If you were asked to name the defining characteristics of a charity, you might say that they are there to meet people’s needs, that they are for the benefit of the public, or that they can get tax relief, writes Paul Ridout, partner, IBB Law.
You might also mention that the people who run them do so as volunteers. That voluntarism is a distinctive feature of the charity world. Larger charities do of course employ staff and have to pay appropriate salaries or wages to recruit and retain the right people, but the top-level decision-makers in any charity – its charity trustees – will in almost all cases be performing their duties without any remuneration.The altruistic nature of trusteeship has been protected by law for centuries, but in an increasingly complicated and demanding world, it is not surprising that there have been some relaxations of the rules along the way, as well as calls from some quarters for the rules to be overhauled or scrapped. The result is that what used to be a relatively simple rule against trustees being paid has now become a complicated and potentially confusing area of law and regulation. That means that it is not always easy for a conscientious charity trustee to know exactly what is permitted and what is likely to get them in trouble with the Charity Commission.
Payments to trustees have cropped up as the subject of many of the Commission’s inquiry reports, and seem to be one of the recurring themes of its regulatory work, alongside the related subject of conflicts of interest. This article will try to clarify the current state of play and flag up some of the points that are often overlooked by unwary charity trustees.
The starting point in charity law is that a charity trustee may not profit from their charity. The leading case on this subject (which, I am sorry to report, concerned a solicitor who was a governor of Yorkshire College as well as being its solicitor) provides the following statement of the principle:
“A person in a fiduciary position is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.”
This rule applies not only to the trustees themselves but also to people who are closely connected with them so that it would also prohibit payments to the spouse or child of a trustee, or to a company in which a trustee has a substantial stake.
Trustees are, of course, entitled to be reimbursed for expenses that they incur in carrying out their duties so that a trustee who needs to hire a childminder in order to attend a board meeting will not be out of pocket, and travel expenses are usually recoverable.Note also that important qualification, 'unless otherwise expressly provided'. There has been a long history of payments to trustees being expressly permitted. In some cases that permission is given within the constitutional documents of the charity, where it has for many years been customary for there to be a 'professional charging clause' that would allow a solicitor or accountant or other professional who is a trustee to charge their usual fees for work done for the charity. In other cases, the Charity Commission or the courts may have been asked to authorise payments to trustees and, where a good enough case has been made as to what it is in the interests of the charity for a trustee to be paid, that authority will have been given by the making of an Order under the Charities Act or, where the charity is established as a company, by means of giving consent to the amendment of the charity’s Articles of Association to permit the payment of trustees.
In most cases, the remuneration that has been allowed is not actually for the trustee’s performance of his or her duties as a charity trustee. It has usually been in relation to payments for other services, where the charity might otherwise have had to pay more for an external provider.
More recently, changes introduced in the Charities Act 2006 (and now contained in the 2011 Act) have recognised that there is often a good case for having a trustee provide services to the charity rather than having to look for someone outside the charity. Under what is now section 185 of the Charities Act 2011, a trustee can be paid for services they provide to their charity (and for goods that are provided in connection with those services) so long as certain conditions are met. They are as follows:
(a) there must be a written agreement between the charity and the trustee (or connected person) who is going to receive the payment
(b) the agreement must set out the exact or maximum amount that is to be paid
(c) the amount in question must be reasonable in relation to the service that is being provided
(d) the trustee concerned must not take part in decisions made by the trustees about the agreement
(e) the trustees must be satisfied that the payment is in the best interests of the charity
(f) the trustees must comply with the statutory duty of care in the Trustee Act 2000 when making their decisions
(g) the trustees who are either being paid or are connected to someone being paid must be a minority
(h) there must be no express prohibition of payment in the charity’s governing document.
Although the Charities Act power is helpful, it cannot be relied on as authority for an employee of the charity to serve as a trustee, and the Charity Commission is particularly alert to the possibility of trustees playing a part in creating opportunities for paid employment for themselves or for connected persons and will expect charities that are considering employing a trustee to be able to demonstrate that they have approached the issue rigorously and in a way that properly addresses the conflicts of interest that may arise.
Where a charity employs someone who is financially interdependent with a trustee (such as a spouse) then this may amount to a trustee benefit that would normally need to be expressly authorised by the Commission, who will need to be persuaded that the arrangement is in the best interests of the charity and that conflicts of interest have been properly managed.
The Act cannot authorise payments to trustees for the performance of their duties as trustees, even in situations where a chair of trustees is expected to devote large amounts of time and expertise to managing the charity.
Another risk area is where payments are made to a trustee by the charity’s subsidiary trading company, whether in the form of director’s fees or payments for services provided to the subsidiary. Because the subsidiary is itself an asset of the charity, the use of its funds to pay a trustee is just as tightly regulated as payment direct from the charity.If you have any questions about payments to trustees and how the rules might affect you, please contact our charities team:
Paul Ridout, partner – char[email protected]