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SocialEconomy A quarterly bulletin of information for charities, voluntary organisations and social enterprises
Issue no. 93 September - November 2008
Affordable home ownership when is it charitable? With the Government suggesting there are insufficient affordable homes to rent or buy, guidance as to when affordable housing is a charitable purpose is essential. The Charity Commission has teamed up with HMRC and the Housing Corporation to produce guidance on “Affordable Home Ownership - Charitable Status and Tax”. The guidance discusses various affordable housing alternatives in terms of charitable activity and public benefit. It explains when the provision of affordable housing for rent and affordable housing for sale can be
charitable for the public benefit and when it will not be charitable. Charities will need to be particularly careful when building houses for sale, since if it is not charitable then it is a trading activity which will be taxable. The guidance suggests some income parameters for purchasers and property prices in different parts of the country below which the sale of property would be considered a charitable activity. It also outlines how HMRC clearance can be obtained to ensure that the activity is primar y purpose charitable trading.
Small charities provisions The so called small charities provisions in the Charities Act were updated with effect from March 2008. All unincorporated charities (small or otherwise) now have a statutory power to amend their governing documents. A small charity is defined as an unincorporated charity with annual income of up to £10,000 and which does not hold land that is held for particular purposes of the charity. They can now transfer their property to another charity or charities with similar purposes and amend their objects clauses without obtaining the consent of the Charity Commission, although the Commission must be notified and can raise objections. A similar though slightly longer procedure can be used where the charity holds permanent endowment.
Permanent endowment has been a much vexed subject for many years. Happily there are now much broader powers to spend permanent endowment. The procedure varies depending on the size of the charity. If the charity has an income in the last financial year of not more than £1,000 or the value of the endowment fund is not more than £10,000 (or if the endowment was not entirely given to the charity), the trustees can spend the endowment as if it were income without obtaining consent or even informing the Charity Commission. This is particularly focused at small charities with endowments that do not produce enough income to fulfil their purposes, but due to the wording of the Act it also covers those permanent endowments which are invested in failing investments which did not produce £1,000 income in
the last year. It is foreseeable, particularly in the current markets, that this may cover significantly larger charities than perhaps the draughtsmen originally intended. Where the income is over £1,000 and the value of the endowment is over £10,000 there is still a power to spend the endowment, but the Commission will need to concur with the resolution of the trustees. Although these provisions are aimed at small charities, the legislation and procedures are not straight forward. Professional advice should be sought where appropriate. The Charity Commission’s guides on these subjects CSD1346A, CSD1347A and CSD1348A1 are available at www.charity-commission.gov.uk/ common/applyforit.asp
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The Hallmarks of an effective charity – revisited The Charity Commission has revisited its guidance CC60, the Hallmarks of an Effective Charity and renumbered it as CC10. The guidance is designed to set out standards to help to improve the effectiveness of a charity. It is based on the structure used for the Charity Commission’s review visits and sets out the principles of good practice for charities that the Charity Commission supports. The guidance is divided into six ‘hallmarks’ (or principles) and for each of these, the Charity Commission has listed a number of ways in which the hallmarks can be demonstrated (although they accept
that not every example will apply to every charity). The guidance is designed for trustees to use as a means of reviewing how their charity is performing and to help them to identify the areas in which the charity is strong and those areas which need further development.
Networks and ICSA. CC10 and the Code are intended t o b e c o m p l e m e n t a r y. T h e Code can be found at www.governancehub.org.uk.
The guidance can be found at: http://www.charity-commission.gov. uk/Library/publications/pdfs/cc10t ext.pdf
There are other codes which trustees may find useful when reviewing their governance procedures. The Code of Governance for the Voluntary and Community Sector is one of these and is endorsed by the Charity Commission, which contributed to its development, in partnership with NCVO, Acevo, Charity Trustee
Statutory Compact? An informal consultation into the future of the Compact between the Government and the voluntary sector was launched last month. The aim is to improve the relationship between the third sector and the public sector and make it more effective. The questions asked include: what sort of agreement should the Compact be in the future? How could the form and content of the Compact be enhanced to make it fit for the
future? How could the Commission for the Compact change to ensure better implementation of the Compact? Commissioner for the Compact, Sir Bert Massie’s own views seem to be that currently there is not the desire in both sectors to make the Compact a legal obligation. Indeed, he seems to prefer a voluntary Compact “Because it works better as a flexible agreement”. He suggests that it may be useful to
have a champion for the Compact and to this end believes that the Commission for the Compact should have more independence and the power to investigate local disputes. If the Commission for the Compact could mediate in disputes between the public and third sector, there would potentially be considerable savings of both time and money. Phil Hope, minister for the Third Sector, who invited Massie to carry
out the consultation stated as his intention that the Office for the Third Sector will lead the debate within government whilst the review is going on. He sees this as crucial given that the Compact is a two-sided agreement. The Home Office has indicated that 2010 will be the earliest date from which any changes will be carried out. To contribute to the debate, email email@example.com (Third Sector 22.08.08)
Draft guidance on professional fund-raising and commercial participation The Office of the Third Sector produced draft guidance for consultation earlier this year, on professional fund-raising and commercial participation, to highlight the key provisions that came into force on 1 April 2008. The consultation threw up some fairly major issues, particularly in relation to those parts of the guidance dealing with the commercial participator rules. These rules deal with commercial entities entering into a promotional venture with a charity to raise funds, for example by selling particular products where part of the purchase price is then paid over to charity. There are a number of rules which apply to the relationship between the charity and the commercial entity – and the wording which can be used in the marketing materials. The new legislation is not clearly drafted and the result of the consultation was that the guidance should be reviewed to try to clarify matters. Final guidance was to be
produced before the summer but this has been delayed. It is unfortunate that the guidance was not finalised before the change in the legislation rather than months later and we hope that this will be remedied soon. www.cabinetoffice.gov.uk /third_sector/law
Communities in control: White Paper July’s community empowerment White Paper seeks to deliver power to communities and individuals. The Communities and Local Government website describes the aims of the White Paper as being “to pass power into the hands of local communities, to encourage vibrant local democracy in every part of the country, and to give real control over local decisions and services to a wider pool of citizens.” What does this mean in practical terms? There is a proposal to set up an Empowerment Fund of at least £7.5 million to support national third sector organisations turn proposals into actions. The Department for Work and Pensions is looking at ways to encourage those on benefits and with disabilities to take up volunteering opportunities. The Department for Communities and
Local Government also intends to carry out a survey of third sector organisations, including faith-based organisations, to understand the difficulties they face. To make it easier for citizens to influence the agenda there will be a new duty for councils to respond to petitions. There will also be a £70 million fund to boost community enterprise. Community empowerment expert, Dr Graham Gardner sees Hazel Blears’ proposals as being a “far cry” from John Prescott’s 2005 proposals to hand over partial control of public services to neighbourhood-based organisations. The vision seems to be that communities will become more involved in local affairs. Whether or not this vision will become a reality will depend on how effectively these proposals are implemented. www.communities.gov.uk (Regeneration & Renewal 18.07.08)
Social Enterprise… Reform of Industrial and Provident Society Law Industrial and Provident Societies are the unsung heroes of social enterprise. A legal form which has been used since the 1840’s, it is not surprising that the assets of this sector are around £9 billion. Most frequently used by housing associations, co-operatives and credit unions - the legal form has proved very innovative in supporting community development in regeneration, community renewables, village shops, village pubs and is being widely used by community land trusts. Unfortunately, with the historical anomaly of HM Treasury
as the lead department, serious reform of the law has never been a high priority. The latest consultation document on proposals for legislative reform continues the long established and belated piecemeal approach which can be contrasted with the wholehearted support of the Third Sector and Government for the introduction of the community interest company. There are only two significant proposals in the proposed reform. Firstly, the abolition of the limit on the amount of transferable share capital which a society can issue to each member, but the retention of the limit for withdrawable share capital at
£20,000. Welcome as this is, it means that the limit of £20,000 for withdrawable share capital has not kept pace with inflation.
social enterprise sector. The idea is that these business angels are able t o m a k e i n v e s t m e n t s w hich combine financial and social return.
The second welcome reform is the introduction of the freedom for societies to set their accounting year ends at any time during the year rather than during a prescribed window.
So which organisations make up Equity Plus? Community Innovation UK is a social enterprise consultancy organisation which provides fundraising, business development, strategy and financial management services and training. Celarben Ventures contributes sp e cia l ist bu sin e ss advisor y services in the areas of business strategy, corporate finance and financial management. Resonance works with value-based businesses in the areas of investment, business development and property-based project management.
The consultation document also proposes more significant changes for credit unions which would permit corporate membership and wider bonds of membership. The consultation document is available from HM-Treasury.gov.uk and is entitled Proposals for a Legislative Reform Order for Credit Unions and Industrial and Provident Societies in Great Britain. Match-making between business angels and social enterprise Seventy-five investors, eight to ten social enterprises, deals ranging from £750,000 to £1 million. This is the vision Equity Plus has for its first year. Equity Plus has none of this money itself. Rather its role is more that of match-maker. Three investment organisations come together as Equity Plus to enable high net wor th individuals (“business angels”) to invest in the
The Equity Plus scheme is about sharing both the risks and the rewards - both of which are potentially higher for the investor under this scheme than under a loan scheme. There is also flexibility in terms of the type of investment. The business angel might buy property for the business or give money as well as offering their exper tise. For more information on Equity Plus see www.equityplus.org.uk (Social Enterprise)
by Chris Billington and Joanna Green Redundancy and the Credit Crunch There is some debate whether the present economic situation brings about anything new for the sector. As businesses struggle to absorb the effects of the credit crunch, charities and voluntary, community and faith organisations face the usual uncertainty of funding rounds and tender opportunities that often fail to deliver. However the sector is not immune from the credit crunch and forward planning, as always, is essential particularly when it comes to dealing with staffing levels and the possibility of redundancy. Where organisations lose grant funding or contracts for projects are withdrawn or come to an end and no more funding is available, redundancies are likely to result. The obvious candidates for redundancy are the staff working on the project which is to end, but in fact, in a redundancy situation, any employee whose role is the same or similar as the role that is disappearing (even if you treat it as a different project or team) is a potential candidate for redundancy and should be included in the pool of employees to be considered. For example, if an organisation was running two projects, each with its own administrator, and the funding for one came to an end, the proper redundancy pool would potentially include not just the administrator of the project coming to an end but also (assuming their roles were roughly the same) the administrator of the project that is to continue, together with any other employee with a similar role. If the administrator of the cancelled project had more experience, or more skills than their colleague on the other team (if so how have you assessed their relative capabilities avoid making assumptions as this could be discrimination), it could be reasonable to retain the better candidate, move that person into the continuing role and make the less qualified colleague redundant instead. This is known as ‘bumping’ and should be considered in every r e d u n d a n c y s i t u a t i o n. A l s o, remember that employees on maternity leave have special protection. Whilst they may be properly selected for redundancy, they must be offered any suitable alternative role otherwise the dismissal will amount to sex discrimination. Failure to correctly identify the pool can render an otherwise perfectly valid redundancy as an unfair dismissal. It will often be useful to expand the selection pool to avoid this potential issue but you need to be mindful of the uncertainty this may cause to your staff. In any event
it is essential that staff know what isgoing on and why so that they can be properly prepared. Employers who are in any doubt should seek specialist advice before making staff redundant and ideally before you have actually made any decision that redundancy is necessary. Redundancy can present particular difficulties for the sector, from the potential financial impact on trustees of unincorporated organisations, to the practical difficulty of identifying the correct pool for redundancy when funding is withdrawn or coming to an end for one or more of several different projects. Unincorporated organisations do not have what is referred to as a separate legal status; they are simply a collection of individual members governed by their constitution or rules which will vest management and control in a select number, the trustees. Staff are employed directly by the trustees. If staff are made redundant, the trustees become liable for the redundancy payments, although the costs should be met from the organisation’s funds. If those funds are insufficient then the trustees remain liable to pay any shortfall from their own pockets. If Tribunal claims are made (for example unfair dismissal or discrimination), the same principles apply. Tr u s t e e s o f u n i n c o r p o r a t e d organisations should regularly review the risk of personal liability and look to incorporate (for example, set up as a company limited by guarantee) as a means of providing some, limited, protection for the trustees. Key triggers, or risk areas, are where an organisation is first starting to employ staff or enter
into valuable contracts. Trustees should consider setting aside specific reserves to meet liabilities such as redundancy costs. Where possible, redundancy costs should be built into project funding. Stopping pay wasn’t a dismissal An employee was placed on suspension pending the outcome of the disciplinary procedure. A compromise agreement was negotiated, on a without prejudice basis, but never finalised. When a claim for unfair dismissal was brought the Tribunal had to determine when was the effective date of termination of employment. The Employment Appeal Tribunal took the view that the employee's non-attendance at work, failure to have a disciplinary meeting and non-receipt of pay when removed from payroll, were all consistent with the suspension and the negotiations to terminate his employment. The act of removing the employee from payroll and the failure to pay were potential breaches of the contract of employment capable of bringing that contract to an end, but were required to be accepted by the employee as having that effect. On the question of whether or not the employee’s claim to the Tribunal was presented in time, the important issue was, therefore, when had the employee accepted the employer’s breach as terminating his employment. This case highlights a number of danger areas for employers, including that the employer should never allow a disciplinary procedure to be delayed whilst termination negotiations are being conducted. The existence of such proceedings can be used to provide a timetable for reaching final agreement. If matters are delayed, the employer faces a claim which they cannot defend for failing to deal with a disciplinary matter in a timely fashion. This issue applies equally to grievances. Termination negotiations should exist entirely
separately from the proper conduct of disciplinary and grievance procedures. The employer ’s position was made more difficult because of the suspension. Had the employee failed to return to work once he had been removed from payroll this could have been treated as an acceptance of the employer’s breach. Here, the employee was absent from work at the employer’s request. A similar situation can arise with sickness and maternity absence, where proper procedures need to be in place to ensure that such absences are managed and that absent employees are n o t simp l y f o rg o t t en about. Radecki -v- Kirklees Metropolitan Borough Council TUPE and Equal pay breaches for the transferee There are a number of cases running through the Tribunals at the moment on equal pay claims with local authorities and NHS Trusts. Such claims have far reaching consequences. The EAT has recently held that an employer’s failure to give equal pay gives rise to a contractual liability so that where that employee transfers under TUPE to a new employer, TUPE protects the pay which the individual employee should be paid, rather than the pay actually paid at that time. This means that transferred employees continue to have a claim against their new employer for the equal pay breach. Of course, the new employer, even where they have fully followed recognised procedures in TUPE situations, will have no way of knowing what the proper level of pay should be, or even that this issue applies to any particular employee. These cases should be of concern to any organisation which has accepted staff on TUPE transfers from local authorities or the NHS, including second generation tendering. Sodexho Limited -v- Gutteridge
Companies Act 2006 –
October 2008 implementation: directors The principal changes to be introduced in October 2008 by the Companies Act 2006 relate to company directors. The main focus is on directors’ conflicts of interest and so we will consider this first, then look at some other changes. Directors already have a duty to avoid conflicts of interest, but from October, this duty will be confirmed in legislation. Conflicts of interest include situations where: • a director has any personal financial interest in a transaction with the charity (such as where a director receives payment from the charity for services or goods); or • a director has a conflict of duty (for example where a director is also a director or trustee of another charity or company and a transaction would affect both).
If a charity’s memorandum and Ar ticles of Association allow conflicts of interest, or if they allow a director who is not conflicted to authorise conflicts on the par t of others, then the absolute duty does not apply. Whilst many existing memoranda and Articles of Association of charities contain provisions dealing with conflicts, they do not always expressly allow them. The Charity Commission takes the view that many of these provisions are likely to permit any conflicts of loyalty to be properly dealt with even after the new legislation has come into force on 1 October 2008. However, it is unlikely that existing provisions would cover transactions or arrangements with trading subsidiaries from which a trustee may take some benefit or
where their duties to each company may conflict. Despite the Commission taking an enabling interpretation of existing provisions, as a matter of good governance and for clarity many charities will want to review their Articles of Association. One benefit of the legislation for trustees is that, where the Articles set out the conflict of interest procedures and it is followed, they cannot be in breach of their duty. Trustees who are not sure whether they have the power should take advice, as it is possible for the Charity Commission to authorise something that would otherwise be a breach of duty.
when the restriction is introduced, that person will automatically cease to be a director. Finally, under the new rules, at least one director must be a ‘natural’ person (in other words a human being and not a company). http://www.charitycommission.gov. uk/supportingcharities/compact.asp
Another change relates to the minimum age of directors, which will be 16 years. If a company has a director who has not reached this age
Consultation on copyright exemptions for small third sector bodies The UK Intellectual Property Office has launched a new consultation on certain copyright exemptions which apply to playing recorded music in public. The Music Licensing Review Consultation is seeking views from users, music rights holders and representative bodies of users and rights holders.
Do you need to review your Articles of Association? As the Companies Act is slowly brought into force, charity trustees of charitable companies should use the opportunity to review their memorandum and Articles of Association, to ensure both that they are adequate for the purposes of the charity and that they reflect the changes in company law. Notice periods for meetings have been shortened by the new law, for example, but this will only apply if the articles do not specifically refer to the longer period – and most
charities’ ar ticles do. Other provisions to consider are that since 1 October 2007, the chairperson cannot be given a casting vote at general meetings in new companies. Where your articles contain a provision allowing this, it will continue to operate unless you remove it, however. Companies will no longer need to have either company secretaries or annual general meetings, although they can chose to continue to have one or both if they wish to.
There are three options for amending the exemptions which currently allow charitable organisations to pay for only one of the two licences normally required for playing music in public. Option one is to recast the exemptions so that they apply only to smaller charities. Option two is to introduce an alternative scheme whereby
charities pay equitable remuneration for playing music. Option three is the repeal of the exemptions. Consultation ends on 31 October. See the Intellectual Property Office website for a copy of the consultation document. www.ipo.gov.uk (Third Sector 02.07.08)
Relaxation of rules over local energy generation? The Government is increasing the
or decentralised energy. Ofgem
currently, however, a number of
alternative arrangements from a
pressure on Ofgem, the energy
describes it as “renewable electricity
barriers to entry for potential DE
licensed third party to enable DE
regulator, to support rather than
generation which is connected
developers including licensing
schemes and small suppliers to
hinder the development of
directly into the local distribution
costs, complex codes, the risks
operate on the public network;
renewable energy. It is doing this
network, as opposed to connecting
and costs of energy imbalance
identifying areas for the industry
to ensure the government meets
to the transmission network, as well
(cash-out), network charges and
to lead on as regards cash-out
its targets for reduction in
as combined heat and power
the underdeveloped provision of
reform; and speeding up the
CO emissions. This is the context
schemes of any scale.” Some of the
supplier services for DE schemes
introduction of a system of
in which the Ofgem consultation
key environmental benefits of this
to operate on the public network.
charging which reflects costs so as
“Distributed Energy-Fur ther
means of energy generation are that
Ofgem’s consultation identified a
to encourage development on
Proposals for More Flexible Market
DE can: make use of waste heat
number of proposals to attempt to
public networks over constructing
and Licensing Arrangements” was
from electricity generation to heat
overcome these barriers to entry
new private wires.
issued in June. Distributed energy
and cool buildings; reduce electricity
and encourage DE to grow.
(DE) could make an important
losses by locating generation near to
contribution to reducing carbon
electricity demand; facilitate the use
emissions, improving security
of local renewable energy sources;
of energy supply and alleviating
encourage increased consumer-
awareness of energy usage.
So what is DE? It is sometimes referred to as distributed generation
Consultation closed on 31 July.
Their preferred proposals
Ofgem will seek to implement
appropriate proposals by the end of
requirement for compliance with
the year. If implemented these
high-cost and high-competency
proposals should make it both easier
and cheaper to have more local
Given the benefits, it seems that
alternatives; encouraging the
renewable energy generation.
DE is to be encouraged. There are
development and provision of
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Contributors to this edition of Social Economy were Chris Billington, Joanna Green, Natalie Johnson, Malcolm Lynch and Sylvie Nunn of Wrigleys Solicitors LLP.
Could we help with your banking needs? Contact Unity Trust Bank, Nine Brindleyplace, Birmingham, B1 2HB, tel: 0845 140 1000 or visit www.unity.co.uk If you require legal advice on charity and social economy law Please contact Malcolm Lynch at Wrigleys Solicitors, 19 Cookridge Street, Leeds, LS2 3AG, tel: 0113 204 5724, or visit www.wrigleys.co.uk
A quarterly bulletin of information for charities, voluntary organisations and social enterprises. This issue covers September - November 20...