Charity and philanthropy update – November 2019
In this edition, we:
- consider the impact that the recent judgment in Routier might have on cross-border giving;
- look at new Charity Commission guidance for charities with a connection to a non-charity;
- recap the major changes to privacy law under the GDPR and how these affect charities; and
- consider a recent High Court judgment in respect of the disposal of charity land.
Going forwards, there are likely to be a number of upcoming developments to watch out for, including the bedding in of the updated version of the Fundraising Code, and the outcome of the government’s recent consultation on the Fifth Money Laundering Directive. We have responded to this consultation which indicated (as expected) that charitable trusts are likely to fall within the definition of an express trust and therefore will have to register with the Trusts Registration Service. We will keep you updated on these, and any other, changes once more information is available.
If you would like further information or advice on any of the topics mentioned in this update, please contact a member of the charities team.
Routier judgment: extending the scope of the inheritance tax exemption on gifts to charities, at least for now!
The Supreme Court issued its judgment recently in the case of Routier and another v HMRC  UKSC43. The decision has possible consequences for UK taxpayers and charities based outside the UK who wish to take advantage of the UK inheritance tax exemption on gifts to charity.
Under her will, Mrs Beryl Coulter (who died in Jersey in 2007) left the residue of her estate on trust for charitable purposes (the Coulter Trust). Although the purposes of the trust were exclusively charitable under English law, the trustees were domiciled in Jersey and the trust was to be governed by Jersey law.
The residue of Mrs Coulter’s estate included substantial UK assets. UK inheritance tax arises on the transfer of such assets on death unless an exemption or relief applies. An exemption from inheritance tax is available on gifts to charity; however, in 2013, HMRC determined that the gift to the Coulter Trust under Mrs Coulter’s will did not qualify for this exemption.
Section 23 of the Inheritance Tax Act 1984 provided (at that time) for an exemption from inheritance tax where there is a transfer of value to a body of persons or trust established for charitable purposes only. On the face of it, the transfer under Mrs Coulter’s will to the Coulter Trust appeared to qualify for the exemption since its purposes were exclusively charitable under English law. However, HMRC argued, on the basis of the House of Lords’ judgment in Camille and Henry Dreyfus Foundation Inc v Inland Revenue Commissioners  3 All ER 97, that the phrase “trust established for charitable purposes only” must be interpreted as being limited to trusts which are governed by the law of some part of the United Kingdom and subject to the jurisdiction of the UK courts.
The executors of Mrs Coulter’s estate argued that HMRC’s view was incompatible with article 56 of the Treaty Establishing the European Community (now article 63 of the Treaty on the Functioning of the European Union) which prohibits restrictions on the free movement of capital between EU member states, and between member states and third countries. However, HMRC argued that article 56 did not apply as the transfer to the Coulter Trust should be regarded as an internal transaction taking place within a single member state. HMRC also argued that, in any event, the restriction resulting from the adverse treatment of the Coulter Trust was justifiable under EU law.
The Supreme Court therefore had two issues to consider:
- whether a movement of capital between the United Kingdom and Jersey should be viewed as an internal transaction taking place within a single member state for the purposes of article 56; and
- if not, whether the decision to refuse inheritance tax relief on the gift to the Coulter Trust is justifiable under EU law.
The status of Jersey
It was accepted between the parties that since Jersey is not a member state, the gift to the Coulter Trust was not a movement of capital between member states.
Therefore, the question was whether Jersey should be viewed as a “third country” for the purposes of article 56 or whether, as HMRC argued, a movement of capital between the UK and Jersey should be regarded as an internal transaction within a single member state (namely the United Kingdom).
The Supreme Court held that, since the EU rules on free movement of capital are not expressed to apply in Jersey and property had moved from a jurisdiction where the rules apply to one where it does not, the transfer could not be described as an internal transfer. Jersey is therefore a ‘third country’ for the purposes of article 56 and so the principle of the free movement of capital does apply to the transfer of funds to the Coulter Trust.
Restriction justifiable under EU law?
The interpretation of section 23 of the Inheritance Tax Act 1984 with the “gloss” of the Dreyfus case (i.e. restricting inheritance tax relief to charitable trusts which are governed by the law of some part of the United Kingdom and subject to the jurisdiction of the UK courts) is incompatible with article 56. The Court therefore needed to consider whether this restriction was justifiable under EU law.
HMRC argued that the restriction was justifiable on the basis that HMRC would need to confirm that the charity was in fact carrying out charitable objects and, in the absence of a mutual assistance agreement between the UK and Jersey at the time, it would be unable to do so.
The Court of Appeal had agreed and had considered that a requirement to have an information exchange agreement between the UK and the third country could be read into section 23. On that basis, the Court of Appeal held that the refusal to grant relief under section 23 was justifiable under EU law.
However, the Supreme Court disagreed with the Court of Appeal. It held that there was no requirement for a mutual assistance agreement in the legislation, and the Court of Appeal should not have concerned itself with a hypothetical one. The fact that such a requirement in section 23 may have made the refusal to grant relief justifiable under EU law did not mean that the court should read that requirement into section 23.
Accordingly, the restriction of the relief from inheritance tax to charitable trusts which are governed by the law of a part of the United Kingdom and subject to the jurisdiction of the UK courts, as well as being established for purposes which are exclusively charitable under English law, cannot be justified under EU law.
Given that article 56 is directly applicable as law in the United Kingdom, and must be given effect in priority to inconsistent national law, the Court concluded that the gift to the Coulter Trust would therefore qualify for the relief from inheritance tax.
Implications of the judgment
In April 2012, the exemption from UK inheritance tax was extended so that it also applies to gifts made to charities established in the EU, Norway, Iceland and Liechtenstein (but not other jurisdictions such as Jersey), provided that such charities have exclusively charitable purposes under English law. In practice, however, very few non-UK charities have taken advantage of this as the relevant legislation also imposes various conditions which must be satisfied by the non-UK charity in question and because of differences in what constitutes a charitable purpose across Europe.
The implications of the Supreme Court’s decision in Routier for non-UK charities is therefore potentially significant and could open up opportunities for the use of non-UK trusts for English charitable purposes by UK taxpayers seeking to rely on the exemption from UK inheritance tax and, perhaps, for cross-border giving more generally. Charities in jurisdictions where charitable purposes are largely consistent with the English law meaning, including Jersey, are likely to be best placed to take advantage of new opportunities. However, it should be noted that there are other more established ways to make sure that gifts to charities do qualify for relief and so, until the full implications of the decision become clear, we would not advise relying on this case as a planning tool, and instead it could be considered as a defence where necessary.
Where inheritance tax has already been paid on gifts to non-UK charities, it may be difficult to get a tax repayment as the position before this case was the “established practice” and a claim for overpaid inheritance tax may not be permitted. However, it may prove helpful as an authority that inheritance tax does not need to be paid where the triggering event for the tax has not yet occurred.
It should, however, be noted in all of this that, since the judgment hangs on the applicability of EU law, its long-term relevance will necessarily be linked to the nature of Brexit and whether such law remains in force in the long-term.
In March 2019, the Charity Commission published new guidance for charities with a connection to a non-charity. The new guidance is principles based and does not introduce new legal requirements. It does, however, set out the good practice that the Commission now expects trustees to be following and consolidates the Commission’s existing guidance on issues arising for such charities.
Where the Commission reviews a charity’s connection with a non-charity, it will expect the trustees to have considered and applied the new guidance in so far as it is relevant to their charity. If trustees choose not to follow the good practice set out in the guidance, they must be able to explain and justify their approach.
Trustees whose organisations may be affected should therefore read the guidance carefully and consider if and how it will apply to them. Trustees will also need to consider the guidance when thinking about new relationships going forward.
Who does the guidance apply to?
The guidance is broadly drafted. It applies to your charity if it:
- has set up and owns a trading subsidiary;
- has been set up by a non-charity, for example, corporate foundations or charities set up by social enterprises, campaigning organisations, or government or local authorities;
- gets regular funding or support from a non-charity;
- gives regular funding to a non-charity, for example, grant makers who regularly fund a non-charity or charities set up to support the activities of a non-charity (such as charities with a link to a NHS trust, or other “friends of” charities);
- works regularly with a non-charity to deliver services, campaigns or other projects;
- has a non-charity as a trustee, or if the non-charity can appoint some of the trustees;
- has a non-charity as its sole or significant member.
Whilst the guidance will apply to a wide range of situations and relationships, it specifically details the following connections to which it will not apply:
- where the connection to a non-charity is not listed above; and
- where the connection is only that:
- the two organisations have a single person who is on the board or staff of both;
- your charity works, or has a funding arrangement on a “one-off” rather than regular basis;
- your charity regularly buys core services from a non-charity which is not its trading subsidiary (e.g. paying a professional fundraising organisation, a letting business or an IT company).
The six principles set out in the guidance are as follows:
1. Recognise the risks
The guidance acknowledges that, most of the time, charities will be able to work effectively with non-charities but notes that such a relationship can bring about new risks including, for example, that a charity carries out work outside of its charitable purposes or is controlled or inappropriately influenced in its decision making. Trustees should be able to identify, review and appropriately manage any risks arising.
2. Do not further non-charitable purposes
Trustees must ensure that, where engaging with non-charities, they act in accordance with their organisation’s charitable purposes and do not further non-charitable purposes. The guidance details a number of activities connected with a non-charity where this risk might arise and what trustees should think about when engaging in these activities. The activities include making grants to a non-charity, carrying out campaigning and political activity with a non-charity, furthering a charity’s educational purpose through producing research (or other output) with a connected non-charity, and investing in and managing the relationship with a subsidiary trading company.
3. Operate independently
A charity must be independent of any connected non-charities with which it works or operates. The guidance sets out that independence means a charity must exist only to further charitable purposes for the public benefit and be governed by its trustees acting only in the interests of the charity. It goes on to set out a number of considerations for trustees seeking to protect their charity’s independence.
4. Avoid unauthorised personal benefit and address conflicts of interest
As a matter of charity law, trustees must avoid unauthorised personal benefit. They must also avoid and manage conflicts of interest. Conflicts of interest are more likely to arise where charities have connections with non-charities. The guidance details a number of situations where conflicts might arise and how the Commission would expect charities to deal with them.
5. Maintain your charity’s separate identity
Whilst it is possible for charities and non-charities to share an identity (something which is particularly common where corporate foundations or trading subsidiaries are concerned), this must be in the charity’s best interests. The guidance sets out rules and standards that apply when operating with a shared identity.
6. Protect your charity
The guidance is clear that a charity’s trustees must be satisfied that any connection to a non-charity is in the charity’s best interests and that, in engaging with the non-charity, the charity’s assets, reputation and beneficiaries are protected. It sets out a number of considerations for charity trustees including that appropriate written agreements to govern the relationship are in place.
The guidance is a welcome improvement on the previous draft guidance which was widely criticised for a number of reasons, including its failure to pick up on the benefits that relationships with non-charities can bring and the confusion it created with regard to existing Charity Commission guidance.
The guidance is accompanied by three checklists to help test and apply the guidance:
- Checklist 1: charities operating a non-charity as a subsidiary
- Checklist 2: charities set up and mainly funded by the non-charity
- Checklist 3: charities in a regular partnering or funding relationship with a non-charity that is not its founder or subsidiary
The implementation of the EU General Data Protection Regulation (GDPR) on 25 May 2018 was a watershed moment for privacy law. The charitable organisations most affected by its requirements are fundraising charities where new requirements to “opt in” now apply in relation to fundraising campaigns and other direct marketing activities. However, other charities, including those holding data on individual beneficiaries and grant making foundations, are also likely to be impacted, albeit to a much lesser degree.
One year on, we recap the major changes to privacy law under the GDPR and consider lessons learned over the past year.
Processors and controllers: An organisation’s obligations under the GDPR will differ depending on whether they are acting as controller, processor or joint controller with another organisation in respect of personal data. (Note that the Information Commissioner’s Office (ICO) has published guidance to help organisations decide who is a controller and who is a processor.) Where there is a controller-processor relationship, the parties must enter into a contract setting out the subject-matter and duration of the processing, the nature and purpose of the processing, the type of personal data and categories of data subjects and the obligations and rights of the controller. The contract must also incorporate the compulsory terms set out in Article 28 of the GDPR relating to the obligations of processors.
Transparency and consent: The GDPR has brought into focus the importance of organisations processing personal data in a manner that is fair, lawful and transparent. The majority of the enforcement action that has taken place in the UK to date has focused on failures in relation to consent and transparency. For example, the parenting club Bounty was fined £400,000 for sharing its users’ personal data with marketing agencies without obtaining their consent. Transparency and consent were also key issues in CNIL’s fine against Google (discussed below).
Processing conditions: An organisation must have a valid lawful basis in order to process personal data. There are six available lawful bases:
- where the data subject has provided their consent;
- where the processing is necessary for the performance of a contract with the data subject;
- where the processing is necessary for compliance with the controller’s legal obligations;
- where the processing is necessary in order to protect an individual’s vital interests;
- where the processing is necessary to perform a task in the public interest; and
- where the processing is necessary to satisfy the “legitimate interests” of the controller or third party.
Data subject rights: The GDPR grants extensive rights to individuals in relation to their personal data, including rights to access their personal data, to rectify or complete inaccurate or insufficient data, to erase personal data in certain circumstances (such as where processing is no longer necessary) or to transfer personal data from one controller to another.
Reporting and enforcement of data breaches
At the time of its implementation, the majority of the media coverage on the GDPR centred around the substantial fines that could be imposed on organisations for non-compliance. Under the GDPR, based on the nature of the contravention and the status of the infringing entity, fines may be imposed of up to the higher of 4% of annual global turnover or €20m (or, for less severe breaches, the higher of 2% of annual global turnover or €10m).
In March of this year, the Fundraising Regulator referred 59 charities to the ICO because they had ignored suppression requests (i.e. requests by members of the public for the charity to stop contacting them by email, phone, post or text) made through the Fundraising Preference Service. The Fundraising Regulator issued each of the charities with regulatory notices and the ICO wrote to the trustees reminding them of their legal duties. Whilst no fines were levied, each of the charities concerned was publically named. For some charities, this may impact on their reputation and, in turn, on their ability to fundraise.
In general, however, enforcement activity over the past year has been less drastic than expected. While the European Data Protection Board has reported that over 200,000 personal data breaches were notified in the first year of the GDPR, this has resulted in relatively few fines. Notable exceptions include the €50m fine that was imposed by the French data protection authority, CNIL, against Google in January 2019. CNIL stated that the fine was the result of Google’s failure to provide adequate transparency in its user notices and to obtain users’ valid consent when processing their personal data for advertising purposes. More recently, in July 2019, British Airways and Marriott were fined £183m and £99m respectively for data breaches which exposed customers' personal data. In both cases, the ICO claimed that poor security arrangements at the companies contributed to the breaches.
Charities should ensure that their policies and practices remain up-to-date and compliant with GDPR requirements. A robust compliance strategy will remain critical to ensuring that charities avoid the significant potential fines under the GDPR.
Lessons in the first year of the GDPR
Since the GDPR has come into effect, we have observed the following trends:
- Discussions on the use and management of personal data have become a regular part of contractual negotiations. Typically, these discussions focus on specifying the roles of the parties as processor, controller or joint controller and understanding their responsibilities in relation to the personal data they access and use. These types of discussions may even be necessary internally within a charity’s structure. For example, in the case of a charity with a trading subsidiary, it is good practice for the charity to have an agreement with the trading company governing the transfer/processing of data.
- Many of our clients have experienced an unprecedented number of requests from individuals for access to copies of their personal data. This highlights the need to have processes in place to manage increased data subject access requests.
- Contractual documentation has become more complex, particularly as a result of the Article 28 GDPR requirements for specific obligations imposed on data processors to be documented in writing. Many clients have updated their standard documentation to provide for appropriate data protection provisions in their contracts.
- A number of clients have observed a cultural shift towards more privacy-focused practices. This is particularly the case where companies have embraced the concept of privacy-by-design as part of their operating model.
- Research published by the National Council for Voluntary Organisations (NCVO) in June 2019 revealed that charities’ income from the general public dipped for the first time since 2008/09. Whilst overall income in the UK charity sector has grown, this is due to increases in grants and investments. It has been suggested that one of the reasons for the decrease in income from the general public is the time and money charities have been forced to devote to comply with the new data protection standards. Karl Wilding, director of public policy and income chief executive of the NCVO, commented that “the drop in public income reflects other findings we’ve seen and anecdotal evidence. Clearly lots of organisations were adapting their fundraising strategies at this point in time, preparing to meet higher data-protection standards, and doing a lot of internal work rather than launching donor-recruitment campaigns.”
Data protection fee
Charities should also note that all data controllers are required to pay a data protection fee to the ICO to fund their data protection work. There is an exemption for “not for profit” organisations which applies where data is processed only for the purposes of:
- establishing or maintaining membership;
- supporting a not-for-profit body or association; or
- providing or administering activities for either the members or those who have regular contact with it.
The exemption is narrow and will also restrict the type of information a charity can hold and how it uses this data. Where the exemption does not apply, a charity will be required to pay a fee of £40.
The ICO has made clear that compliance is an ongoing task and all organisations should be working towards and regularly reviewing their practices. Some specific resources that trustees may find useful are detailed below:
- ICO: GDPR FAQs for charities
- Fundraising Regulator: GDPR introduction
- Institute of Fundraising: GDPR – the essentials for fundraising organisations
- ICO report: GDPR – one year on
In the recent case of David Roberts Art Foundation Limited v Riedweg  EWHC 1358, the High Court held that where an attempt has been made by trustees to comply with the rules relating to charity land disposals but there has been some technical failure, this will not make the transaction itself void. The overriding consideration will be whether the terms of the disposal are the best that can reasonably be obtained by the charity.
Requirements for charity land disposals
Part 7 of the Charities Act 2011 (Act) governs charity land disposals. The provisions set out here permit non-exempt charities to dispose of land without the consent of the Charity Commission (or the court) provided certain conditions are met. Where these conditions are not met or, where the rules do not apply, an order of the Charity Commission (or the court) is required.
The conditions that must be met are set out in section 119(1) of the Act and include that, before entering into an agreement for the sale of the land, the trustees of a charity have:
- obtained and considered a written report on the proposed disposition from a qualified surveyor instructed by the trustees and acting exclusively for the charity;
- advertised the proposed disposition for such period and in such manner as is set out in the surveyor’s report, unless it advises that it would not be in the best interests of the charity to advertise the proposed disposition; and
- decided that they are satisfied, having considered the surveyor’s report, that the terms on which the disposition is proposed to be made are the best that can reasonably be obtained for the charity.
The surveyor’s report must cover certain matters set out in the Charities (Qualified Surveyors’ Reports) Regulations 1992 (Regulations).
Additionally, the Act requires that a statement is included in any contract of sale and a statement and certificate is included in any subsequent transfer. The information that must be included in the statement and certificate is set out in the Act.
David Roberts Art Foundation Limited v Riedweg  EWHC 1358
This High Court case related to an application for summary judgment brought by the David Roberts Art Foundation Limited. The charity had agreed to sell a property for £8.01m to Nicole Riedweg (Buyer) but, having paid a deposit of £410,000, she failed to complete the transaction. The charity subsequently sold the property to another party for £5.5m. In bringing the case, the charity sought to retain the deposit and claim damages from the Buyer for the shortfall in purchase price.
The requirements of the Act were used by the Buyer to defend her position who claimed that because certain sections of the Act had not been complied with (including that the contract did not contain the required statement and that the draft transfer was only partially compliant) the contract was void. Further, it was not clear whether the trustees had considered the surveyor’s report and decided that the terms of the proposed sale were the best that could reasonably be obtained for the charity.
However, the High Court was of the view that Parliament could not have intended that failure to include a statement in a contract would lead to it being invalid and that such an outcome was “disproportionate to the role played by the statement in the statutory regime”.
This case was distinguished from the earlier case of Bayoumi v Women’s Total Abstinence Educational Union Ltd  EWCA Civ 1548, where comments had been made to suggest that a failure to comply with the statutory requirements led to a contract for the sale of land being void. However, in that case, no attempt at all had been made to comply with the statutory regime.
Lessons for charity trustees
Whilst the judgment should be of comfort to charity trustees, it is important to note that failing to meet the requirements of the land disposal regime may lead to uncertainty and disputes.
The judgment also highlighted that the requirements of section 119 of the Act are chronological so, where trustees are considering a disposal of charity land, the correct sequence of actions/decisions should generally be:
- the trustees consider making a disposal of charity land;
- the trustees obtain a report from a surveyor that complies with the Regulations (including on the manner of disposal) to ensure that the land is disposed of on terms that are the best that can reasonably be obtained;
- the report is considered by the trustees;
- the property is advertised unless the surveyor has advised against it;
- an offer is made by a potential purchaser; and
- the trustees consider the offer against the report. A supplementary report may be needed in some circumstances (e.g. if time has passed since the original offer or the terms of the offer itself differ from those suggested in the report).
The judgment commented that, in this case, the drafting of the minutes of the trustees’ meeting (relating to the land disposal) could have been improved. Therefore, trustees should also make sure to document all of their decisions accurately and fully.