Spotlight

Significant changes are afoot for permanently endowed

charities. The Trusts (Capital and Income) Bill recently introduced

in the House of Lords will, for the first time, give trustees with

permanent endowment who wish to invest on a total return

basis, a statutory power to operate without the usual restrictions

on capital expenditure. Trustees can adopt the provisions by

resolution, subject to compliance with regulations to be made

by the Charity Commission.

At present, trustees of charities with permanent endowment

can only operate a total return approach to investment and

distribution of returns if they have a Charity Commission total

return order. The Commission’s orders are somewhat complex

in operation and have not proved to be a universal solution to

the problems of total return investment. The Law Commission

therefore proposed a new statutory total return regime for

permanently endowed charities and it is these proposals that

are now reflected in the Bill. Whilst much will depend on what is

in the Commission’s regulations, the proposals in the Bill appear

to offer a more satisfactory framework.

In summary, the key features of the Bill are:

◆◆ trustees must adopt the new statutory total return provisions

by resolution, subject to their being satisfied that it is in the

interests of the charity to do so;

◆◆ no Charity Commission Order or consent is required;

◆◆ the permanent endowment funds will be freed from the

restrictions otherwise applying to them on expenditure of

capital but the trustees are bound instead by regulations that

are to be made by the Charity Commission;

◆◆ the statutory provisions may be adopted for the whole or part

of the endowment fund concerned and charities can adopt

the new provisions in relation to some, but not all, of their

separate endowment funds if they think this appropriate –

separate consideration and separate resolutions will be needed

for each fund;

◆◆ the statutory provisions enable a power of accumulation to be

conferred, to allow unapplied return to be added to the capital

of the fund;

◆◆ a charity’s existing Charity Commission total return orders will

cease to have effect if it adopts the new powers.

The Charity Commission is given power to make regulations in

particular covering:

◆◆ the resolutions the trustees must make (including steps to

be taken before passing a resolution), possible termination or

variation of resolutions and requirements for notification of

resolutions to the Commission;

◆◆ the investment and expenditure of the fund, including

requirements to maintain the long-term value of the funds

concerned, requirements to obtain advice and in relation to

the operation of the power of accumulation. In some cases,

expenditure will still require the Commission’s consent. This

will no doubt be required for major expenditure of a “capital”

nature which could not be said to reflect a standard annual

distribution of return and may affect the long-term value of

the fund. Regulations will also cover accounting/reporting

requirements; and

◆◆ steps to be taken if the resolution ceases to have effect.

Permanent endowment changes

Working with the Not-for-Profit Sector Spring 2012

CONTENTS

1–2 Permanent endowment changes

2 New European charity vehicle proposed

3 Client Focus – The Royal Society

3–4 HMRC extends own definition of charity to all tax reliefs

4–5 News in brief

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There is no clear indication as yet when the Bill will progress and

become law. Even when it does, the Charity Commission will be

required to follow the usual three month consultation on its

guidance. It is likely therefore that the new provisions will not

be available for several months.

However, it appears, that once introduced, the proposed new

statutory provisions will offer a more satisfactory solution

to the dilemma of total return investment for permanently

endowed charities.

If you have any questions regarding anything raised in this

article, please contact Ann Phillips on anp@stoneking.co.uk

or 0207 324 1740

Ann Phillips Partner AnnPhillips@stoneking.co.uk

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New European charity vehicle proposedOn 8 February 2011, the European Commission published the

“European Foundation Statute” – a proposal for a Regulation to

introduce a new legal entity known as a “European Foundation”

for public benefit purpose entities (also known as charities)

across the European Union.

The aim of this legislation is to create a new legal structure for

charities that operate in more than one Member State, with the

intention of harmonising the treatment of those organisations,

and donations to them.

Charities who already work in more than one Member State

will be well aware of the complexities involved – particularly

having to meet different registration conditions in different

jurisdictions to obtain the often favourable tax treatment

offered to charities and their European counterparts. For

a European Foundation, this barrier is removed – only one

organisation is required, and the tax treatment given to the

organisation is the same as any other charity in the country in

which the charity is operating. For example, a UK based charity

that has activities in England, France and Germany would have

the tax breaks afforded to UK charities automatically applied to

the English activities and donations from English supporters, the

French equivalent to the activities in France, and so on.

The Foundation will be a separate legal entity, capable of legal

personality (as with a UK company), and the directors/trustees

will have limited liability. To be eligible, an organisation must

have activities or a stated objective of carrying out activities in

more than one Member State, and the Regulations provide for

conversion and merger as well as the creation of new entities.

The Regulation itself covers the detail of the Foundation,

including its structure, how to register, and some detail as to

how to amend governing documents and dissolve. Member

States will have to designate a registry, and this registry will

deal with regulation of entities operating in their Member State.

An interesting use of language in the Regulation as currently

drafted means that a Foundation that provides the appropriate

documentation shall be registered within a certain timeframe,

which may require swift decisions on whether something is

charitable.

At present, the Regulations are only in draft form, and they need

to be formally passed through the European system – much

like the passage of a Bill through the UK parliament before it

becomes an Act and therefore law. How long this takes depends

upon the number of amendments submitted and considered,

but if there is little amendment to the text, the Regulation

could be in force within 15 months. There has been much

public support for the establishment of the Foundation within

the European Union, and so provided the practical details are

acceptable, we may see the implementation of this new legal

entity by September next year.

We will, of course, update you as and when the Foundation

does come into being, but in the meantime, if you currently

have activities in more than one Member State, it may be worth

considering the proposed regulation, and potential conversion

to a Foundation in due course.

If you have any questions about the European Foundation,

please contact Vicki Bowles at vickibowles@stoneking.co.uk

Vicki BowlesBarristerVickiBowles@stoneking.co.uk

Permanent endowment changes – continued

The Royal Society is the national academy of science for

the UK. We recognise, promote, and support excellence in

science, encouraging the development and use of science

for the benefit of humanity.

The Society was founded in 1660 with the same ethos and

goals that we have today. Stone King are helping us to ensure

that our Royal Charter, which dates back to the 1670’s, allows

us to maintain our position as the UK’s leading scientific

champion.

The Society has played a part in some of the most

significant and life-changing discoveries in scientific

history. Royal Society scientists, including over 80 Nobel

laureates, continue to make

outstanding contributions

to science in many research

areas.

Among other act iv i t ies ,

t h e S o c i e t y i d e n t i f i e s

and supports the work of

outstanding scientists in the

UK, whether they are in the

early stages of their career or

are already established. We

also support other countries who are building their scientific

strength, particularly in Africa.

Bringing science to new audiences is another goal, with

events such as our Summer Science Exhibition, the Royal

Society Winton Prize for Science Books and online resources

such as Trailblazing, an interactive timeline of the world

changing and sometimes quirky science published in our

journals over the last 350 years.

Science is also vital to many areas of government policy

making and the Society seeks to ensure the government and

the public have access to impartial and independent expert

advice to inform debate and guide good decision making.

Client Focus – The Royal Society

Regular readers of Spotlight will be aware that HMRC introduced

a new “management condition” into its definition of charity in

April 2010 for charities claiming Gift Aid. Charities had to be in

a position to show that they were satisfied that all persons who

held a management position (including executives, trustees

and senior employees who had some control over day to day

management and use of assets) were “fit and proper” before

making any Gift Aid claim.

As hinted at in the previous edition, HMRC have now extended

this definition to all charitable tax reliefs, so any application

made for any tax relief by a charity after April 2012 can only be

made if the charity is satisfied that it meets the new test.

For the vast majority of charities, practically, this poses no real

issue. Charities should have in place methods of ensuring that

individuals who are working with and for them are appropriate,

HMRC extends own definition of charity to all tax reliefs

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News in briefCharities Act 2011 in force On the 14th March, the Charities Act 2011 came into force,

consolidating the Charities Acts 1993, 2006 and the Recreational

Charities Act 1958. As you will be aware, this does not create

new law, but merely puts most of the existing law in one place.

The main issue for charities, is that all the previous sections

numbers are now defunct, and for documents created post the

14th March, the new 2011 numbers must be used.

Benevolent funds keep charitable status As predicted by most of the sector, the Tribunal has ruled that

benevolent funds can keep their restricted beneficiary class, and

still be charitable. Although hailed by some as a waste of time

and costs, the decision does bring some legal certainty, which

is welcomed if only by lawyers! The Tribunal could, perhaps,

have gone further in deciding why the restricted beneficiary

class exemption exists for charities for the relief and prevention

of poverty, since doing so could have provided some useful

guidance in indirect benefits, but they declined to do this.

(taking references from previous employers, for example), and

so, if called upon, the charity could show that as far as they were

aware, all individuals were “fit and proper” people to be working

for a charity. If you want to be extra cautious, then ask trustees

and senior staff to fill out and sign HMRC’s model declaration

(available at http://www.hmrc.gov.uk/charities/tax/recognition.

htm#6), but this is by no means a requirement, and you would

still have to take account of any information that comes to light

after the declaration has been signed.

It is, of course, hugely unhelpful to the sector as a whole to

have to deal with two definitions of charity, but HMRC do

not appear to see it this way. Whilst the definition is in force,

charities will need to ensure that they comply, and the model

declaration is the simplest way to show HMRC that you have

complied. Bear in mind though, that the only time you will

actually need to have evidence of this, is in the unlikely event of

an HMRC investigation. If being investigated, you would need

to have evidence that you were satisfied that the management

condition was met, but there is no requirement to use the model

declaration – or any other form of declaration. HMRC also do not

require charities to confirm to them on a regular basis that they

meet the definition. The only time this will become an issue, is

in the unlikely event of an investigation.

For new charities, the new definition appears to exclude the

possibility of claiming Gift Aid in the period before the charity

is entered on the register. Legally, registration with the Charity

Commission does not confer charitable status – it merely

recognises it – but this is a common misconception, and once

to which HMRC appear to subscribe. Registration with the

Commission only comes into play when a charity meets the

income threshold of £5,000, and there are a number of excepted

charities – such as Academies – but these organisations are

still charities under the law of England and Wales, and they

should be entitled to the same tax reliefs as the charities on the

register. Whether it will be the case post April 2012 that charities

cannot claim Gift Aid for the period before registration remains

to be seen, but hopefully HMRC will continue with the previous

arrangement.

This new regulation appears to have taken the Charity

Commission by surprise, going against the principles of joined

up government in this connection. However, it should be noted

that HMRC is now charged with allowing tax reliefs to more

than UK charities, and it may be this difficulty that is driving

these changes.

If you have questions about the new definition and the

application of the test, please get in contact with your usual

contact at Stone King, or speak with your accountant.

Article written by Michael King and Vicki Bowles

Michael King Partner MichaelKing@stoneking.co.uk

Vicki Bowles Barrister VickiBowles@stoneking.co.uk

“However, it should be noted that HMRC is now charged with allowing tax reliefs to more than UK charities, and it may be this difficulty that is driving these changes.”

VAT decisions – donations v consideration Two recent VAT decisions have considered income of a charity,

and whether it was a pure donation, or consideration for a

supply.

Three Counties Dog Rescue concerned the “donation” requested

by the charity when a dog was adopted. The charity argued that

the term “donation” was used more for PR purposes than to

describe the actual income, as members of the public were more

used to seeing the term donation used. On the facts, there was a

minimum amount specified, and the Tribunal found that it was

consideration for the supply of the dog, rather than a gift. This

was important for the charity, as the sale of donated goods (such

as the dogs) is subject to the zero rate of VAT, and this ruling

allows the charity to reclaim its input tax, without having to pay

any VAT on the donation to HMRC.

The reverse was being argued in the Aberdeen Sports Village

(ASV) case. Aberdeen Sports Village (ASV) was set up as a joint

venture between Aberdeen County Council and Aberdeen

University. Each party paid the Sports Village an “annual

grant payment” to cover shortfalls as part of the joint venture

agreement, which also placed certain obligations on ASV in

terms of discounts offered, and preferential treatment for

Aberdeen University students. The taxpayer claimed that this

was a donation in the sense of a gift, and therefore not subject

to VAT. The Tribunal disagreed, and found that the degree of

control exercised over the activities of ASV meant that the

payment was consideration for the supply of certain services

to the Council and the University (including discounts given to

Council employees and students). Again – the description of the

payment was irrelevant – the Tribunal looked at the substance

of the transaction to decide how the payment should be treated.

These cases highlight the complexities of VAT, and when

consideration is consideration for VAT purposes is not always

straightforward. Specialist VAT advice is always recommended

when looking at tax arrangements.

Gift Aid updated guidance HMRC have also issued updated guidance on Gift Aid, which

makes changes to the explanations required to donors in

relation to the maximum amount of relief that can be claimed,

and corrects a mistake about the length of time records should

be kept in the previous guidance. The previous guidance stated

that records needed to be kept for four years, but the correct

period is six years.

The new guidance is available on the HMRC website,

and charities have until 31st December to amend Gift Aid

declarations, but to ensure old copies are not in circulation

after that date, we recommend making the changes as soon

as possible.

Tax relief cap to go? When the Chancellor announced the proposed cap on the

amount of tax relief that could be claimed by donors on

donations to charity in the recent budget, I doubt that he

realised the uproar it would cause in the sector.

In a heartening show of solidarity, charities and sector

spokespeople have worked together to lobby the government to

change their minds on the proposal. At the time of writing, David

Cameron has announced that he will “listen to the concerns

raised”, but it remains to be seen what the final outcome will be.

Stone King Website Breaking news stories can often be found on the Stone King

website homepage. Recent articles include a note on the

benevolent funds judgment mentioned above, and a note about

the risks to charities of cloud computing.

Vicki BowlesBarristerVickiBowles@stoneking.co.uk

News in brief – continued

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