The Charities (Protection and Social Investment) Act 2016 is designed to provide tougher regulatory powers to the Charity Commission, anyone operating a charity or acting as a trustee. Knowledge of its scope and powers are essential.

Believe it or not, the Charities (Protection and Social Investment) Act 2016 was born out of a media scandal. In January 2013, The Times newspaper revealed that one of Britain’s biggest charities at the time, the Cup Trust, was being used as a front for tax avoidance by wealthy donors[1].

The news is that the Cup Trust raised an impressive £176 million between 2010 and 2011. But instead of using the money to “improve the lives of young children and adults,” as per its charitable objective, it carried out trades that artificially generated Gift Aid for donors to reduce their tax bills. Investors who “donated” £1 million to the Cup Trust, for example, would receive most of their money back — but still, be entitled to claim Gift Aid worth between £250,000 and £375,000.

An example of the level of public disgust at the fraud was illustrated by Margaret Hodge, then chairwoman of the Public Accounts Committee, who told The Times:

“Of all the tax avoidance schemes I have come across, this is perhaps the worst. I thought I was past being shocked, but this genuinely has shocked me.

“To exploit a mechanism designed to encourage charitable giving in order to avoid tax is just disgusting. The Charity Commission certainly has questions to answer about how such flagrant abuse was allowed to occur.”

Unsurprisingly, the Charity Commission hit back. It told MPs that if they wanted a tougher regulator, then new, wider-ranging powers would have to be legislated for.

Thus, the Charities (Protection and Social Investment) Bill was born and given its royal assent. Various provisions of the Act came into force over the following year and are still yet to come into force.

Thus far, the Charities (Protection and Social Investment) Act 2016 makes four key changes in the law:

• it gives new powers to the Charity Commission to fight abuse of powers;
• there are now more circumstances in which people can be disqualified from acting as charity trustees;
• more controls over the process of charitable fundraising;
• it confirms the power of charities to make social investments.

Following the Cup Trust scandal, the Charity Commission asked for greater regulatory powers. These were duly granted by the Charities (Protection and Social Investment) Act 2016.

If the Charity Commission believes charity trustees or a charity has acted improperly, breached its duties or has been mismanaged, it can issue an official warning.

The Charity Commission must give prior notice of its intention to issue an official warning. This was 14 days in the draft guidance; however, in December 2016 the commission increased the notice period to 28 days. The notice should stipulate the reason for the warning and give guidance on what the commission thinks should be done to rectify the position.

An official warning, once given, can at the Charity Commission’s discretion, be made public, leading to reputational damage to the charity. In addition, if the breach specified in the official warning is not addressed, further regulatory action can be taken against the charity.

Given the power of the Charity Commission to create adverse publicity for a charity, any correspondence from the regulator should be taken seriously.

Automatic disqualification

Under the Charities (Protection and Social Investment) Act 2016, the scope for being automatically disqualified from being a trustee has been extended beyond the pre-existing rules. Prior to the Act, a person could not be a trustee if they:

• were convicted of an offence involving dishonesty or deception;
• were bankrupt or involved in an arrangement with their creditors; or
• had been disqualified from acting as a company director.

These criteria still apply, but the Charities (Protection and Social Investment) Act 2016 has extended the automatic disqualification where there has been:

• a conviction for:
• various offences under counter-terrorism legislation;
• money-laundering offences;
• offences under the Bribery Act 2010;
• misconduct in public office, perjury, and perverting the course of justice;
• attempting, aiding, or abetting these offences;
• contempt of court;
• being designated under terrorist asset-freezing legislation; and
• being on the sex offenders register.

Disqualifying an existing charity trustee

The Charity Commission has been given new powers to disqualify an existing trustee so long as:

• one of the six conditions listed below have been met;
• the person is deemed unfit to be a trustee; and
• disqualification is in the public interest to protect the trust and confidence that people have in charities.

The six conditions are:

1. the person has been cautioned for a disqualifying offence against a charity;
2. the person has been convicted outside the UK for an offence which would automatically disqualify them from acting as a trustee if the offence was committed in the UK;
3. HMRC has found the individual not to be a fit and proper person (for the purposes of paragraph 4 of Schedule 6 to the Finance Act 2010);
4. the person was a trustee or employee of a charity at a time when there was misconduct or mismanagement of a charity, and they were responsible, or had knowledge and failed to take reasonable steps to stop it, or their conduct contributed to it;
5. the person was an officer or employee of a body corporate, in similar circumstances as in condition four;
6. past or continuing conduct by the person is damaging or likely to be damaging to public trust and confidence in charities generally.

So as you can see, these conditions are quite broad. What potential effect does this have? This opens up a situation where case law is likely to define parameters to the Charity Commission’s powers.

Pursuant to the Charities (Protection and Social Investment) Act 2016, fundraising agreements between charities and professional fundraisers or so-called ‘commercial participators’ are required to include specific information which will assist its regulation, such as:

• details of any voluntary fundraising scheme or standards that the fundraiser or commercial organisation intend to be bound by;
• details of how vulnerable people will be protected given the Charities (Protection and Social Investment) Act 2016 prohibits “unreasonable intrusion on a person’s privacy, unreasonably persistent fundraising and undue pressure to donate”;
• arrangements in place that would enable the charity to monitor compliance with the requirements of the agreement.

If these provisions are not included in a fundraising agreement, the agreement may be deemed unenforceable and in breach of the Institute of Fundraising’s Code of Fundraising Practice.

Separately, charities with an income over £1 million must report how many complaints they received about fundraising and outline their approach to raising money in their annual report.

A social investment is one that is made to further a charity’s objective and generate a profit.

The Charities (Protection and Social Investment) Act 2016 gives power to all charities (except for statutory charities and Royal Charter bodies) to make social investments.

The Charities (Protection and Social Investment) Act 2016 requires the trustees to do the following when making a social investment:

• consider whether they should obtain expert advice regarding making the investment, and;
• get that advice, and;
• satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefits the charity will receive

Under the Charities (Protection and Social Investment) Act 2016, trustees also have an obligation to review existing social investments from time to time.

Following the assent of the Charities (Protection and Social Investment) Act 2016, the Charity Commission entered a lengthy consultation process to decide how best to administer its new powers around issuing an official warning. This resulted in a Question and Answer document[2] and an Operational Guidance document[3] being released.

The new powers issued to the Charity Commission are seen as a last chance for the sector to prove it can regulate itself. Charities worried they might fall foul of some of the new regulatory stipulations should discuss their situation with an experienced solicitor who can advise them on how best to ensure compliance.

Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced charity law solicitors who can advise on all legal matters relating to the charity sector. For more information, please call our office on 020 3588 3500.

[1] https://www.thetimes.co.uk/article/charity-at-heart-of-massive-tax-avoidance-scam-r3gvn0p7mrz

[2] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/576625/Official_warnings_to_charities_and_trustees_Q_and_A.pdf

[3] http://ogs.charitycommission.gov.uk/g404a001.aspx