Charity and philanthropy update – July 2020

In this edition, we:

• provide an update on forthcoming changes to the UK’s Trust Registration Service in accordance with the Fifth Money Laundering Directive;
• consider how charities can hold meetings remotely;
• look at key issues to consider if two charities decide to merge; and
• mention a checklist recently published as part of the Charity Digital Code of Practice.

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.

The UK Trust Register – an update

The current position under 4MLD

Many of our readers will be aware of the UK’s Trust Registration Service (TRS), introduced in 2017 by the UK’s implementation of the EU’s Fourth Money Laundering Directive (4MLD). This requires the trustees of “taxable relevant trusts” to provide HMRC with certain information to identify the “beneficial owners” of such trusts. Charitable trusts with no tax liability are not required to register with the TRS under the 4MLD rules.

New rules under 5MLD

The UK is now implementing the EU’s Fifth Money Laundering Directive (5MLD) which significantly expands the trust registration requirements under 4MLD. In particular, the trustees of all UK and some non-EU trusts will be required to register with the TRS, whether or not the trust in question has UK tax liabilities. 

The Government’s original consultation in 2019 on the implementation of 5MLD indicated that charitable trusts would be required to register with the TRS once the new 5MLD rules were implemented in the UK – a change which would have created significant additional compliance obligations for the trustees of charitable trusts. However, following representations from professional bodies and other third sector organisations, the government proposed, in a second “technical” consultation published in January 2020, that charitable trusts would continue to be excluded from registration under the TRS. 

On 15 July 2020, HMRC and HM Treasury published their response to the technical consultation, together with draft regulations which will implement the changes to the TRS as required by 5MLD. The response confirms that, in general, “charitable trusts regulated in the UK” will be exempt from registration with the TRS. Furthermore, the draft regulations make it clear that, as well as excluding charitable trusts which are registered with the Charity Commission, the new rules will also exclude all charitable trusts in England and Wales that are exempt and excepted from registration with the Charity Commission, including those that have an annual income below the £5,000 registration threshold. This point had previously been unclear.

What remains uncertain?

Whilst this is very positive news for charities, there remain a number of points on which clarity is needed. In particular, it is unclear whether the following would be covered by the general exclusion for charitable trusts:

• restricted funds (for example, endowment funds) held by a charity but not registered separately with the Charities Commission;
• nominee or bare trust arrangements in respect of assets held for a charity; or
• non-UK charities that are recognised by HMRC as a charity for UK tax purposes.

The Government has promised that further details of the parameters of the exemptions will be covered in forthcoming guidance, and we hope that these points will be clarified in such guidance.

Next steps

For any trust structures which fall within the scope of the new 5MLD rules, the earliest date for registration with the TRS is 10 March 2022. There is therefore plenty of time to wait for Government guidance and, if registration with the TRS is required, to compile the necessary information. In the meantime, trustees can relax in the knowledge that the vast majority of charitable trusts (if not all) will be excluded from these new administrative requirements.

Covid-19 and charity meetings

The Covid-19 pandemic has caused disruption to virtually everyone’s usual working arrangements and, whilst the UK Government’s “stay at home” message is now starting to be relaxed, it is likely that social distancing measures and the advice to work from home where possible will remain in place for quite some time. For charity trustees, this has raised questions as to how they can carry on running their organisation if they are not able to meet in person.

Trustee meetings

Some charities have express provisions in their governing documents which allow meetings to be held remotely (either by telephone or other electronic means), so trustees should start by reviewing their governing documents to check this. 

However, even if the governing documents do not specifically permit remote trustee meetings to be held, unless there is an express prohibition (in which case the trustees may need to investigate the possibility of amending the governing document), it is generally accepted that meetings held via video link are valid, as long as the participants can all see and hear each other. Normally, unless the governing documents specifically permit the use of a telephone-only meeting, a meeting conducted via telephone may not be validly held since the participants cannot see each other. However, the Charity Commission has confirmed that, in light of the current circumstances, it will take a more relaxed approach to telephone meetings, as long as any decisions made at the meeting are recorded. Nevertheless, meetings should be conducted via video wherever possible.

Where a trustee meeting is to be held remotely, the usual requirements regarding giving notice of the meeting and circulating minutes should be complied with.

Trustees might also wish to consider alternatives to holding meetings, for instance by approving decisions through unanimous written resolutions where the governing documents allow this. There is also case law to suggest that a simple majority of trustees of an unincorporated charity may bind the minority, but the safest course of action would be to seek unanimous approval.

AGMs and other members’ meetings

Many charities are structured with a membership body beyond their trustees – these include charitable companies and charitable incorporated organisations (CIOs). Key issues, such as the approval of annual accounts, are often decided at an annual meeting of the charity’s members (AGMs). 

Some charitable companies and CIOs may well already have express clauses in their governing documents which allow AGMs and other members’ meetings to be held remotely. For those charities which do not, it may be possible to take advantage of measures which were recently introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020).

An extraordinary piece of legislation for extraordinary times, CIGA 2020 was first introduced by the government on 20 May 2020. It enjoyed a rapid passage through parliament and received royal assent on 25 June 2020. It includes provisions which provide companies (including charitable companies) and other “qualifying bodies” (including CIOs) with flexibility as to how they conduct AGMs and other members’ meetings. 

Postponing AGMs

As a result of the disruption caused by the pandemic, some charitable companies and CIOs may wish to postpone their AGM. CIGA 2020 permits charitable companies and CIOs whose AGM was due to be held between 26 March 2020 and 30 September 2020 to delay such AGM up to 30 September 2020 (subject to any further extension of time by the Government).

Guidance recently published by the Charity Commission notes that, if a charity postpones its AGM, it may be difficult to finalise its annual reports and accounts. It asks that, wherever possible, charities should try to submit annual reports and accounts on time; however, if a delay is anticipated, charities should email the Charity Commission to explain the situation.

Holding meetings remotely

Other charitable companies and CIOs will be keen to go ahead with their AGM or other members’ meetings but will be unable to hold such meetings in person. For those charities, CIGA 2020 provides that members’ meetings:

• need not be held at any particular place;
• may be held, and any votes may be permitted to be cast, by electronic means or any other means (i.e. there is no requirement for physical meetings, so they could be held by telephone, videoconference or a combination of both); and
• may be held without any number of those participating in the meeting being together at the same place.

If it is proposed to take advantage of the provisions in CIGA 2020 to hold a members’ meeting remotely, members are not entitled to insist upon attending the meeting in person or to demand the right to vote by particular means. However, the decision to hold the meeting remotely should be recorded in the minutes, and all other usual meeting requirements should be met.

Key dates

These measures are retrospective in nature and apply to members’ meetings held between 26 March 2020 and 30 September 2020. This should reassure charities which have already convened remote member meetings but were unsure as to their validity.

Interaction with charities’ constitutions

Importantly, the provisions of CIGA 2020 are also confirmed to override any contrary provisions in a charity’s constitution. 

Preparing for the future

The flexibility currently available to charities in relation to their meetings is to be welcomed. However, the provisions in CIGA 2020 are due to expire on 30 September 2020 (albeit with an option for the government to extend the measures until 5 April 2021), so trustees should consider now whether they need to take any steps to “future-proof” their charity by, for example, amending the governing documents to include specific provisions relating to remote meetings.

Charity mergers

What is a charity merger?

A merger is the coming together of two or more charities to form one organisation. Assets and knowledge of the charities are “pooled” with the aim of creating a stronger, larger and more effective combined charity without losing existing acquired resources.

Why do charities merge?

There are many reasons why charities might choose to merge including:

• overcoming financial challenges: a merger will often help reduce costs and duplication, improve access to funding and give the charity a greater source of specialist knowledge and expertise. In recent months, the impact of Covid-19 has devastated the finances of many charities, so a carefully chosen merger could help certain charities not only to survive the pandemic but also to thrive beyond it;
• increasing the reach of services: together the charities will be able to reach a wider number and range of beneficiaries; and/or
• creating a better public profile: collaboration will help the charities to access a wider supporter base and increase public awareness.

Identifying a suitable charity with which to merge

The objects of a charity govern the activities that it is permitted to engage or invest in. For two charitable entities to merge, their objects must be compatible and so mergers most commonly take place between charities that operate in the same sphere as each other.

Charity trustees must ensure that any assets transferred (to a new vehicle or to an existing charity) will continue to be used to carry out the charitable purposes for which they were intended, so choosing a suitable charity to merge with is of paramount importance.

How do charities merge?

Once two charities have decided that they wish to join together, it will be necessary to consider how best to structure the merger. There are two main options:

• a new charity is set up and both existing charities transfer their assets and liabilities to the new charity; or
• one existing charity transfers its assets and liabilities to the other (known as a “takeover merger”).

The establishment of a completely new structure may be the more expensive option; however, it is often preferred as a more neutral approach than a takeover merger, as the new charity is a joint venture between the existing charities and both charities go into the new arrangements on an equal footing.

Ultimately, the route chosen will depend on a variety of factors, including the location of the entities (i.e. whether cross-border regulations or local law restrictions will be relevant), tax considerations of the entities, and which approach will be most beneficial and simplest considering all the circumstances.

The trustees must also ensure that they have the requisite powers necessary for the merger, for example, the power to transfer assets to another charity. There might be a restriction in a charity’s governing documents on transferring a substantial proportion of the charity’s assets unless the charity is being dissolved. It is possible to amend a charity’s powers in this respect by application to the Charity Commission.

Key issues and practical points

Due diligence

• As part of the merger process, the respective sets of trustees will need to conduct due diligence on the other charity in much the same way as in a corporate transaction. This includes reviewing contracts (employment, supplier etc.), funding arrangements (both inward and outward), IT, internal policies, intellectual property, properties (if there are any), litigation, insurance and regulation to identify any potential issues. Trustees should be prepared for this to be a time consuming process.
• It is a good idea for trustees to ensure that their charity’s arrangements are in good order before due diligence commences, for example, making sure that all employment contracts are signed, any expired contracts are renewed as appropriate, and all relevant filings/notifications are up-to-date.

Employees

• It is very likely that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will apply to the merger. This means that some or all of the charities’ employees will transfer across to the new merged entity (or to the other charity if a takeover merger route is followed). TUPE will place a number of obligations on the charities and their trustees, both during and after the merger process, and it will be important for the charities to ensure that all TUPE requirements are correctly followed.

Restricted funds

• Existing funds and contracts will need to be checked to establish whether they have been reserved for specific purposes, events or expenditure. Where a charity has restricted funds or a permanent endowment, it is important that the terms of the restriction or endowment are adhered to. Any such restrictions will need to be transferred to the new charity.

Arrangements with third parties

• Some assets may not be capable of being transferred to a new charity if, for example, the charity only has access to them through an arrangement with a third party. If the third party is unwilling to transfer the arrangement the existing charity may have to (i) continue operating as a shell structure following the merger until the funds are exhausted/arrangements come to an end; or alternatively (ii) postpone the merger.

Consents

• It may be necessary to obtain the consent of third parties to the merger, including the Charity Commission, other Government bodies, or other entities which provide funding. If a property interest is to be transferred, the consent of a landlord may also be needed.
• The Charity Commission’s approval may be required in the following circumstances:
  • approving amendments to the charity’s powers to enable the merger to go ahead;
  • if a new charity is to be established, approving the registration of the new charity (which includes approval of its constitutional document); or
  • if there is a takeover merger, approving amendments to the objects clause of the charity that receives assets.
• The Charity Commission’s approval takes time (especially on a registration) and this needs to be factored into the timeframe of the transaction as a whole.
• The shareholders/members (if relevant) and trustees of each entity will also need to approve the merger.

Intellectual property

• It will be necessary to agree upon a name for the new merged entity. It must also be decided whether, for example, a new domain name and new email addresses will be needed, and what should happen to any existing domain names, entity names and other intellectual property.

Governance

• Governance considerations often cause more difficulty than expected so careful thought should be given to how the new charity will be governed early on in the process. Questions which should be considered include the following.
  • Who will make up the board of trustees? (For example, will it be composed equally by trustees from the existing charities?)
  • Who will be CEO or Chairman (if there is to be one)?
  • Will any current manager need to resign?
  • Will committees be put in place for certain matters?
• Once decisions have been made, new governance documentation (such as shareholders’/members’ agreements, revised constitutional documentation and guidance for committees) will need to be drafted.

PR and announcements

• Communications with the outside world regarding the merger should be carefully managed and agreed between the charities.

Notification to the Charity Commission

• The Charity Commission keeps a separate register of charity mergers. Registering the merger ensures that any legacies or donations left to the original charities are automatically transferred to the new merged charity.

Concluding remarks

A successful merger can be a very positive step for a charity which might otherwise be struggling. A pooling of funds and expertise should help to ensure that the trustees are able to deliver the best possible results to their beneficiaries. In 2019, approximately 240 charity mergers were registered with the Charity Commission. For many charities, the impact of the Covid-19 pandemic may mean that a merger is the only way to secure their survival so we should expect to see an increase on these figures in 2020 and beyond.

Charity Digital Code of Practice

A free online checklist has been published as part of the Charity Digital Code of Practice to help charity trustees and leaders with the decisions they need to make about digital issues during and coming out of the pandemic.

The checklist has been published in response to the Charity Digital Skills Report 2020, which found that one in three charities has cancelled services during the Covid-19 crisis due to a lack of digital skills.

The checklist can be found here and some highlights are as follows.

• Remote working: Encouraging trustees to consider the lessons learnt from remote working – how is Covid-19 and remote working changing the culture at all levels of charities, and what else can we do to support staff and volunteers in becoming even more collaborative, innovative and willing to try new ideas?
• Services: How can charities protect vulnerable beneficiaries who may not be able to access digital services - what alternative forms of support can charities offer?
• Fundraising: How can charities pivot their fundraising so that it becomes digital? How can charities optimise the conditions for digital fundraising by building communities around their cause?
• Governance: How are charities changing governance processes to facilitate the quick decision making needed for digital during Covid-19? Are online board meetings organised so that they enable all trustees to participate and make informed decisions?

It is clear that the way charities operate and interact with funders and beneficiaries will need to evolve as a result of the Covid-19 crisis, and the checklist provides a framework for charities to consider how digital services can help with this.