The birth of a new charity regime… as OSCR hits a big birthday

06.05.16

OSCR is now ten years old. Time flies.

In true birthday spirit, we bring a present…in the form of an update drawing together various developments in OSCR regulation, new and updated guidance from the regulator as well as other regulatory treats from others sources that Scottish charities cannot ignore (doing nothing is not an option and in the case of charities that hold investments there is action that must be taken this month!).

To help with some aspects of the new OSCR reporting framework, we have a FREE offer below (another present!) in respect of answering OSCR’s questions about a charity’s governing document.

Targeted Regulation and other things you MUST take some action on

For OSCR, it is all about the good governance of charities, and ‘Targeted Regulation’ is designed to enhance how OSCR can focus its regulatory functions to help the sector flourish.

We have touched on these issues previously in our blog, but here is a closer look at the suite of new guidance and regulation.

The ‘drivers’ for the new Targeted Regulation framework

OSCR has set out the overarching objectives, which are:

  • the protection of charitable assets and beneficiaries; and
  • the protection and integrity of charitable status (an existential driver or brand protector of the ‘badge’ of charity and what that means in public perception and mind-set).

The situations and circumstances that will drive OSCR’s regulatory attention and intention are stated to be:

  • persons acting as charity trustees while disqualified;
  • a charity trustee acting improperly which adversely impacts on the charity’s assets and/or beneficiaries;
  • a charity being used for, or being, the victim of criminal activity;
  • a charity operating in a fragile territory;
  • charities that repeatedly fail to meet their reporting requirements to the regulator;
  • charities that take actions without seeking prior consent from the regulator;
  • charities that do not provide public benefit;
  • individuals or organisations that are inappropriately benefiting from charitable status;
  • charities who are at the margins of the charity test or who have complex and/or novel structures; and
  • bodies or individuals that misrepresent themselves as charities.

Changes to annual return reporting

Following consultation, annual returns are changing. OSCR is seemingly keen to reduce the volume of information routinely submitted by charities. It are also hoping to make it less burdensome by moving to wholly electronic filing.

From 1 April 2016, charities no longer have to submit a supplementary monitoring form alongside their annual return. Having said that, what OSCR wants to know about a charity in an annual return will depend on the income of the charity. It has set three thresholds; the bigger the charity, the longer the form. For charities with an income of less than £25,000, only a very short form 'Section A' return is required. This confirms the principal details of the charity and its basic income/expenditure.

Charities with an income of between £25,000 and £249,999 must complete a Section A and Section B return. This begins to introduce the 'good governance' principles underpinning a more targeted regulation by OSCR. Charities must confirm when they last examined the terms of their governing document, and whether they have the correct number of trustees in office and validly appointed. These charities must also select the appropriate financial safeguards currently in place, and disclose payments to charity trustees and connected people. OSCR will also want to know whether the charity is part of a group structure and the details of significant funding sources (the latter would appear to be aimed at potential private benefit and also control and influence).

For large charities with an income of £250,000 or greater, the return goes into more detail yet. These charities must go on to Section C, where OSCR asks a number of income, asset and expenditure related questions.

Section B is perhaps where the key legal governance is now found in the annual reporting and asks new questions of charity trustees. We can help you complete your annual return Section B and in doing so help your governance in the eyes of OSCR. Charities that have not reviewed their governing document in the last year should get in touch, as we are offering a free meeting with one of our charity law specialists to discuss what steps you can take to get your constitution into better shape or help you confirm all is in order. Please contact Alan Eccles to find out more about this.

Publishing annual accounts and reports

To underpin elements of good governance, OSCR is also pushing for transparency. Following the Targeted Regulation consultation, OSCR reported that the majority of respondents were in favour of publishing annual accounts and trustee reports.

Annual accounts are already public documents in the sense that members of the public can request them directly from the charity. OSCR will now supplement this by publishing the accounts and reports online for charities with an income £25,000 and above, and the accounts of all SCIOs. It will begin this process with accounts it receives from 1 April 2016.

OSCR will, however, redact all sensitive and trustee information. This falls into line with its decision not to create, at this stage, any form of register of charity trustees. No doubt OSCR will work to coordinate further, as appropriate, trustee details internally within OSCR to assist with the oversight of charities.

OSCR has also indicated that this year it plans on issuing more guidance on trustee annual reports. We will be following that in due course.

Notifiable events

On the face of it, this is the big one in terms of new regulation. Though it is not a going to be a legal requirement for charities to report these incidents to OSCR, it will now expect trustees to report on certain notifiable events.

OSCR has reported that this is about ensuring public confidence in the charities sector, doing so by ensuring the protection of charitable assets and beneficiaries, and protecting charity status.

Trustees will be expected to use their judgement as to whether a particular incident should be reported to the regulator. That will be an important judgment call in some circumstances and we will be issuing further details of how we can help navigate the notifiable events process in the best of interests of the charity, its beneficiaries and assets. OSCR’s guidance must be carefully considered and understood to identify what events should be notified and also to ensure multiple regulatory compliance if the charity operates in more than just the charity regulatory environment.

Although it is left to the trustees' discretion as to what to report, OSCR say that what it wants to know is any event that has a significant effect on the charity or its assets. This will depend on the each particular charity's particular circumstances. For a charity that deals with vulnerable people, it might be of no charity regulatory consequence to the day-to-day running of the charity if the police have to attend to a particular beneficiary (indeed it may be an aspect of the charity’s core activities). For other charities, police involvement could jeopardise the charity’s whole operations.

If trustees identify a notifiable incident, they would then be expected to report it to OSCR as soon as possible, with details of the incident, how it is being managed and what the trustees will do to prevent it recurring. OSCR will then make a decision on whether it needs to follow the matter up. OSCR have said that it will not view such notifications as a negative. As noted above, we are able to help charities navigate the framework in what could be a sensitive situation that could be reputationally or financially damaging and impact negatively on the charity’s work and business.

Remuneration

Continuing the theme of good governance, the regulator has produced an updated note on trustee remuneration. OSCR has real concerns when private individuals are benefiting from a charity. Reasonable payments to trustees are therefore allowed only if all of the following conditions are met:

  • there is no restriction to the payment in the charity’s governing document;
  • less than half the total number of charity trustees are getting paid (directly or indirectly) from the charity;
  • there is a written agreement between the charity and the charity trustee;
  • the written agreement sets out the maximum amount to be paid, and
  • the charity trustees are satisfied it is in the interest of the charity for the services to be provided by the charity trustee for that maximum amount.

Similar restrictions apply to people who are connected to the trustees.

The rules applicable to remuneration provisions which came into force on 15 November 2004 are different and are not affected by these rules. Saying that, the general duties to act in the interest of the charity and use charitable assets properly will apply to govern remuneration irrespective of when the specific payment power was in force. Charities will wish to take care when updating pre-15 November 2004 constitutions in this regard to avoid provisions losing their pre-15 November 2004 status.

The OSCR guidance note makes the following suggestions, which may or not be suitable for each and every charity and situation, but set out the issues that OSCR will be interested in (such as trustees making informed decisions, value, conflicts and transparency). They are that charities should:

  • have a payment policy that makes sure any payments to charity trustees and/or connected people complies with the conditions set out in the 2005 Act;
  • establish a register of charity trustees’ interests;
  • obtain at least two separate quotes for services; and
  • clearly minute the decision that paying a particular charity trustee or a person connected to them for services is in the charity’s interest.

Updated trustee duties guidance

OSCR’s trustee duties guidance has been updated, broadened and re-branded as ‘Guidance and Good Practice for Charity Trustees’. It currently exists only as an online version, but this month we are promised a downloadable pdf version. Although the idea of the guidance linking to other parts and vice versa of the OSCR website is a neat addition.

Register of persons with significant control

This does not emanate from OSCR, but the introduction of mandatory registers of persons with significant control is something that many charities cannot avoid.

Any corporate body limited by shares or guarantee will need to maintain such a register from 6 April this year (and provide such information to Companies House in annual returns (or ‘confirmation statements’ as they will become known) that are submitted after 30 June). Brodies has written about this separately and more fully, but it is important for charity trustees to be aware that the register will have to contain the details of any person (which might not be a human being) that controls 25 percent or more of the voting rights of the company, or has the power to appoint trustees, or otherwise can exert significant influence on the charity. Even if there is no such person, action must be taken now to ensure full compliance.

Automatic Exchange of Information: ‘grant-giving’ charities must read this

The United Kingdom’s Automatic Exchange of Information (AEOI) brings together the various regimes of reporting to HM Revenue & Customs (HMRC) with the main aim of combatting tax evasion.

Until recently, charities and not-for-profit entities were exempt from reporting through the International Tax Compliance (United States of America) Regulations 2014 (aka FATCA) regime. Based on legislation introduced in the USA to require certain non-US 'Financial Institutions’ to report details of payments to US persons to the US Internal Revenue Services (IRS), the UK regulations place an obligation on certain entities to report to HMRC in place of the IRS.

Charities and not-for-profit entities are however not exempt from the reporting requirements of:

  • the Standard for Automatic Exchange of Financial Account Information - Common Reporting Standard (known as CRS and in layman’s terms can be described as the Organisation for Economic Cooperation and Development (OECD) version of FATCA);
  • the (European Council) Directive on Administrative Cooperation in Tax Matters (known as DAC, and akin to the EU version of FATCA); and lastly
  • the Crown Dependencies and Overseas Territories AEOI agreements (known as CDOT).

Those likely to be most affected will be grant giving charities with investment portfolios. Whilst a nil return may be required under the various AEOI regimes, responsibility lies with charity trustees to meet the various reporting requirements, and failure to submit a return to HMRC could result in penalties.

There is need for charities to take certain action in this regard before the end of May 2016. We can help you avoid non-compliance and avoid the risks of penalties.