Act in such documents from 14 March, so trustees will see the change starting to creep in, over time.