Charity Commission guidance for charities with a connection to a non-charity published

It is commonplace for a charity to have a connection to a non-charity – a charity might, for example:

• Have a trading subsidiary
• Be founded by a corporation
• Work in partnership with a non-charity to achieve some of its charitable aims

This new guidance from the Charity Commission is intended to provide a single point of reference for the Commission’s guidance for any charity with a connection to a non-charity, and so to make it easier for such charities to comply with best practice in their management of this relationship.

Does the new guidance introduce new legal obligations for charities?

The Charity Commission has stated that this guidance is only intended to consolidate information for charities that have connections with non-charities, and not to introduce new legal requirements.

However, if the Charity Commission has cause to review the arrangements between a charity and a connected non-charity, it will expect the charity trustees to have applied the new guidance, or to be able to explain and justify the charity’s chosen approach if it is decided not to follow the best practice set out in the guidance.

Overview of the guidance

Which charities need to apply the guidance?

The new guidance starts by setting out the kind of arrangements to which the guidance applies, and the situations in which it doesn’t. Briefly, if a charity:

• Has set up a trading subsidiary, which it owns
• Has been founded by a non-charity, such as a corporation or social enterprise
• Gives regular funding to, or receives regular funding from, a non-charity
• Works in partnership with a non-charity to provide services or to campaign
• Has a non-charity as a trustee, or as a sole or “significant” member

Then, regardless of whether the non-charity is commercial or not for profit, public or private, the guidance will apply to the charity.

The guidance could cover other relationships too, but states that it is not intended to apply where the connection between a charity and a non-charity does not feature in the above list, and:

• The charity and non-charity have a single person on the board of or employed by both organisations
• The charity works with a non-charity, or enters into a funding arrangement with a non-charity, on a “one off” basis
• A non-charity that is not a trading subsidiary of the charity regularly provides services to the charity – for example, to provide professional fundraising services.

The six principles

The main body of the new guidance sets out six principles for managing and reviewing a charity’s connection to a non-charity:

1. Recognise the risks

The guidance emphasises that a charity having a close connection to a non-charity is not, in itself, problematic and charities can derive new opportunities and benefits from such connections. However, such relationships can also bring new risks or increase existing risks. Such risks include:

1. The charity carrying out work that does not further its charitable purposes.
2. The charity failing to manage conflicts of interest appropriately.
3. The non-charity inappropriately controlling or influencing the decisions made on behalf of the charity.
4. The charity investing in or providing other support or benefit to the non-charity or those connected to it inappropriately.
5. The connection with the non-charity causing reputational damage to the charity, because of either the existence of the connection or the activities of the non-charity.
6. It being difficult for the public to distinguish the charity from the non-charity, with possible reputational damage as a result of that.

In order to comply with their trustee duties not to expose their charity to undue risk, it is necessary for charity trustees to assess the risks of their charity’s close connection to any non-charity. They must then take appropriate steps to manage the risks identified, review the risks and the management of those risks regularly for as long as the relationship exists, and document the steps taken as part of this risk management process.

2. Do not further non-charitable purposes

In order to be, and remain, a charitable organisation, a charity must have and seek to further purposes that are exclusively charitable. This means that charities must take particular care when carrying out joint projects with a non-charity, or providing funding to a non-charity.

All charitable funds must be applied for purposes that are only charitable, and any benefit to the non-charity from the connection to a charity must only be incidental – that is, a necessary result or by-product of carrying out the charity’s purposes. If charitable funds are applied for non-charitable expenditure, this can have tax implications for the charity.

To make sure charitable funds are only expended on a charity’s charitable purposes, charity trustees must have a clear understanding of their charity’s purposes, set out in the governing document.

3. Operate independently

A charity must be managed by its trustees, who must act only in the best interests of the charity, so as to seek to achieve its charitable objects for the public benefit. It must be and remain independent of any non-charity with which it has a close connection, even if the non-charity provides substantial funding to the charity, or founded the charity.

4. Avoid unauthorised personal benefit and address conflicts of interest

The guidance emphasises that conflicts of interest can affect any organisation, including charities. Trustees have a duty to act solely in the best interests of the charity in their decision making, but conflicts might arise as a result of a personal interest on the part of a trustee, or from the existence of the duty or loyalty of a trustee to another organisation or person.

A conflict of interest on the part of a trustee must be appropriately identified and managed. Failure to manage a conflict of interest correctly may result in a decision made by the trustees of a charity being invalid.

5. Maintain your charity’s separate identity

This section of the guidance is concerned with public perceptions of charities, and how these may be affected by their relationships with non-charities, and the guidance states that charity trustees have a legal obligation “to keep it [their charity] distinct from any connected organisation”.

This guidance sets out that if a charity has a close connection with a non-charity, the charity trustees have a legal obligation to keep the financial structures of the charity and the non-charity separate. They should, as a matter of best practice, make a decision as to whether it is in the best interests of the charity to share an identity, or to keep the identities of the charity and non-charity clearly delineated.

The guidance recognises that it can be in the best interests of a charity to share an identity with a non-charity but again emphasises the need for the charity trustees to identify the risks involved in sharing the charity’s identity in this way, to carry out an appropriate assessment of the risks, and subsequently to take steps to manage and regularly to review those risks.

Particular risks highlighted by the guidance include:

1. The risk that the general public cannot tell the charity apart from the non-charity – which, in a worst case scenario, might result in donations to the charity instead being given to the non-charity.
2. Reputational risks to the charity – if the non-charity’s activities are viewed negatively, people may attribute those activities to the charity if it is difficult to tell the two organisations apart.
3. Confusion among those working for the charity between the two organisations, which may, for example, lead to increased risk of errors in the sharing of resources and possible loss of benefit to the charity in favour of the non-charity.

The guidance emphasises that the charity trustees must take care when fundraising to ensure donors know which organisation is asking for money – the charity or the non-charity – and to what extent any funds received will be shared between the two organisations. They must also ensure they safeguard the charity’s assets solely for its charitable purposes. Donations to the charity must be received by the charity, and funds raised by the charity cannot be transferred to the non-charity and used to support the non-charity inappropriately.

6. Protect your charity

A key duty of charity trustees is to safeguard the assets of their charity (including its reputation), and they must protect its beneficiaries. This section of the guidance therefore sets out the legal obligations of charity trustees when considering whether or not it is in the best interests of the charity to create (or continue) a relationship with a non-charity, and what they should do as a matter of best practice.

Charity trustees must:

1. Act with reasonable care and skill, including obtaining professional advice where appropriate.
2. Be fully informed about the non-charity, carrying out appropriate due diligence so that they can make their decision taking into account all the relevant factors.
3. Ensure the charity receives value for money if it is paying the non-charity for a service or resource, or sharing resources with it.

Charity trustees should also, as a matter of best practice:

1. Consider alternatives to creating or maintaining the connection with the non-charity for the purposes of furthering the charity’s objects.
2. Identify the risks of the connection with the non-charity, and how they will be managed or might change over time.
3. Put appropriate written agreements in place to govern the arrangements with the non-charity, so that the charity is protected.

In relation to the written agreements, the guidance recognises that what is appropriate will vary depending on the complexity of the arrangements with the non-charity, and the values and risks involved. However, in all cases, the charity must be prepared to enforce the agreement against the non-charity, and obtain appropriate advice on doing so, if necessary. Failure to do so may result in the charity trustees breaching their duty to safeguard the assets of the charity.

What to do if something goes wrong…

The guidance provides information on what to do if things go wrong in a charity’s management of its relationship with a non-charity. This can be summarised as:

• Taking appropriate action to put things right.
• Taking steps to prevent a repetition of the same or similar mistake.
• Reporting the incident to the Charity Commission if it constitutes a “serious incident”.

More information on reporting a serious incident can be found in this guidance from the Commission. Charities may find the Examples table found in the “What to report” section of the guidance particularly useful when deciding whether they have a serious incident to report to the Commission.

Useful resources in the new guidance

The Charity Commission has included a simple infographic setting out the key questions for charity trustees to consider when managing their charity’s connection to a non-charity. This will be useful for quick reference at charity trustee meetings, for example.

There are also downloadable and editable checklists, which will be helpful from a risk management perspective, to allow charity trustees to test whether they are applying the guidance in managing their charity’s connection to a non-charity for:

• Charities operating with a non-charity as a subsidiary
• Charities set up/mainly funded by a non-charity
• Charities in a regular funding or partnering relationship with a non-charity that is not its founder or subsidiary

Particular issues for particular types of charity/non-charity relationships

This section of our briefing highlights the key issues to consider for charities with some of the most common types of close connections with non-charities.

Grant making charities

• Remember that a charity can make grants to a non-charity, but the funds transferred to the non-charity can only be used for charitable purposes for the public benefit, even after the funds leave the charity.
• Make appropriate checks on the non-charity to make sure that it is capable of carrying out the work required and a suitable organisation for the charity to fund. The checks you make will vary depending on the values and organisations involved – for example, a grant to a non-charity operating overseas will normally require more due diligence than a grant to a non-charity operating in the England.
• Make sure that any benefit to the non-charity is incidental – that is, a necessary result or by-product of furthering the charity’s purposes.
• Put an appropriate written agreement in place for the grant, including reporting arrangements and clawback provisions.
• Monitor the expenditure of the funds by the non-charity, and, if it becomes apparent that the non-charity has not applied the funds received in accordance with the conditions of the grant, take steps to obtain the return of the funds to the charity – including obtaining appropriate professional advice as needed.

Charities with trading subsidiaries

• When considering setting up a trading subsidiary, make sure you know how a trading subsidiary will benefit the charity in achieving its purposes.
• Identify and consider the risks involved in the charity owning a trading subsidiary, and put in place a process to assess, regularly review and appropriately address the risks. Document the steps taken.
• If the charity invests in the trading subsidiary from the charity, remember:
  • A charity can only invest in a trading subsidiary to the same extent that it can make any other investment. The charity must have appropriate investment powers, and follow its investment policy.
  • As with all investments, any investment in a trading subsidiary will need to monitored, and charity trustees must be prepared to assert the charity’s rights as shareholder.
  • If a charity “props up” a failing trading subsidiary inappropriately by providing additional funds, this would be a breach of the trustees’ duty to apply the charity’s funds exclusively for charitable purposes.
• If a charity trustee is also director of the charity’s trading subsidiary, ensure you identify conflicts of interest, and manage any conflicts appropriately.
• If the appointment of a trustee to be director of the trading subsidiary would result in a benefit to the trustee, such as payment as a director, check this is permitted by the charity’s governing document and obtain permission from the Charity Commission prior to any appointment if not.
• Consider whether the charity should share its identity with the trading subsidiary. If it benefits the charity to do so, put appropriate licensing agreements in place.
• Consider ways in which to keep the identities of the charity and trading subsidiary clear, if appropriate, and put these in place.
• Control how the charity is portrayed to the general public by agreeing with the trading subsidiary on the content about the charity that the trading subsidiary can incorporate in its communications.
• Apply the Code of Fundraising Practice to protect donors to the charity.
• Protect the assets of the charity by ensuring that the charity gets value for money if it pays the trading subsidiary for services or resources, or shares services or resources with the trading subsidiary – and put appropriate written agreements in place to do so.
• Be prepared to take steps to protect the assets of the charity if things go wrong, including taking appropriate professional advice with regard to enforcing agreements and obtaining the return of funds if necessary.

Charities with corporate founders

• While you cannot “do due diligence” on a founding organisation, you should take steps to make sure you understand its business, and how its aims differ from those of your charity.
• Identify and consider the risks arising from the charity’s connection with its founder, and put in place a process to assess, regularly review and appropriately address the risks. Document the steps taken.
• In particular, if the charity is reliant on the founding organisation for income, you should seek to manage the risks of losing or having to refuse that income by considering options for diversifying the charity’s sources of income.
• You must maintain the independence of the charity, and not simply carry out the wishes of the founding organisation. You must ensure you are free to make your own decisions about the management and administration of the charity in furthering its charitable objects.
• If you have a trustee who is also a director or employee of the founding organisation, you:
  • Must ensure that conflicts of interest and loyalty are correctly identified and managed appropriately.
  • Should train such trustees in their trustee responsibilities, particularly the duty to act solely in the best interests of the charity.
• Consider ways in which to keep the identities of the charity and founding organisation clear, if appropriate, and put these in place.
• Control how the charity is portrayed to the general public by agreeing with the founding organisation on the content about the charity that the founding organisation can incorporate in its communications.
• If the charity proposes to enter into new arrangements with its founding organisation, for the sharing of services or resources, for example, you should:
  • Carry out some form of due diligence process to assess whether this is in the best interests of the charity.
  • Ensure the charity gets value for money.
  • Put appropriate written agreements in place.
• Remember that in some circumstances it may not be appropriate to accept funds from a founding organisation, even though it is the founding organisation.

Further information

This briefing note is intended to provide a summary of the new guidance, and to highlight key considerations for some of the most common form of charity/non-charity connections, and is no substitute for reading the guidance itself.

If you would like to discuss how any aspect of the Charity Commission guidance may affect your charity, or what steps your charity should now take to comply with the best practice set out in the guidance, please contact a member of the Charity Law team.