Milestones: managing key events (RS6)

MMiilleessttoonneess

Managing key events in the life of a charity

CCoonntteennttss

PPaaggee

IInnttrroodduuccttiioonn 11

EExxeeccuuttiivvee ssuummmmaarryy 22

SSttaarrttiinngg uupp 66Registering as a charity 6The role of the governing document 7Incorporation 8

PPllaannnniinngg aahheeaadd 1111Extent of planning 11Accuracy of expectations 12

FFuunnddiinngg 1144Independence 14Sustainability 15Contract funding 16Grant funding 18Grant making charities 19Managing fundraising 20Raising funds through appeals 21Raising funds through trading 22

MMaannaaggiinngg cchhaannggee 2255Updating the governing document 25Developing capacity 25Employment 26

Balancing responsibilities between trustees and employees 27Acquisition and disposal of land 29Winding up 32

Alternatives to winding up 33

AAnnnneexx AA -- QQuueessttiioonnss ttoo aasskk aatt eeaacchh ssttaaggee 3355

AAnnnneexx BB -- SSuurrvveeyy ffiinnddiinnggss 4400

AAnnnneexx CC -- GGlloossssaarryy ooff tteerrmmss 4488

AAnnnneexx DD -- RReessoouurrcceess ffoorr ttrruusstteeeess 5500

AAnnnneexx EE -- BBiibblliiooggrraapphhyy 5555

AAcckknnoowwlleeddggeemmeennttss 5577

v1.1.0

IInnttrroodduuccttiioonn

There are over 180,000 registered charitiesin England and Wales. Each charity isdifferent and their diversity is one of thedefining characteristics of a vibrant civilsociety. Charities share many commonevents or milestones as they develop, growand change. The lessons learnt by onecharity can be of benefit to other charitiesby helping them to avoid common pitfallsand take advantage of best practiceexperience.

Society is increasingly turning to charitiesto provide and deliver key services andamenities, with an expectation that theseservices will be delivered in a wellorganised, effective and accountable way.This report aims to play a part insupporting new and developing charitiesby exploring, from the charity regulator’sperspective, some of the issues charities canexpect to encounter. It aims to disseminatethe information gained from charities’experience of milestone events andillustrate some best practice ways ofpreparing for and dealing with them. Tocomplement our casework experience, thereport also presents findings from a surveywhich gathers, for the first time, thefeedback of recently registered charities.1

1 The surveyed charities were all registered in 1995, either for the first time or subsequently as a charitable company.

11

EExxeeccuuttiivvee ssuummmmaarryy

2 Section 1(3) Charities Act 1993.

22

A 'milestone' is defined as a significantchange that has repercussions for manyaspects of a charity's role and activities. Itmay have implications for the charity'sgovernance arrangements, the rolesindividuals play, potential liabilities and soon. The characteristic of a milestone is thatmany changes have to be considered at thesame time and the demands on trusteesand staff increase significantly.

The report is structured around issues andphases of development rather than strictlyby milestone because many of the issuescovered by the report are relevant to morethan one milestone. Typical milestones inthe life of a charity are illustrated below,with the section of the report that dealswith the related key issues shown inbrackets.

The milestones that charities commonlyencounter as they develop are:

• establishing themselves as a formallegal entity (Starting up);

• employing staff for the first time(Managing change);

• planning future activities (Planningahead);

• encountering changes in their fundingarrangements such as getting a grant,entering into a contract to deliverservices or setting up a tradingsubsidiary (Funding);

• making changes in their governance ororganisational structure (Managingchange);

• acquiring, repairing or selling property(Managing change); and

• winding up or changing direction(Managing change).

Annex A provides a list of questions thattrustees may find useful to ask themselvesat various stages of their charity'sdevelopment.

There are many milestones in the life of anyone charity. This report concentrates onthose for which the Charity Commission'sregulatory experience adds a particularperspective and value. It is not a manual; itdoes not give detailed instructions on whatto do when each milestone is met. Instead itdraws attention to the main issues that theCharity Commission sees and of whichcharity trustees need to be aware.

Each milestone can be a springboard if wellmanaged but cause problems otherwise. Insome cases the Charity Commission willbecome involved because our authority oradvice is needed or because the charitybecomes a cause for concern which maylead to an investigation. More generally, theCommission has a statutory duty of"promoting the effective use of charitableresources".2 In our experience, resourcesare used most effectively in a charity thatmanages its transitional stages well. This ismore likely to happen in a charity whichtakes a long-term, informed perspective.

Our casework shows that charities oftenexperience milestones or transitionalevents as crisis points rather than asanticipated stages in a process. Themilestones listed above are identifiablebecause new and developing charitiesregularly meet the same events as thosebefore them without the benefit of learningfrom others' experience. Experience ispassed on through umbrella and advisorybodies but they report that charities oftendo too little, too late. All too often, charitiesseek support and advice when they hit atransitional period rather than inpreparation for it. The evidence alsosuggests that charities' response is often toimplement a short-term solution ratherthan to adapt their organisational structureto ensure that the charity has the capacityto continue to function efficiently andeffectively in its new situation.


This can be explained, in part, by a lack ofadequate planning. Only 49% of thecharities surveyed produce a yearly orlonger term plan. Charities can only dealwith milestone events successfully in thecontext of a proper risk managementstrategy. A long-term perspective andawareness of the context within which thecharity is operating are essential to a properassessment of risk. If trustees are to managecharities effectively, they need a workingplan, appropriate to their size and needs,based on an awareness of the probabledirection of their charity's development, anunderstanding of the social and economicfactors that are likely to impact upon themand an awareness of the evolving needs oftheir beneficiaries.

Charity Commission casework experienceindicates that trustees are not alwaysaccurate in their expectations for theircharity. This is confirmed by our survey:21% of charities had underestimatedexpenditure or overestimated income intheir early years; 39% had underestimatedthe time required to run the charity; and18% had underestimated the complexity ofaccounting involved.

A large number (59%) of charities with staffand/or volunteers do not have a long-termor yearly plan that ensures they are able tomeet their commitments as employers.Only 58% are confident that they are up todate in their understanding of employmentlegislation.

The conditions in which a charity operatescan have an effect on their ability to planahead. Short-term and restricted fundinghave the most significant impact in thisrespect. 69% of grant funded charitiessurveyed reported that relying on short-term grant funding had compromised theirability to plan their development.

There is scope for trustees to be more pro-active in ensuring that the organisationalcapacity of their charity keeps pace with itsgrowth. 69% of surveyed charities statedthat they had never made changes to theirmanagement or governance structure.

The Charity Commission's evidence showsthat, perhaps understandably, charitytrustees and employees tend to focus theirattention and resources more heavily ontheir beneficiaries than on theirorganisational structure. 22% of surveyedcharities reported that the daily running ofthe charity took up most of their availableresources, which does not leave muchscope for the development of internalsystems and structures. As identified by theActive Community Directorate, the long-term interests of beneficiaries are betterserved by robust organisations with thecapacity to use funds efficiently.

On the whole, charities do not currentlycommunicate or co-operate with each otherto a very high degree.3 However, theevidence suggests that smaller charities aremore likely to look up from their dailywork and take a more strategic perspectivewhen they have secure funding in place.Evidence supports the findings of theGovernment's recent Cross Cutting Review,The Role of the Voluntary Sector in PublicService Delivery.

The main message of this report is thatplanning should be central to a charity'sgovernance and, to inform the planningprocess, trustees should make use of theexperience and lessons learned by othercharities. Sound planning and a properassessment of risks by charities, of theirgovernance, finance and activities, willpromote efficiency, sustainability andgrowth in the sector.

3 See Charity Commission publication CCoollllaabboorraattiivvee WWoorrkkiinngg aanndd MMeerrggeerrss (RRSS44).

33


CChhaarriittyy CCoommmmiissssiioonn ccaasseewwoorrkk eexxppeerriieenncceeaanndd ccoonnssuullttaattiioonn wwiitthhiinn tthhee sseeccttoorr sshhoowwtthhaatt ssuucccceessssffuull cchhaarriittiieess::

• have a governing document whichmatches the reality of what they wantto do;

• have governance arrangements whichkeep pace with change;

• take stock to ensure that they have theskills and experience/knowledge forthe nature of their activities, especiallywhen getting into complex situationssuch as contract negotiations or settingup a trading subsidiary;

• confront difficult or emotionallycharged issues such as whether to windup their charity or transfer activities;

• are financially stable and have:- secured sufficient, or sufficiently

diverse, income,- properly costed their activities and

contained their expenditure, and- paid sufficient attention to

financial planning and riskmanagement.

Research for this report involved detailedanalysis of our bank of casework and otherdata held within the Charity Commission,a survey of all charities registered in 1995(either for the first time or subsequently asa charitable company) and consultationwith charities, umbrella and advisorybodies.

RReeccoommmmeennddaattiioonnss

Below are some recommendations whichwe believe will help charities anticipateand successfully deal with the milestonesin their development.

• As good practice, trustees should:- develop a business plan and risk

management strategy, howeversimple, to establish the projectedfuture activities and financial andorganisational situation of thecharity and determine how thesewill be managed.

• As part of that process, trustees should:- ensure that they fully understand

their governing document, refer toit on a regular basis and act withinits terms;

- ensure that the governingdocument they adopt isappropriate, comprehensive andcontains provision for amendmentto meet the evolving needs of theircharity;

- be proactive in sharing experience,use all available sources ofinformation and network withother charities to develop realisticprojections of income, expenditureand time commitment;

- weigh up both the potentialbenefits and costs of incorporationwhen considering whether toregister as a charitable company;

- maintain a realistic understandingof the extent of their liability forany losses incurred by theircharity;

- scrutinise the conditions attachedto grant funding and contracts toensure that the independence oftheir charity is not compromised;

- ensure that the terms of anycontract they enter into safeguardthe interests of their charity and itsusers;

- ensure that fundraising is activelymanaged, even when it iscontracted out, and that it complieswith all relevant legalrequirements;

44

- ensure that their own roles andthose of the charity's managers andemployees are clearly defined sothat all parties understand thescope of their responsibilities;

- seek the appropriate level of legaladvice before entering into aproperty transaction;

- give regular consideration towhether or not their charity has aviable future and a good reason tocontinue.

• Grant makers should seek to ensurethat any administrative and monitoringrequirements accompanying fundingare proportionate to the size of thegrant.

• Umbrella and professional bodiesshould:- encourage charities to use model

and standard governing documentswhich contain the provisions thatthey are likely to need;

- provide guidance on trustees'personal liability and on the extentto which incorporation can providesome protection against thisliability.

• The Active Community Directorate, aspart of its strategy for encouragingcapacity building, should promotebusiness planning and predictive skillsby charities.

The Charity Commission produces anextensive range of guidance that sets outour position and the main points ofconsideration for charities in relation toeach issue. Where such guidance isavailable, it is sign-posted in the report. TheCharity Commission will incorporate theexperience gained from this research intoits wider range of publications.


55

SSttaarrttiinngg uupp

One of the early decisions for anorganisation planning to register as acharity is to choose an appropriate legalform and a suitable governing document.Another is to draw up a plan outlining thefirst few years' activities and anticipatedincome and expenditure. The CharityCommission's regulatory experienceindicates that charities which get it 'right' atregistration tend to run into fewerdifficulties as they grow or change.

RReeggiisstteerriinngg aass aa cchhaarriittyy

Registering as a charity is a key event forany organisation because of theopportunities it presents. Charities with anincome greater than £1,000 per annum arecurrently legally required to register with

the Charity Commission.4 A previoussurvey undertaken by the CharityCommission shows that the main reasonsfor which charities register, other than thelegal requirement, are to secure funding, toobtain tax relief and to achieve widerrecognition. Registration is also seen asconferring public confidence in the charity,its trustees, staff and volunteers.5

"Before [we were registered as a charity],when we went anywhere for donations,the first thing they would ask is whetheror not we were a charity. When I said nothey said sorry, but they couldn't helpus.”

Charity representative

TThhiiss ccaassee iilllluussttrraatteess tthhee ppoossiittiivvee iimmppaacctt tthhaatt rreeggiissttrraattiioonn aass aa cchhaarriittyy ccaann hhaavvee oonn aann oorrggaanniissaattiioonn..

A village hall was able to apply for grant funding after raising enough funds to become registeredas a charity.

Charitable status allowed the hall to apply for a grant that would otherwise have beeninaccessible to it. The grant was awarded, enabling the hall to modernise its facilities and increasethe range of events that it is able to run.

The charity's new charitable status gained press attention which raised its profile and publicisedits events and facilities.

4 There are some exceptions to this, see EExxeemmpptt CChhaarriittiieess (CCCC2233). The Strategy Unit review makes the recommendationthat the proposed Charities Bill include a raised registration threshold of £5000 but allow for voluntary registrationbelow that figure, and that the Bill should also include changes to the rules regarding excepted and exempt charities.See Charities and Not-for-Profits: A Modern Legal Framework - The Government’s response to ‘Private Action, PublicBenefit’ on the Home Office website.5 Findings from a Charity Commission review of its charitable status function (2002).

66

TThhee rroollee ooff tthhee ggoovveerrnniinngg ddooccuummeenntt

Registering a charity under a suitable,comprehensive governing document helps

The governing document is a legaldocument containing a charity's objects(what the charity is set up to do) andpowers (how it will achieve those objects).If a charity acts outside the scope of itsobjects and powers, that will constitute abreach of trust and could have seriousconsequences for both the trustees and thecharity.

Recognition of the importance of thegoverning document at the outsetestablishes a culture of best practice in

terms of trustees' attitude toward it; thegoverning document should play a centralrole in all future governance decisions.However, Charity Commission caseworkand findings from our review visitsprogramme indicate that a large number oftrustees do not make reference to theirgoverning document when directing theactivity of their charity. Consequently,charities often 'outgrow' their governingdocument as they evolve.


TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn aa cchhaarriittyy''ss ggoovveerrnniinngg ddooccuummeenntt ddooeess nnoott mmaakkeepprroovviissiioonn ffoorr aaccttiioonnss iitt mmiigghhtt hhaavvee ttoo ttaakkee..

A charity ran into difficulties when it discovered that its governing document did not contain themeans by which it could remove trustees whose behaviour was damaging the charity.

A dispute developed between some of the trustees and the management body of the charity,during which the former prevented the managers and chief executive from carrying out theirwork. The other trustees contacted the Charity Commission to request a copy of the charity'sgoverning document in order to determine what action to take. It did not contain a clause statingthe conditions under which a trustee could be removed from office. The Charity Commissionbecame involved when allegations of misappropriation of funds were made. The CharityCommission held several meetings to establish what had happened to the funds in question andtried to effect a compromise between the parties.

A special meeting was eventually held to insert the necessary clause in the charity's governingdocument. This was not an easy process because all the trustees needed to be present but theywere in dispute. The dispute was finally resolved by the removal of those trustees that had beencausing the disruption and the charity was able to continue its work.

The trustees and management body of the charity were clearly not aware of the full details oftheir governing document and, when drafting it, had not ensured that it contained all clauses thatmight prove necessary. The dispute and the protracted arrangements required to remove thedisruptive trustees took up time and resources that should have been directed toward meetingthe charity's purposes.

77

to avoid the potential stumbling points thatcharities can encounter as they develop.

In addition, of the charities surveyed for anearlier regulatory report, TTrruusstteeeeRReeccrruuiittmmeenntt,, SSeelleeccttiioonn aanndd IInndduuccttiioonn (RRSS11)some 45% did not provide new trusteeswith a copy of the charity's governingdocument. Trustees who do not direct theactivities of their charity with reference toits governing document are leavingthemselves and their charity open to risk.

• Wherever possible, umbrella bodiesshould encourage charities to usemodel and standard governingdocuments which contain theprovisions that they are likely to need.

• Trustees should ensure that they fullyunderstand their governing document,refer to it on a regular basis and actwithin its terms.

• Trustees should ensure that thegoverning document they adopt isappropriate, comprehensive andcontains provision for amendment tomeet the evolving needs of theircharity.


RReellaatteedd CChhaarriittyy CCoommmmiissssiioonn GGuuiiddaannccee::

RReeggiisstteerriinngg aass aa CChhaarriittyy (CCCC2211) provides information and guidelines with which foundingtrustees ought to familiarise themselves before beginning an application for charitable status.

CChhoooossiinngg aanndd PPrreeppaarriinngg aa GGoovveerrnniinngg DDooccuummeenntt (CCCC2222) gives full details of Charity Commissionrecommendations on what trustees should consider in relation to their governing document,including a checklist of standard provisions which we would normally expect to see included. Italso contains details of what it means to be a charitable company and the circumstances in whichincorporation might be appropriate.

The Charity Commission provides model governing documents which can be adapted by mostcharities. A list of other organisations for which a standard governing document has been agreedcan be found on the Charity Commission website.

IInnccoorrppoorraattiioonn

Incorporation (ie establishing a company)is one of the constitutional forms availableto a charity. Our survey confirmedanecdotal evidence of a growing trendtoward incorporation among charities. Intotal, 14% of charities surveyed for thisreport are registered as charitablecompanies but that figure rises to 27% forsurveyed charities established since 1995.

The trend toward incorporation appears tobe largely based on fears about trusteeliability and the risks associated with acharity's income sources and activities. 60%of surveyed charities that had incorporatedhad done so to protect their current trusteesand 22% had incorporated to help with therecruitment of trustees. 33% incorporatedbecause they employed staff and 26%because they were working withvulnerable people. 59% of surveyed

88

charities with a main income fromcontracts, and 36% with a main incomefrom a trading subsidiary, wereincorporated.

76% of charitable companies surveyed havea yearly or longer term plan in place,compared to 47% of unincorporatedcharities, which suggests that incorporationcan bring a more professional approach.Many surveyed charities noted this as areason for incorporating.

49% of incorporated charities had done soon advice from a solicitor and 30% onadvice from an umbrella or advisory body.However, there is evidence to indicate thattrustees are not always confident thatincorporation is the best option for theircharity. Only 34% of the incorporatedcharities surveyed had carried out anassessment of whether incorporation wasthe most appropriate legal form. 15% ofsurveyed charities that had incorporatedstated that they did not know whether ithas been the right choice. 19% ofunincorporated charities did not knowwhether it would be suitable for them.

Incorporating can waste resources if itresults in charities operating within astructure that is overly complex. There isalso an opportunity cost involved becausethe process of incorporation can disrupt acharity's work. On the other hand, failing toincorporate when it is appropriate to do socan be damaging to a charity and leave itstrustees open to unnecessary risk.

Our experience and research show a highdegree of misconception among trusteesabout what trusteeship entails, the level ofrisk that trustees face and the extent towhich incorporation will mitigate that risk.Some survey respondents reported that asignificant event for their charity had beenlosing trustees who had found theresponsibility too great.


"[We] found out that we were thetrustees of the school."

Survey response to question: "Pleaseprovide details of the [unexpected]situation."

"I'm not a trustee, I'm on the committee."

Charity trustee.

The creation of a corporate identity givestrustees a certain amount of protectionfrom personal liability when their charity isengaged in high risk activities such asentering into contracts, employing staff orworking with vulnerable people. But, iftrustees fail to act with due diligence, thecorporate identity of the charity may notprotect them from personal liability forcosts incurred. The directors of a charitablecompany have certain fiduciary duties tothe company and may be personally liablefor any breach in those duties.6

6 The governing body of a company are effectively the trustees of the charity as defined by section 97 of the CharitiesAct 1993 as ‘the persons having the general control and management of the administration of a charity’.

99


"Being unincorporated keeps trustees ontheir toes."

Chief executive of an incorporatedcharity.

Trustees should not overestimate the levelof risk that their position brings. Equally,they should not become complacent whena corporate identity has been established.Many of the advisory bodies consulted inresearch for this report expressed concernthat charities perceive incorporation tooffer more protection than it actually doesand that charities are often pressured intoincorporation by the national body ofwhich they are a member or by the need toreassure existing or potential trustees.

Trustees should consider carefully theadvantages and disadvantages ofincorporating as a company and may needto take professional advice. Smallercharities may find that incorporation is amore significant milestone than it is forlarger charities, which find it easier toabsorb the costs associated with dualregistration, financial administration,winding up the unincorporated charity and

so on. The additional work and costsinvolved in incorporation should befactored in to charities' plans.

Part VII of the Charities Act 1993 allows forthe incorporation of an existing trusteebody. The trustee body can be incorporatedwithout having to go through the processof winding up the charity. This may bemore suitable for some charities andtrustees should seek advice. The liability ofthe individual trustees is unaffected by thisform of incorporation.

• Trustees should weigh up both thepotential benefits and costs ofincorporation when considering whetherto register as a charitable company.

• Trustees should maintain a realisticunderstanding of the extent of theirliability for any losses incurred by theircharity.

• Umbrella and professional bodiesshould, as good practice, provideguidance on trustees' personal liabilityand on the extent to whichincorporation can provide someprotection against this liability.


TThhee EEsssseennttiiaall TTrruusstteeee:: WWhhaatt yyoouu nneeeedd ttoo kknnooww (CCCC33) outlines the role of trustees.

TTrruusstteeee RReeccrruuiittmmeenntt,, SSeelleeccttiioonn aanndd IInndduuccttiioonn (RRSS11) provides information on best practice inrecruiting new trustees.

IInnccoorrppoorraattiioonn ooff CChhaarriittyy TTrruusstteeeess (CCCC4433) provides details of how to incorporate the trustee body.See also operational guidance CCoorrppoorraattee TTrruusstteeeess (OOGG3388) available on the Charity Commissionwebsite.

TTrruusstteeee IInnddeemmnniittyy IInnssuurraannccee (OOGG110000) sets out our policy on trustees purchasing insurance whichprotects them against the risk of personal liability arising from certain breaches of trust.

1100

PPllaannnniinngg aahheeaadd

EExxtteenntt ooff ppllaannnniinngg

"In the beginning I had no fixed idea ofwhat I was doing."

Charity founder.

Our casework experience shows thatcharities which plan for their future aremore likely to use their resourceseffectively than those which do not. Lessthan half (49%) of surveyed charities haveeither a long-term or a yearly plan directingtheir activities. It may be entirelyappropriate for some charities to haveminimal planning but many of thesurveyed charities had no long-term plandespite being involved in activities thatwarrant a strategic perspective.

Risk management is an important elementof trustees' responsibility. Charities canonly deal with milestone eventssuccessfully in the context of a proper riskmanagement strategy. A long-termperspective and awareness of the contextwithin which the charity is operating areessential to trustees' assessment of risk.

The survey showed that charities with ayearly or longer term plan are consistentlymore likely to be accurate in theirexpectations of income, expenditure, timecommitment and legislative requirementsthan charities without.

LLeevveell ooff ppllaannnniinngg uunnddeerrttaakkeenn bbyy rreessppoonnddiinngg cchhaarriittiieess

19%

10%

24%3%

30%14%

We plan 1 year at a time (30%)

We have a yearly and a long-term plan (eg 3-5 years) in place (19%)

We make plans on an ad hoc basis (14%)

We respond to events as they occur (10%)

We see no need for a strategic plan (24%)

Other (3%)

1111


AAccccuurraaccyy ooff eexxppeeccttaattiioonnss

• only 1 in 4 had an actual year endincome within 20% of their estimate;

• 19% had an actual year end income ofless than 80% of their estimate;

• 11% of charities had an actual incomeof 300-500% of their estimate.7

As income or expenditure reach variousthresholds, charities are required to prepareand submit increasingly detailed accountsand reports. The requirement to haveaccounts independently verified alsobecomes more comprehensive as charitiesreach higher income/expenditurethresholds. Charities planning a substantialincrease in income through, for example, agrant application often fail to take intoconsideration the additional resources thatmay have to be devoted to their accounts asthey cross these thresholds.

Charities can find it difficult to predictfuture activities and finances. Survey andCharity Commission data show thatcharities' expectations are not alwaysaccurate, especially in newer charities. Asignificant proportion of surveyed charitieshad underestimated:

• the time required to run the charity(39%);

• the time required from trustees (25%);and

• the complexity of accounting involved(18%).

21% of surveyed charities had eitherunderestimated expenditure oroverestimated income during their earlyyears. In addition, of the charities thatregistered with the Charity Commission in2002 with an estimated first year income ontheir application form:

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn aa cchhaarriittyy iiss eessttaabblliisshheedd wwiitthh uunnrreeaalliissttiicc eexxppeeccttaattiioonnss..

A charity established with a large amount of statutory grant funding to run a public attractionhad difficulties almost immediately because the charity's estimated visitor numbers provedextremely ambitious. The charity received further funding to broaden its activities in an attemptto attract greater public interest but this was unsuccessful. A Review Visit to the charity revealedthat the charity was well-run. Its problems were entirely due to the fact that it was founded withthe expectation of significantly more income than it actually received. The nature of the buildingand location of the charity meant that efforts to revive its fortunes also failed and the charity wasforced to close down and sell its property to pay off its creditors.

The grant making bodies in this case were extremely 'hands off', even when approached by thetrustees of the charity for advice. Money was wasted because the charity and the grant makersdid not take sufficient care when setting up the charity to ensure that their plans were realistic.

7 Newly established organisations that have not been operational long enough to have actual income figures arerequired to provide an estimate on their application form.

1122


Casework experience shows that charitiesare more likely to be successful if theirfounders have considered all of theirexpectations and done some research toensure that they are realistic.

Networking with other charities and usingprofessional and advisory bodies can helptrustees to build a realistic picture of howtheir charity can expect to change. Allcharities' accounts and governingdocuments are available from the CharityCommission. Looking at those of similarcharities can be a useful exercise forfounders who want to gain an accurateperspective and prepare a governingdocument suitable to their needs.

Some of the problems charities experiencewill be beyond their control but others areavoidable with minimal forward planning.Most of the 'significant events' that charitiesdescribed in the survey related to servicesthey had been able to provide to their

beneficiaries. This focus on outputs, whileunderstandable, needs to be balanced by acorresponding internal focus and long-term perspective if resources are to beapplied to the greatest public benefit.

• Trustees should use all availablesources of information and networkwith other charities to develop realisticprojections of income, expenditure andtime commitment.

• Trustees of all charities should developa business plan, however simple, toestablish the projected future activitiesand financial and organisationalsituation of the charity.

• The Active Community Directorate, aspart of its strategy for encouragingcapacity building, should promotebusiness planning and predictive skillsby charities.


TThhee RReeggiisstteerr ooff CChhaarriittiieess:: IInnffoorrmmaattiioonn aanndd SSeerrvviicceess AAvvaaiillaabbllee (CCCC4455) provides details of theinformation that the Charity Commission makes available to the public.

CChhaarriittiieess aanndd RRiisskk MMaannaaggeemmeenntt, available on the Charity Commission website onwww.charitycommission.gov.uk , provides guidance designed to help trustees set a frameworkwhich allows them to: identify the major risks that apply to their charity; make decisions abouthow to respond to the risks they face; and make an appropriate statement regarding riskmanagement in the Annual Report.

1133

FFuunnddiinngg

The source of a charity's income isfundamental to the way it operates becauseit determines the amount of time andresources that will be devoted to managingfunding streams and the extent to which acharity can be pro-active in driving thedirection of its activities. The termsattached to grant and contract funding inparticular can drive a charity in certaindirections.

The most common sources of incomeamong the charities surveyed were:

• donors (56%);• members (39%); and• grants (37%).

There are many other means by whichcharities can fund their activities - throughfees, rent, borrowing, sponsorship,investment. This report focuses mainly ongrants, contracts, trading and propertybecause these are the funding methods inwhich the Charity Commission is mostlikely to have any regulatory involvement.

IInnddeeppeennddeennccee

of the grant funded charities surveyed forthis report said that they had directed theircharity's activities in a certain way in orderto be eligible for funding and 12% said thattheir independence had been compromisedby the terms of a grant.

69% of grant funded charities surveyedindicated that dependence on short-termfunding had compromised their ability toplan as thoroughly as they would like. 15%said that they had had difficultyresponding to external changes incircumstances because of grants beingtightly allocated or unavailable for whatthey wanted to do. 12% of surveyedcharities reported that they had had grantapplications turned down because theirreserves level was 'too high'.

It is good practice to diversify incomestreams in order to limit the risks posed byone source drying up and to boostsustainability and independence. Thesurvey showed a high degree of diversityin the income streams for most charities.

Charities can become over focused ongetting grant funding and fail to ensurethat it fits with their objects or their plans.There is a balance to be struck. Maximisinga charity's ability to attract funding is vitalbut this needs to fit with the charity's overallplans and be consistent with the terms ofthe charity's governing document (see TThheerroollee ooff tthhee ggoovveerrnniinngg ddooccuummeenntt on page 7).

Independence of governance is ofparamount importance for charities. Over-dependence on restricted grant or contractfunding can be limiting for charitiesbecause, under trust law, charities have aduty to apply restricted funds in line withthe reason for which they were given. 22%

"We have to be a chameleon andconstantly change our colours to getfunding."

A charity representative.

"Trying to adhere to everyone else'srequirements is moving us away fromwhat we were set up to do."

Chief executive of a grant funded charity.

1144

FFuunnddiinngg

Grant makers sometimes seek a charge oversome or all of a charity's assets in return forgrant funding. In these cases, the charitymust get Charity Commission authority togo ahead with the agreement.8 Charitiesshould ensure that the extent of the agreedcharge is proportionate to the size of thegrant and that the terms of the agreementdo not put the charity at undue risk.

• Trustees should scrutinise theconditions attached to grant fundingand contracts to ensure that theindependence of their charity is notcompromised.


TThhee IInnddeeppeennddeennccee ooff CChhaarriittiieess ffrroomm tthhee SSttaattee (RRRR77) and LLooccaall AAuutthhoorriittiieess aanndd TTrruusstteeeess (OOGG5566)explore independence in more detail.

CChhaarriittyy RReesseerrvveess (RRSS33) examines in more detail the issues surrounding reserves and restrictedfunding.

TThhiiss ccaassee iilllluussttrraatteess hhooww aa cchhaarriittyy oovveerrccaammee iinniittiiaall pprroobblleemmss rreessuullttiinngg ffrroomm ggrraanntt ddeeppeennddeennccee..

A charity that was founded and sustained through grant funding had been slowly expandingand enhancing its services in response to increased demand. The building that the charity leasedcame up for sale and the trustees felt that owning the property would be a boost to theirindependence. However, the bank would not lend them the money because of the short-termnature of their funding and their related inability to provide a long-term business plan.

The charity secured a donation of consultancy advice which helped them to take a strategic viewand develop alternative funding methods such as charging fees for some of their services. On thebasis of the new strategic plan, the charity was able to raise match funding to gain a grant to buypremises. Ownership of the property has allowed the charity to develop its services with greaterindependence. The charity still relies on grant funding for many of its projects but has diversifiedits income sufficiently to allow the trustees and chief executive to be selective about the fundingthey take and to plan and control the way in which the charity moves forward.

SSuussttaaiinnaabbiilliittyy

A sufficient level of planning is importantto ensure that charitable resources are notwasted in running a charity that has noviable future.

Consultants and feasibility studies can helpa charity to explore new ways of fundingtheir charity and also help them to develop

their business strategy and internalsystems, structures and skills base.However, only 8% of surveyed charitieshad requested funding for eitherconsultancy fees or feasibility studies.

8 Section 38(1) Charities Act 1993.

1155

FFuunnddiinngg

9 The Charity Law Association’s paper ‘Charities and Local Authority Contracts’, available via their website, highlightssome of the issues encountered in forming and maintaining contracts and shows how charity law affects a charity’sability to make contracts.10 HM Treasury’s Cross Cutting Review, The Role of the Voluntary and Community Sector in Service Delivery,promises full implementation of the Compact and makes several recommendations for improvements in the way thegovernment interacts with the voluntary sector, including a move away from one-year and end-loaded contracts.

CCoonnttrraacctt ffuunnddiinngg

Charities are increasingly entering intocontracts with public bodies to provideservices on their behalf and this trend lookslikely to continue. 10% of surveyedcharities reported that they are currentlycontract funded.9

Whilst change is underway following theoutcome of the Treasury's Cross CuttingReview, short-term contracts and deficitfunding are currently still the norms thatcontract funded charities can expect.10

Deficit funding is awarded subject to thecharity demonstrating that it has achievedcertain pre-agreed outcomes. The balanceof risk is weighted heavily toward thecharity because it must spend on a projectbefore receiving funding for it. Only a verysmall number of surveyed charities hadhad deficit funding withheld because offailure to meet outcomes. Nevertheless, it isa potential problem of which trusteesshould be aware.

Smaller charities are more adverselyaffected by outcome based funding. Theylack the resources to undertakesophisticated analysis of the impact of theirwork. They are also less able to absorb theadditional overheads that grants bring butdo not cover.

10% of grant or contract funded charitiessurveyed reported that they hadexperienced problems meeting the costs ofdelivering deficit funded projects. Somecharities use grant income received forother projects to cover the cash flow fordeficit funded projects. Trustees should becareful about using restricted funding inthis way in case the accounts do notbalance, for example where outcomes arenot met and funding is withheld. In thateventuality they could be in breach of trust.

Trustees should assess the risks involved inaccepting a deficit funding agreement andmake sure that the terms of the contract areclear about factors such as the conditionson which the funding will be given and howachievement of outcomes will be determined.They should also ensure that they have thecapability to measure their outcomes. Wheretrustees are unhappy about the terms ofany contract they should try to re-negotiateand, if the situation does not improve,reject the funding wherever possible.

Charity Commission cases includesituations in which charities have got intodifficulties because they either had noformal contract or their contract did notcover them for all eventualities.

1166

FFuunnddiinngg

A local government authority can decidenot to renew a contract and charities areoften affected by the priorities of their localauthority. The Charity Commission hasseen many cases in which charities havestruggled or been forced to wind upbecause of funding being cut at shortnotice.

Delay in releasing funding is anotherpotential problem faced by charitiescontracted to provide public services.Many of the charities consulted during ourresearch stated that delayed funding had

caused them cash flow problems. TheCharity Commission is aware of cases inwhich funds have been paid so late thatthey have arrived close to the deadline bywhich they have to be applied. Trustees arethen forced to rush their spendingdecisions or face losing the money. Thatdoes not represent sufficiently independentgovernance.

• Trustees should ensure that the termsof any contract they enter intosafeguard the interests of their charityand its users.

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn ttrruusstteeeess ddoo nnoott eennssuurree tthhaatt tthheeyy aarree ssuuffffiicciieennttllyyccoovveerreedd bbyy tthhee tteerrmmss ooff aa ccoonnttrraacctt..

A number of charities came to the attention of the Charity Commission because they had run intodifficulties when their local authority suddenly pulled its funding. Some of the charitiesemployed staff and were obliged to pay redundancy. There was no agreement in the charities'contracts with the local authority to cover such costs and many of the charities had no funds inreserve due to the restricted nature of their funding up to that point. These charities were forcedto wind up their activities as a consequence.

The trustees of these charities put charitable funds at risk by entering into contracts that did notprotect their long-term interests.


CChhaarriittiieess aanndd PPuubblliicc SSeerrvviiccee DDeelliivveerryy:: AAnn iinnttrroodduuccttiioonn aanndd oovveerrvviieeww (CCCC3377) gives advice andguidance to trustees and staff of charities thinking of entering into contracts with public bodiesto provide services in return for payment.

1177

FFuunnddiinngg

GGrraanntt ffuunnddiinngg

A significant number of charities dependupon grant funding for some or all of theirincome. 41% of surveyed charities hadreceived grant funding and 25% were inreceipt of grant funding at the time of thesurvey. For 15% of respondents, grantfunding was their main source of income.

Grant funded charities face similar issues tocontract funded charities. Receipt of a grantcan be a significant positive milestone for acharity. However, the restricted nature ofmost grant funding can compromisetrustees' independence of governance andrestrict their ability to develop as theywould like.

The survey showed that the problemscharities experienced in relation to grantsincluded having difficulty securing corecosts (34%), charities' requirements notbeing reflected in funders' priorities (15%)and funders putting an excessiveadministrative burden on charities (40%).

Whilst charities exist in a challengingfunding environment, they should not seekgrants that are rigidly prescriptive abouthow income is to be applied, especially ifthey do not have recourse to other sourcesof income. The Charity Commission seescases where charities experience difficultiesbecause their funding cannot be channelledinto related areas not specified in theirgrant application. For example, some grantmakers give funding for a salary whileothers will fund a post. In the lattersituation the money can be used to fund re-recruitment costs if the original staffmember moves on, whereas this is notpossible if the grant maker specifies thatthe funding is for salary costs only.

Charity Commission casework experienceshows that charities which make well-informed grant applications are better ableto manage the funding they receive. Thecases in which charities have run intodifficulties often involve funding forprojects that are too complex for the charityto comfortably deliver. Again, many ofthese grant-related problems can beattributed to inadequate planning that failsto take account of such things as theresources required to deliver the projectand cover its administration.

"During the first few years, managingour grants took up about a third of mytime."

Chief executive of a rapidly growingcharity.

1188

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn aa cchhaarriittyy mmaakkeess aa ggrraanntt aapppplliiccaattiioonn wwiitthhoouutt ssuuffffiicciieennttpprreeppaarraattiioonn..

A dispute between trustees of a village hall came to the attention of the Charity Commissionwhen one group made a complaint about the other. The dispute centred upon an application forgrant funding to build a new hall which one group did not want. A complicating factor in thedispute was ambiguity in the governing document which was unclear about various issuesincluding who the trustees were.

Charity Commission staff held meetings with the disputing groups and were able to effect acompromise and prevent the matter from going to court. A Scheme of the Commission wasproduced which regularised the issue of trusteeship and other areas of confusion.

The trustees who made the grant application did not have the agreement of the community as awhole or a clear understanding of the legal basis of their charity and their role within it. It wasalmost inevitable that this would lead to a dispute that could not be resolved by reference to theirgoverning document.

TThhiiss ccaassee iilllluussttrraatteess tthhee nneeeedd ffoorr ttrruusstteeeess ooff ggrraanntt mmaakkiinngg cchhaarriittiieess ttoo aappppllyy tthheeiirr ffuunnddss iinn kkeeeeppiinnggwwiitthh tthheeiirr ggoovveerrnniinngg ddooccuummeenntt aanndd nnoott tthheeiirr ppeerrssoonnaall pprreeffeerreennccee..

A grant making charity had a level of reserves that triggered the Charity Commission'smonitoring system. The trustees of the charity said that they couldn't find anywhere to spend themoney. On examining the charity's governing document it was discovered that the charity'sobjects referred to a much larger geographical area than the trustees had been considering. It wasmerely their personal desire to limit the area of benefit that was causing the money toaccumulate. The Charity Commission insisted that the charity spend its money in keeping withthe area of benefit detailed in its governing document. Monitoring shows that the charity hasnow applied its income appropriately.

FFuunnddiinngg

GGrraanntt mmaakkiinngg cchhaarriittiieess

Grant making charities are subject to thesame strictures as all charities and mustensure that their grant making policy fulfilstheir objects. A grant making charityshould ensure, to the best of its ability, thatits funds are applied in the most effectivemanner in line with the terms of its

governing document. As part of that duty,administration, both for the grant makerand the funded charities, should beproportional to the size of the grant.Equally, the personal preferences oftrustees must not dictate where grants areawarded.

1199

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn ffuunnddrraaiissiinngg iiss nnoott pprrooppeerrllyy mmaannaaggeedd

A charity began an appeal to fund the establishment of a clinic at a local hospital. During routinescrutiny of the charity's accounts, the Charity Commission became concerned about apparentlyhigh fundraising costs. A formal inquiry was opened.

The appeal initially received corporate funding and significant income from organisedfundraising events. However, changing circumstances meant that corporate support dried upand organised fundraising events became very labour intensive, generating high income but lowprofit.

The appeal continued despite concerns raised about its long-term future and without a formalbusiness plan in place. A new Appeals Director was recruited but at that time a number oftrustees were coming to the end of their 3-year terms of office. As a result, the Appeals Directorwas not closely monitored for the first few months of his employment.

The fundraising objectives became unclear and working practices were in need of improvement.The new trustees dispensed with the services of the Appeals Director.

The clinic has been built and handed over to the local NHS Trust, the appeal is now closed. Thepresent trustee body has adopted a more hands-on approach to the day to day running of thecharity.

FFuunnddiinngg

MMaannaaggiinngg ffuunnddrraaiissiinngg

Fundraising can be legally complex andtime consuming. It requires activemanagement and should form an integralpart of a charity's strategic plan.

The Charity Commission usually onlybecomes actively involved in charities'fundraising practices when there is cause tobelieve that funds are being lost or wastedbecause of poor management or dishonestactivity. The Charity Commission also has arole to play in promoting the effective use ofcharitable resources, including fundraising.11

Fundraising is one of the highest publicprofile activities that a charity engages in.Managed well, it can be a major source of

income. Managed badly, it can underminethe public's confidence in the integrity ofcharity. Fundraising features highly in theinquiries and evaluations that the CharityCommission carries out (15%).12 Theseoften centre on the four fundamentalelements of fundraising - legality,transparency, accountability and financialcontrols.

The Charity Commission will intervene ifwe have reason to believe that a charity'sfundraising practices are damaging to theirbeneficiaries, stakeholders or the widerintegrity of charities, or where trustees arein breach of legislation.

11 Section 1(3) Charities Act 1993.12 The Charity Commission can open a formal inquiry into a charity under Section 8 of the Charities Act 1993. Details ofthese cases are published on our website. Evaluation cases are opened when there is cause for concern and todetermine whether a formal inquiry is appropriate.

2200

FFuunnddiinngg

Trustees should familiarise themselveswith the specific legal requirementsrelevant to the form of fundraising they areplanning to undertake and ensure that theycomply fully with them. The Institute ofFundraising provides comprehensiveadvice on legal requirements and bestpractice considerations relating to differenttypes of fundraising ventures.

• Trustees should ensure thatfundraising is actively managed, evenwhen it is contracted out, and that itcomplies with all relevant legalrequirements.


CChhaarriittiieess aanndd FFuunnddrraaiissiinngg (CCCC2200) sets out a number of factors that should be considered in theplanning process for fundraising.

CChhaarriittiieess aanndd CCoommmmeerrcciiaall PPaarrttnneerrss (RRSS22) provides a detailed examination of the issues involvedin outsourcing fundraising.

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn aa cchhaarriittyy aappppeeaall iiss sseett uupp wwiitthhoouutt pprroovviissiioonn ffoorr hhoowwttoo aappppllyy ssuurrpplluuss ffuunnddss..

A charity that was set up to help families in need after a large disaster was unable to distributeall of the funds raised. Charitable funds cannot be used to give individuals benefits above theirneeds. Response to the appeal was greater than anticipated and donations far exceeded themoney required to meet the needs of the specified beneficiaries. The charity had not madeprovision for what it would do with excess funds. The result was bad feeling among stakeholdersand trustees couldn't apply the funds as they had intended.

If greater care had been taken over the terms in which the appeal was originally set up, thecharity could have simply put the excess funds to use for wider purposes within the communityand the families would have been saved a great deal of distress.

RRaaiissiinngg ffuunnddss tthhrroouugghh aappppeeaallss

Most appeals with a specified target raiseeither more or less than anticipated, andpredicting anticipated funds is difficult.However, this is only problematic iftrustees have not made provision for whatthey should do in this eventuality and havenot included details in the appeal literature.Where funds are raised through a public

appeal, trustees of charities that exceed orfall short of a specified target must eithertry to return the money or seek permissionto apply it 'cy-près', that is to purposes asnear as possible to the original, unless theappeal specified what would happen toany unused money.

2211

FFuunnddiinngg


DDiissaasstteerr AAppppeeaallss:: AAttttoorrnneeyy GGeenneerraall''ss GGuuiiddeelliinneess (CCCC4400) sets out guidelines to help peoplesetting up an appeal to avoid the problems commonly associated with them.

Charities are often established with aspecific target in mind - to build a communitycentre, for example - and reaching thattarget is a definite milestone. A well runcharity will have clear plans to determinewhat their charity will do once its target hasbeen reached and will ensure that theircharity's governing document makesprovision for these planned activities.

• Trustees should ensure that the termsof an appeal include details of howincome will be applied if it exceeds orfalls short of the target.

RRaaiissiinngg ffuunnddss tthhrroouugghh ttrraaddiinngg

Setting up a trading subsidiary is a keyevent for many charities because itrepresents a new source of income andinvolves significant structural changeswithin the organisation.

Two casework examples follow whichillustrate common issues associated withcharities and trading:

• the relationship between primarypurpose activities, ancillary tradingand trading in its own right; and

• the financial viability of tradingsubsidiaries.

Charities can engage in two main forms oftrading. One is 'primary purpose' trading -trade that is necessary to fulfil the charity'sreason for existence. The other form,

'ancillary trading', is that which is not theprimary purpose of the charity, for examplea café within a charitable museum.

Income from trading purely forfundraising, such as a charity shop, is notsubject to the charity tax relief that appliesto other charitable income, and should beplaced in a non-charitable tradingsubsidiary so that it is clearly separated.This includes splitting the time of any staffemployed by the charity who alsoundertake work for the trading subsidiary.The Charity Commission can offerassistance to ensure that the paperworkthat accompanies this process is correct.The Inland Revenue's publication IR2001offers an excellent explanation of tax-exempt trading.

2222

FFuunnddiinngg

TThhiiss ccaassee ddeemmoonnssttrraatteess tthhee nneeeedd ffoorr ttrruusstteeeess ttoo ttaakkee ccaarree wwhheenn ttrraaddiinngg,, eennssuurree tthhaatt tthheeiirr cchhaarriittyy''ssaaccttiivviittiieess aarree aauutthhoorriisseedd bbyy iittss ggoovveerrnniinngg ddooccuummeenntt,, aanndd sseeeekk aaddvviiccee ffrroomm tthhee CChhaarriittyyCCoommmmiissssiioonn wwhheerree tthheerree iiss aannyy ddoouubbtt..

A charity had a café on its premises that was correctly classed as ancillary trading. This waspermitted by its governing document and there was no need to set up a trading subsidiary.

The charity then began to rent out the café for events that occurred when the venue was closedto the general public. The charity did not set up a trading subsidiary to facilitate this change andtherefore did not pay the correct tax.

The trustees of the charity contacted the Charity Commission when the problem becameapparent. We advised them to re-organise the charity so that money from trading would bedirected through a trading subsidiary and taxable income could be accurately accounted.

The Inland Revenue insisted that the charity repay tax on all its trading activities, backdated overa number of years.

The trustees were deemed not to be liable for these costs because they had acted prudently bytaking advice before expanding their use of the café, although that advice was poor. Repayment,therefore, came from the charity's resources. Had the charity not been financially robust, thetrustees' failure to ensure that its activities were wholly charitable would have caused the charityto fold. Had the trustees acted without taking advice, they may have been deemed liable for theloss and forced to repay the Inland Revenue from their private resources.

Where trustees intend to finance asubsidiary company from the charity's ownresources, they should make sure that:

• they have the power to do so; and• have properly assessed the financial

viability of the subsidiary tradingcompany.

Professional advice might be required toassist in this process. Trustees must take allreasonable steps to minimise any loss to thecharity if the venture fails and must beparticularly careful in situations where thesubsidiary trading company is operating ata loss and requires new capital.

2233

FFuunnddiinngg

TThhiiss ccaassee iilllluussttrraatteess hhooww aa cchhaarriittyy ccaann iinnccuurr lloosssseess bbyy ffaaiilliinngg ttoo eennssuurree tthhaatt iittss ttrraaddiinngg ssuubbssiiddiiaarryyiiss pprrooppeerrllyy sseett uupp aanndd ffiinnaanncciiaallllyy vviiaabbllee..

The Charity Commission's monitoring of annual returns and accounts highlighted someirregularities in the transactions made between a charity and its trading subsidiary. A formalinquiry was opened.

The trading company had been set up to raise funds for the charity through a lottery, underadvice from a fundraising company. The charity had funded the trading subsidiary's start-upcosts on the assumption that it would quickly become profitable but the trading subsidiaryproved unsuccessful at raising funds. As a result, the charity provided additional financialsupport to the trading subsidiary. The support was described in the charity's accounts as 'loans'but no formal loan agreements were in place and no security was raised. Without the charity'ssupport, the trading subsidiary would not have been viable.

The Charity Commission advises that charity funds should not be used to prop up an insolventor failing trading subsidiary. The trustees in this case had not set a limit on the extent to whichthey would support the trading subsidiary and should have shut it down when it becameapparent that the venture was not going to become financially viable.

The contract by which the trading subsidiary's activities were governed was between thecommercial fundraising facilitator and the charity. Consequently, all the financial risks of thetrading subsidiary remained with the charity, negating the protection from the risks ofcommercial trading that the trading subsidiary is set up to offer.

Following the Charity Commission investigation, the trading subsidiary was wound up and thetrustees of the charity were authorised to write off loans totalling nearly £150,000. Theinvestigation concluded that the trustees had not acted as prudently as they might have done butdid not deem them liable for the loss because they had not acted in bad faith and had soughtsome professional advice.

Undertaking trading is a key milestone fora charity and trustees should ensure that:

• the affairs of a charity and its tradingcompany are kept separate;

• a trading subsidiary is only createdafter a proper financial assessment; and

• monitoring procedures are in place toevaluate the trading subsidiary'ssuccess, with contingency plans shouldit prove unsuccessful.


CChhaarriittiieess aanndd TTrraaddiinngg (CCCC3355) explains when charities may engage in trading activities for fund-raising purposes, and when a separate subsidiary trading company should be established tocarry out those activities.

IInntteerrnnaall FFiinnaanncciiaall CCoonnttrroollss ffoorr CChhaarriittiieess (CCCC88) gives guidance on monitoring a charity's financialposition and its investments.

2244

MMaannaaggiinngg cchhaannggee

Charities change, like any organisation,under the influence of various factors -economic fluctuations, trends in donorgiving and grant making policies, changesin beneficiaries' needs for example. As partof this change trustees need to ensure thatthe governance structure and capacity ofthe charity keep pace and remainappropriate to meet its purpose efficientlyand effectively.

UUppddaattiinngg tthhee ggoovveerrnniinngg ddooccuummeenntt

This report has already noted theimportance to charities of working within agoverning document that accommodatestheir activities and way of functioning. Agoverning document should also includeprovision for amendment as the charityevolves. The Charity Commission recognisesthe importance of a governing documentthat is fit for purpose. Of the guidance givento charities on governance or administrationin 2002, 29% was in the form of alterationsto objects or governing documents.


AAmmeennddiinngg CChhaarriittiieess GGoovveerrnniinngg DDooccuummeennttss:: OOrrddeerrss aanndd SScchheemmeess (CCCC3366) provides guidance tohelp trustees who need to apply to us for an Order or a Scheme. It sets out the circumstances inwhich trustees will need to approach us for help in changing the purposes of the charity or itsadministrative provisions. It describes the differences between an Order and a Scheme and howwe make them. More detailed coverage of the issue can be found in Operational Guidance OOrrddeerrssaanndd SScchheemmeess (OOGG11) available on our website.

UUnniinnccoorrppoorraatteedd cchhaarriittiieess:: AAmmeennddmmeennttss ttoo GGoovveerrnniinngg DDooccuummeennttss (OOGG 4455) and information sheetAAmmeennddiinngg GGoovveerrnniinngg DDooccuummeennttss:: UUnniinnccoorrppoorraatteedd cchhaarriittiieess (CCSSDD--11334422AA), available on ourwebsite, provide guidance especially for smaller charities (ie those charities with an income ofless than £10,000 per year).

DDeevveellooppiinngg ccaappaacciittyy

For a charity to remain efficient as its workexpands, its ability to carry out that workneeds to expand in step. This may includeconsidering whether to take on staff andchanging the charity's way of operating toaccommodate more work and greatercomplexity. It may also involve re-evaluating the balance of skills on thecharity's board and among its staff andvolunteers to cope with increasedadministration of income and charitableactivity.

Charity Commission casework, surveydata and consultation with umbrella andadvisory bodies all indicate that charitiesdo not develop their organisationalcapacity to a sufficient extent. This is partlydue to the fact that capacity building issimply not a consideration for somecharities and partly due to an inability orfailure to plan ahead - see PPllaannnniinngg.Funding restrictions can also limit charities'ability to develop their capacity.

2255


TThhiiss ccaassee iilllluussttrraatteess aa bbeesstt pprraaccttiiccee wwaayy ooff uussiinngg ggrraanntt ffuunnddiinngg ttoo eexxppaanndd oorrggaanniissaattiioonnaall ccaappaacciittyy..

Charity Commission staff met with a small charity which was growing quickly in response toheavy demand for its services and needed to amend its governing document accordingly. Thecharity was presented with the opportunity to apply for a large grant to continue to expand itsservices. The grant application did not form part of their business plan. The trustees and chiefexecutive held a meeting and decided not to go forward with the application because they werealready working to the limit of their capacity. Instead, they applied for an interim grant to helpthem to develop their organisational structure and systems and, having ensured that they wereable to manage a large increase in income, and having adjusted their business plan accordingly,they applied for the large grant.

With hindsight, the trustees reported that their decision to delay was correct. The amount ofwork involved was, in fact, even greater than they had anticipated.

The majority of charities surveyed statedthat they had never made changes to theirmanagement/governance structure (69%)or to their trustee board (54%). Of thosethat had made changes to theirmanagement or governance structure, 71%had at least a yearly plan in place. Likewise,58% of charities that had made changes totheir trustee board had a yearly or longerterm plan in place. Changes to the trusteeboard were equally as likely to be made inresponse to unforeseen factors as they wereto be part of a strategic plan, while 64% ofchanges to the management or governancestructure were part of a strategic plan and36% in response to unforeseen factors.

Many of the rapidly growing charitiesconsulted during research for this reportsaid that, with hindsight, they would havedeveloped more slowly to allowthemselves to step back and take a morestrategic perspective.

"It was like being on a runaway train. Weneeded to stop and take a breath."

Chief executive of a rapidly growing,grant funded charity.

"One of the fundamental step changes inthe life of a charity…is when theybecome an employer."

Chief executive of an advisory body.

EEmmppllooyymmeenntt

Over one in five of the charities surveyedthat provide a service or support areentirely trustee run. The evolution from atrustee run charity to a charity with paidemployees can be a big cultural andorganisational shift.

The charities and advisory bodiesconsulted for this report consistently citedemployment as the most significant andpotentially problematic issue that charitiesface. 41% of surveyed charities with paidstaff do not have yearly or longer termplans that would enable them to managethis change effectively. 66% of surveyrespondents have staff or volunteers orboth. 39% of these charities reported thatthey are not confident that they are up todate in their understanding of employmentlegislation.

2266


Volunteers are also an invaluable asset tocharities and over one in three of surveyedcharities rely on the work of volunteers.However, trustees are often unaware thatvolunteers may have some of the samerights as paid staff and that, in some cases,the terms of a volunteer's involvement witha charity constitute a contract ofemployment.

Employment cases make up a relativelysmall proportion of the cases handled at theCharity Commission but they are oftenserious cases. Unanticipated costsassociated with employment can causecharities to fold and failure to act prudentlyhas the potential to leave trusteespersonally liable for losses incurred.Staffing issues that do not require CharityCommission intervention can still reduceefficiency and result in bad publicity that isdamaging to the name of charity.

There are countless issues to consider whenemploying staff: employment contracts;working space and the regulations thatapply to it; systems of management andreporting; funding of salaries, nationalinsurance, pensions and so on; andadditional or on-costs. There is an addeddimension when charities are working inpartnership with another organisation andshare staff or have staff who also carry outwork for their trading subsidiaries. CharityCommission staff have seen cases thatrange from charities that have taken onstaff without any space to accommodatethem to charities that have faced large,unexpected bills in order to comply withemployment regulations.

Problems occur when charities fail to fullyappreciate what employment entails. In anopen survey question in which charitieswere asked to note an event that wasunexpected or had unexpected consequences,13% reported employment issues. This islower than anecdotal evidence suggestedbut confirms that charities are not alwaysprepared for the impact of employment. Italso suggests that building skills inemploying and retaining staff is perhaps anarea which the Home Office and HMTreasury could focus on as part of theircapacity building and infrastructurestrategy if charities are to play a greater rolein providing public services.13

BBaallaanncciinngg rreessppoonnssiibbiilliittiieess bbeettwweeeenn ttrruusstteeeessaanndd eemmppllooyyeeeess

When charities take on staff there should,ideally, be a clear divide between governance- the role of the trustees (who are also directorsif it is a charitable company) - andmanagement - the role of the chief executiveor management who direct the dailyrunning of the charity. When there are onlya few staff in place and trustees are stillinvolved in the daily activity of the charity,the division of labour between governanceand management can be difficult to maintain.

At the heart of a significant number ofsituations that result in a CharityCommission Section 8 inquiry is a trusteebody that does not have an appropriatelevel of control. Commonly, a dominanttrustee has remained too involved in thedaily running of the charity once staff are inplace or the chief executive has beenallowed to run the charity unchecked andthe trustees have become too removed.

13 See the proposals for a futurebuilders fund (July 2003) following the recommendations within the Treasury’s CrossCutting Review, The Role of the Voluntary and Community Sector in Service Delivery and the Home Office proposalsfor supporting the voluntary and community sector.

2277


Trustees who do not allow their charity tobe managed by those appointed to do sooften disrupt its running. When a charitybecomes complex enough to require staff,the trustees cannot be personally involvedin everything and trying to do so can resultin maladministration.

Similarly, managers or chief executiveswho retain too much responsibility for therunning of a charity and fail to sufficientlyinvolve the trustees (in which case thetrustees may also be at fault for acceptingsuch a situation) or are selective about whatthey report to trustees are often the cause ofmaladministration. Many of the casesinvolving dishonesty that the CharityCommission sees have begun with smallmisdemeanours and escalated when theindividual goes unchallenged.

The drive and energy exhibited by thefounding individual(s) of many charitiesmay not be the qualities that are neededwhen the charity is more established. Manycharities struggle in their early years andthe sort of person who can root out the

funding and work long hours getting thecharity up and running often finds itdifficult to step back when the charity ismore stable and has more staff to share theworkload.

Smaller charities can experience a loss offocus and morale when an individual whohas been a strong, positive force within acharity leaves. The departure of a dominantindividual is a good opportunity forexisting trustees and staff to reassess theirroles and instil a better balance of authoritywithin the charity.

Whether it is a trustee, chief executive orother member of staff that resists theevolution of a charity, it can be extremelycostly and is a common cause ofmaladministration. Internal relations canbreak down to the extent that a charity'swork is disrupted, good staff can be lostand opportunities for development missed.Grant makers will sometimes withholdtheir funding if they are aware that thereare disputes within a charity.

TThhiiss ccaassee iilllluussttrraatteess tthhee ddaannggeerrss ooff aalllloowwiinngg oonnee ttrruusstteeee ttoo ttaakkee ttoooo mmuucchh ccoonnttrrooll..

The Charity Commission opened a Section 8 inquiry into a charity in which the founding trusteehad been taking decisions without holding formal meetings and consulting his fellow trustees.One such decision was the termination of the contracts of two employees, which led to anindustrial tribunal that ruled against the charity. The charity was forced to pay £2,000compensation.

A previous inquiry had been opened into the charity because of inadequate financial controls -the finances of the charity were being handled almost exclusively by the founding trustee. Advicearising from that inquiry had been ignored.

A new trustee was appointed following the second investigation and the founder trusteeresigned. Financial controls have now improved and all decisions are shared between the trusteebody.

2288


Cases in which trustees have takenunauthorised benefit from their positionare commonly the result of individualsconsidering themselves to be entitled to iton the basis of the amount of time theydevote to running the charity.

TThhiiss ccaassee iilllluussttrraatteess wwhhaatt ccaann hhaappppeenn wwhheenn tthhee ffoouunnddeerrss ooff aa cchhaarriittyy ddoo nnoott aacccceepptt tthhaatt tthheeyyccaannnnoott mmaaiinnttaaiinn ffuullll ccoonnttrrooll oovveerr aa cchhaarriittyy oorr ttaakkee bbeenneeffiitt ffrroomm tthheeiirr ppoossiittiioonn..

A charity was established by two parents in response to the death of their child. The couple werethe only trustees and the only people running the charity. In spite of the fact that the charity'sgoverning document prohibited the payment of trustees, both trustees received payment becausethey were working full time running the charity and felt that they needed to support themselves.Following a Charity Commission investigation, the trustees resigned, identified others to act astrustees and continued to work as employees of the charity. The new trustees came into constantdispute with the founding couple because they were not able to distance themselves personallyfrom the work of the charity and could not allow others to run it for them. This culminated in anindustrial tribunal case and a further Charity Commission investigation.

The charity had been functioning in a disorganised and unfocused manner due to the personaltensions within it and its financial administration was a cause for concern. Since the removal ofthe founding individuals, the charity has been able to function in a more organised, accountableand successful manner.

AAccqquuiissiittiioonn aanndd ddiissppoossaall ooff llaanndd

At any stage in a charities’ lifecycle,acquiring and disposing of land aresignificant events.14 Responses to an openquestion about key events showed that 30%of surveyed charities listed property as a keyevent. This was the highest category for anysingle event (charities could list up to three).

Disposing of and acquiring land can have asignificant positive impact on a charity whenwell managed. For example: buying officespace can provide greater independence forcharities that have previously paid rent and/or relied on grants for their accommodation;buying new facilities can allow a charity toexpand the services it provides; selling landcan provide a huge boost in income.

14 Disposal means sales, leases, grants of rights of way or other rights, exchanges of land, and all other transactions inwhich trustees part with or grant an interest in their land except for the release of a rent charge and the granting of amortgage.

2299

• Trustees should ensure that their ownroles and those of the charity'smanagers and employees are clearlydefined so that all parties understandthe scope of their responsibilities.


TThhiiss ccaassee iilllluussttrraatteess tthhee ddiiffffiiccuullttiieess tthhaatt cchhaarriittiieess ccaann ffaaccee iiff tthheeyy ddoo nnoott sseeeekk pprrooffeessssiioonnaall aaddvviicceebbeeffoorree eenntteerriinngg iinnttoo aa pprrooppeerrttyy ttrraannssaaccttiioonn..

A growing charity received funding to buy office space. The space had previously been used forother purposes and so required conversion. The trustees received a quote for the cost of the workand put in their bid for funding on that basis. However, the work quoted for did not take accountof regulations that apply to working space. As this was the first time the charity had beeninvolved in buying commercial property, the trustees were not fully aware of the regulations thatthey needed to meet. They received grant funding on the basis of the quote and went ahead withthe conversion. However, an inspection by the Health and Safety Executive highlighted variousregulatory breaches. The charity had to modify the building in order to adhere to standardrequirements, which more than doubled its budgeted expenditure. The additional costs were metout of the charity's reserves.

The lack of awareness of health and safety regulations within this charity could have forced it toclose. The purchase of office space should have been a progressive step for the charity but insteadthey are in a position of trying to rebuild their reserves.15

15 The Health and Safety Executive produces a free leaflet entitled ‘5 steps to Risk Assessment’. HSE Books produce apublication entitled ‘Charity and voluntary workers, a guide to health and safety at work’. Unison produces a freedownloadable guide to the ‘six pack’ of health and safety regulations that apply to the workplace as well asinformation relating to other health and safety matters.

When involved in a land transaction,effectively run charities will:

• properly plan and manage thetransaction and its effects;

• ensure that it represents the bestinterests of the charity and its users;

• comply with the various statutoryrequirements; and

• engage good quality professionaladvice to assist in the process.

If a charity is to hold land it is advisablethat it is constituted as a company or has anincorporated trustee body. A companyconstitutes a legal person and, as such, it

may hold property of all kinds in itscorporate name. Trustees do not, therefore,have to hold the property in their ownnames and this limits the risk to them asindividuals. Holding property in acorporate name also avoids the expenseand inconvenience of transferring it whentrustees are replaced.

Problems usually arise when charities areinvolved in acquiring land for the firsttime. Lack of experience, sometimescoupled with insufficient or inaccurateprofessional advice, result in oversightsthat can be extremely costly.

3300

Charities and the general public are oftenunaware that trustees cannot sell land atless than the best price, even if to do sowould avoid selling to a purchaser that theyor their local community find objectionable.They can reject an offer on the grounds thatland will be used in a way that is directlycontrary to the purposes of the charity oraccept a lower offer if the new purpose forthe land is compatible with the charity'strusts. It is sometimes permissible for acharity to sell or lease land to anothercharity for less than the full market value.Trustees should take advice on this.

Cases opened at the Charity Commissioninclude situations in which trustees haveeither sold land below the market price andare therefore failing in a statutory requirement,or want advice because they are unhappyabout selling to the highest bidder.

Some charity projects involving landarouse opposition which leads to mediaattention and phone calls to the CharityCommission because it is assumed that thecharity can be selective about the buyer towhich it sells. Trustees should makeinformation about such a sale available tothe public and, where appropriate, pursuea pro-active publicity campaign. The costscan be justified by the counteraction of anegative public profile which can damagethe good name of charity and impact onincome.

It may be necessary for a charity thatreceives a large amount of income from thesale of land to update their trusts. Trusteesshould contact the Charity Commission foradvice.


TThhiiss ccaassee iiss aann eexxaammppllee ooff aa ssiittuuaattiioonn iinn wwhhiicchh aa cchhaarriittyy nneeeeddeedd ttoo uuppddaattee iittss ttrruussttss aafftteerr ssaallee ooffllaanndd rreessuulltteedd iinn aa llaarrggee rriissee iinn iittss iinnccoommee..

A church charity received a considerable amount of income from the sale of land. The governingdocument of the charity stated that the vicar was entitled to a certain percentage of income fromthe land which meant that he was now entitled to a very large sum of money. The vicar and thecharity approached the Charity Commission to update the trusts so that the money wouldremain within the charity.

Sometimes a charity's governing documentstipulates that land should be used for aspecific purpose. This does not bar thecharity from selling the land as long asproceeds from the sale are used to purchaseland that will be used for a similar purpose.An example of a case in which this happensis where a charity that owns a recreationground sells it to a developer and buysalternative grounds to serve the samepurpose, making a considerable profit. Ifthe trustees do not wish to buy replacementproperty, they should contact the CharityCommission for advice before the saleproceeds.

If land forms part of a charity's permanentendowment, then the proceeds will also bepermanent endowment and cannotnormally be applied without an Order fromthe Charity Commission.

These are only some of the many issues thattrustees should take into consideration andthey illustrate the potential complexity ofproperty transactions. The legal position onland is set out in Sections 36-40 of theCharities Act 1993.

• Trustees should seek the appropriatelevel of legal advice before enteringinto a property transaction.

3311



Charity Commission publications AAccqquuiirriinngg LLaanndd (CCCC3333) and DDiissppoossiinngg ooff CChhaarriittyy LLaanndd (CCCC2288)outline the areas that trustees should consider, the statutory requirements that they must meetand the points at which Charity Commission involvement is required.

Guidance tailored specifically for small charities relating to the issues raised in this section: SSmmaallllCChhaarriittiieess:: TTrraannssffeerr ooff PPrrooppeerrttyy,, AAlltteerraattiioonn ooff TTrruussttss,, EExxppeennddiittuurree ooff CCaappiittaall (CCCC4444); OperationalGuidance SSmmaallll CChhaarriittiieess:: DDiissppoossaall ooff CChhaarriittyy LLaanndd aanndd BBuuiillddiinnggss (OOGG220044); and informationsheet DDiissppoossaallss ooff llaanndd aanndd bbuuiillddiinnggss wwiitthh ppaarrttiiccuullaarr rreeffeerreennccee ttoo rreeccrreeaattiioonn ggrroouunndd cchhaarriittiieess.

WWiinnddiinngg uupp

A charity that continues to operate withouta viable future may be wasting funds thatcould be better used by winding up thecharity and transferring its assets toanother charity. Winding up a charity can

be a positive step to either acknowledgethat the charity's mission is complete orobsolete or that charitable funds can nolonger be effectively applied by thatorganisation.

HHooww oofftteenn ddooeess yyoouurr cchhaarriittyy aasssseessss iiff iitt sshhoouulldd ccoonnttiinnuuee??

22%

7%

13%

22%

26%10%

Only in a crisis (26%)

At every AGM (22%)

At regular intervals (10%)

Never (7%)

Occasionally, eg when considering a change of direction (22%)

N/A (13%)

3322


Some charities have a clearly identifiableaim and wind up when it has beenachieved. Others specify in their governingdocument the length of time for which theywill be operational. In many cases charitiespeter out and do not wind up in anorganised fashion. An emotionalattachment to a charity and its cause oftenprevents trustees from winding up theircharity when it becomes clear that it no

longer has a viable future. Dwindlinginterest from trustees, volunteers anddonors is another cause of charities slowlyunravelling rather than actively taking thedecision to wind up. This is frequently linkedto beneficiaries' needs being less immediatebut, regardless of the level of demand for acharity's services, trustees should not allowcharitable funds to be swallowed up by anineffective organisation.

TThheessee ccaasseess iilllluussttrraattee ggoooodd aanndd bbaadd pprraaccttiiccee iinn tteerrmmss ooff aasssseessssiinngg wwhheetthheerr ttoo ccoonnttiinnuuee wwiitthh aacchhaarriittyy''ss aaccttiivviittiieess..

A charity that was set up to preserve a local historical site was wound up following a meeting inwhich trustees decided that the charity had served its purpose. Interest in the site had increasedduring the course of the charity's work so there was sufficient funding and support from othersources to ensure that the site would be preserved. The charity transferred its excess funds tocharities with similar objects. The trustees had anticipated that the charity would not need tocontinue indefinitely and had made provision for winding up in its governing document. TheCharity Commission removed the charity from its register when all final records and accountswere received.

A fee-charging educational charity which owned land and employed staff ran into difficultieswhen demand for its services slowed. The trustees continued to operate the charity on the beliefthat its position would improve but it did not. The trustees' belief that the situation wouldimprove seemed to be largely based on an emotional attachment to the charity. The CharityCommission advised the trustees that they ran the risk of insolvency and the trustees finallyrecognised that it was inevitable that the charity would have to wind up. The CharityCommission facilitated the transfer of its assets to another charity with similar purposes and thefailing charity was removed from the register. Had the trustees been more realistic the value ofthe assets it passed on would have been greater.

Trustees of an unincorporated charity canonly be indemnified out of the assets of thecharity if there are sufficient assets to covertheir debts. Therefore, if a charity continuesto incur costs to the extent that its liabilitiesoutweigh its assets, the trustees may bepersonally liable for the charity's debtsregardless of whether they have actedprudently. See IInnccoorrppoorraattiioonn. Likewise,trustees of a charitable company shouldminimise their expenditure when itbecomes apparent that insolvency isunavoidable, otherwise they can be forcedto contribute toward the payment of thecharity's debts. It is illegal for a company to

trade when it is insolvent so trustees mustbe aware of when the charity has reachedthis point.

AAlltteerrnnaattiivveess ttoo wwiinnddiinngg uupp

It may not be necessary to wind up in orderto secure a future for a charity that still hasbeneficiaries to serve. Joining forces withanother charity, either by workingcollaboratively or merging, is another wayin which charities can ensure that funds areput to best use.

3333


TThhiiss ccaassee iilllluussttrraatteess hhooww aa cchhaarriittyy eennssuurreedd tthhaatt sseerrvviicceess ttoo iittss bbeenneeffiicciiaarriieess ccoonnttiinnuueedd wwhheenn llooccaallaauutthhoorriittyy ffuunnddiinngg wwaass ccuutt..

A care centre run by a local charity faced closure when the County Council that funded it wasunable to continue its commitment. The charity secured an emergency grant from another agencyto continue its services in the short term. It also made contact with a national charity with similarobjects to enquire if the national charity could take over the running of the centre. The largercharity decided, on the basis of a feasibility study, that it would be able to take over and continueto provide the service to beneficiaries. As a result, the people of the local area still have access tothe service they need.


CChhaarriittyy RReesseerrvveess (RRSS33) and CCoollllaabboorraattiivvee WWoorrkkiinngg aanndd MMeerrggeerrss (RRSS44).

MMaannaaggiinngg FFiinnaanncciiaall DDiiffffiiccuullttiieess aanndd IInnssoollvveennccyy iinn CChhaarriittiieess (CCCC1122) provides guidance forcharities that are in financial trouble and also advice about how to recognise when a charity is indanger of becoming insolvent.

IInntteerrnnaall FFiinnaanncciiaall CCoonnttrroollss ffoorr CChhaarriittiieess (CCCC88) also provides guidance on maintaining healthyfinances and keeping up-to-date on the financial situation of a charity.

SSmmaallll CChhaarriittiieess:: DDiissssoolluuttiioonnss aanndd RReemmoovvaall ffrroomm tthhee RReeggiisstteerr (OOGG220022) and information sheetGGuuiiddaannccee ffoorr ssmmaallll cchhaarriittiieess wwiinnddiinngg uupp (CCSSDD--11334444AA) highlight the issues that small charitiesneed to consider.

Trustees of charities set up with a specifictarget sometimes find that additional needsbecome apparent in the course of theirwork. For example, a charity with objects toprovide hospital equipment may find that,once the equipment has been funded, theusers of that equipment need transport.There are several ways of responding tothis kind of situation. A charity's governingdocument should include a power ofamendment, otherwise trustees of anunincorporated charity will have to seekCharity Commission authority to broadenits objects.

A charity with the power of amendmentshould ensure that new objects accord withtheir trusts. The beneficiaries are key; newobjects should be to the advantage of

current beneficiaries and should notconflict with other objects. For example, thecharity in the situation outlined aboveshould not start providing transport if thereis still an outstanding need for equipment.

Founding trustees should ensure that theirgoverning document includes a power ofdissolution which allows the trustees towind up the charity and outlines how itwill be done. For example, it shouldprovide details of how any remainingfunds will be applied.

• Trustees should give regularconsideration to whether on not theircharity has a viable future and a goodreason to continue.

3344

AAnnnneexx AA -- QQuueessttiioonnss ttoo aasskk aatt eeaacchh ssttaaggee

The following lists provide trustees with questions that they may find useful to ask themselves atvarious stages of their charity’s development. The points covered have been drawn from ourcasework and from the responses to our survey. They are included here as a resource to helptrustees as one part of their wider consideration of an issue. They should be regarded as a startingpoint and not the last word on a particular issue. Relevant Commission publications in whichfurther guidance can be found appear in brackets.


• Do we need to establish a new charity or is there another charity already trying to achieve thesame aims in the same area? (See TThhee RReeggiisstteerr ooff CChhaarriittiieess on the Charity Commission websiteat www.charitycommission.gov.uk. See also TThhee RReeggiisstteerr ooff CChhaarriittiieess:: IInnffoorrmmaattiioonn aanndd sseerrvviicceessaavvaaiillaabbllee (CCCC4455).)

• Do we have to register with the Charity Commission? (With some exceptions, it is a legalrequirement for charities with an income over £1,000 per annum to register with the CharityCommission. See RReeggiisstteerriinngg aass aa CChhaarriittyy (CCCC2211) and EExxeemmpptt CChhaarriittiieess (CCCC2233).)

• Is there a model governing document that can be adapted for use by the charity? (These maybe provided either from the Charity Commission or other large national parent charities. Seethe Charity Commission website.)

• Have we made sure the governing document contains the provisions that the charity will needas it grows and evolves - including a power of amendment and power of dissolution?

• Have we looked at the governing documents of other similar charities to get an idea of what itis necessary to include?

• Have we considered what will be the most appropriate form for the new charity ie trust,unincorporated association, charitable company? (See CChhoooossiinngg aanndd PPrreeppaarriinngg aa GGoovveerrnniinnggDDooccuummeenntt (CCCC2222).)

• Do all of the founding trustees understand their role and the governing document? (See TThheeEEsssseennttiiaall TTrruusstteeee:: WWhhaatt yyoouu nneeeedd ttoo kknnooww (CCCC33).)

• Is there an umbrella organisation to go to for guidance and information?

• Have we made some initial plans and projections? For example, have we thought about:

- time required to run the charity- time required from each trustee- complexity of the accountancy involved- anticipated expenditure- projected income- the actions that will be possible if the charity either exceeds or falls short of projections and

targets?

3355

KKeeeeppiinngg ppaaccee wwiitthh cchhaannggee

• Do we have a written plan for the charity that covers both the immediate future and longer timeperiods?

• Do we have a mechanism for reviewing our plan on a regular basis?

• Do we review staff skills, the composition of the board and the suitability of the governingdocument to existing circumstances and those expected in the future?

• Do we need to restructure our organisation or develop its capacity before increasing incomeand activity?

• Will a significant increase in income require additional resource management (eg therequirements of a higher SORP threshold)?

• Do we network with other charities and utilise umbrella bodies to find out from others'experience what to expect as we develop?

• Have we sought funding for capacity building and feasibility studies where appropriate?

FFuunnddiinngg

• Do we regularly explore new funding sources?

• Does our current funding structure compromise our independence? (See TThhee IInnddeeppeennddeennccee ooffCChhaarriittiieess ffrroomm tthhee SSttaattee (RRRR77) and LLooccaall AAuutthhoorriittiieess aanndd TTrruusstteeeess (OOGG5566).)

• What can be done to diversify our income?

• Is our charity's level of reserves properly accounted for and set out in a comprehensive reservespolicy so that funders can understand it? (See CChhaarriittiieess'' RReesseerrvveess (CCCC1199) and CChhaarriittyy RReesseerrvveess(RRSS33).)

• Do we need Charity Commission authority to accept funding? (If your funder seeks a chargeover your charity's assets in return for a grant, you must contact the Charity Commission forauthority.)

• Before we accept deficit funding, can we cover the interim cash flow situation?

• Are the terms of any contract(s) we accept covered in our charity's risk assessment? (SeeCChhaarriittiieess aanndd PPuubblliicc SSeerrvviiccee DDeelliivveerryy:: AAnn iinnttrroodduuccttiioonn aanndd oovveerrvviieeww (CCCC3377) and CChhaarriittiieess aannddRRiisskk MMaannaaggeemmeenntt on the Charity Commission website.)

• If we are currently unincorporated, is it necessary to incorporate before accepting a contract?

QQuueessttiioonnss ttoo aasskk aatt eeaacchh ssttaaggee

3366


• Are we clear about what the funder expects to see for their money eg how outcomes will bemeasured?

• Does our funding application include all the costs we will incur eg administration and corecosts?

• Does our charity have the capacity to deliver the level of complexity that the funded projectrequires or is there a risk that we may over stretch ourselves?

• Does our charity have enough staff resources to cope with any extra administration both toapply for grants and to manage and monitor the application of funds throughout the period ofthe grant and beyond?

• Are we applying to funding bodies that make the type and size of grant we need?

• Are we ensuring that our grant applications are in keeping with our objects?

• Are we getting feedback and advice if funding bids are rejected?

• Are our fundraising plans part of a wider business plan?

• Are we familiar with the laws surrounding the specific type of fundraising planned? (SeeCChhaarriittiieess aanndd FFuunnddrraaiissiinngg (CCCC2200).)

• Is our fundraising venture cost-effective?

• Have we made provisions for what we will do if we raise more or less funds than necessary forthe stated purpose of an appeal? (There are rules about this. See DDiissaasstteerr AAppppeeaallss:: AAttttoorrnneeyyGGeenneerraall''ss GGuuiiddeelliinneess (CCCC4400).)

• Have we put in place adequate controls for monitoring and reporting on fundraising activities,especially when they are contracted out? (See CChhaarriittiieess aanndd CCoommmmeerrcciiaall PPaarrttnneerrss (RRSS22).)

TTrraaddiinngg

• Are there any restrictions in our governing document prohibiting or restricting our ability tocarry out trading activities? (See CChhaarriittiieess aanndd TTrraaddiinngg (CCCC3355).)

• Have we planned anticipated income and expenditure from our trading subsidiary carefullyand realistically?

• Do we need to take advice from the Charity Commission or a professional advisor regardingsetting up a trading subsidiary?

• Are we complying with the necessary tax rules associated with charitable and non-charitabletrading? (Contact HM Revenue & Customs for information).

• Are we reviewing our trading activities regularly and do we have contingency plans in place,including winding up the subsidiary if it should prove unsuccessful?

3377


EEmmppllooyymmeenntt

• Do we have all the necessary policies and procedures in place and are we compliant with allrelevant employment legislation?

• Are we familiar with employment legislation, including that which applies to volunteers, anddo we need to take professional advice?

• Will there be any costs involved in complying with employment regulation and legislation egadapting the workplace to meet health and safety regulations?

• Have we considered how an increase in staff numbers will impact on the managementstructure and culture of the organisation?

• Do we have a job description and arrangements for induction and support of the personappointed?

• Are roles clearly defined, including lines of management?

• Are we clear about what is to be delegated to employees and what the trustees will remainresponsible for? (See TThhee EEsssseennttiiaall TTrruusstteeee:: WWhhaatt yyoouu nneeeedd ttoo kknnooww (CCCC33).)

• Have we considered all the 'domestics' of employment including workstations, additional costsuch as telephone calls, electricity etc?

• Have we factored in costs such as National Insurance and pension arrangements to our longer-term plans?

• Have we considered outsourcing as an alternative to employment?

PPrrooppeerrttyy

• Does our governing document include a power to dispose of or purchase land or property,where required? (Charity Commission authority is not usually necessary except incircumstances relating to Permanent endowment. See AAccqquuiirriinngg LLaanndd (CCCC3333) and DDiissppoossiinngg ooffCChhaarriittyy LLaanndd (CCCC2288).)

• Have we planned the transaction carefully, taking full account of relevant legislation?

• Have we complied fully with Section 36 of the Charities Act 1993 before commencing a sale,including seeking appropriate professional advice, ensuring that the full market price is sought,and giving due public notice of the sale where necessary? (Charity Commission authority isrequired if S36 of the Act cannot be complied with.)

• Is the proposition financially viable in both the short and long term?

• Does the purchase represent effective use of charitable funds?

3388

• Does the charity have enough resources to manage an investment in land?

• Are the potential land/ buildings to be purchased subject to planning or legal use restrictions?

• In whose name(s) will the new property be held? (This will depend on whether your charity isa company or whether your trustee body is incorporated or there are individuals as holdingtrustees.)

• Have we informed all interested stakeholders of our intentions to buy/sell and considered theimpact of our decision on the profile of the charity?

WWiinnddiinngg uupp

• Do we give regular consideration to the continued need for our charity to operate and to itsability to do so?

• Is it necessary, or would it be more effective, to work collaboratively or merge with anotherorganisation? (See CCoollllaabboorraattiivvee WWoorrkkiinngg aanndd MMeerrggeerrss (RRSS44).)

• Would it be appropriate to utilise the power of amendment in the governing document and re-focus the charity to a more relevant need? (Charity Commission authority will be necessary inthis case. See AAmmeennddiinngg CChhaarriittiieess'' GGoovveerrnniinngg DDooccuummeennttss:: OOrrddeerrss aanndd SScchheemmeess (CCCC3366) andSSmmaallll CChhaarriittiieess:: TTrraannssffeerr ooff PPrrooppeerrttyy,, AAlltteerraattiioonn ooff TTrruussttss,, EExxppeennddiittuurree ooff CCaappiittaall (CCCC4444).)

• Do we have a power of dissolution in our governing document and does it provide details ofhow remaining assets should be applied? (Where there is no power of dissolution, trustees mayneed to contact the Charity Commission for advice.)

• Have we taken stock of the charity's assets and liabilities and considered issues such as staffnotice and redundancy payments? (See MMaannaaggiinngg FFiinnaanncciiaall DDiiffffiiccuullttiieess aanndd IInnssoollvveennccyy iinnCChhaarriittiieess (CCCC1122) and IInntteerrnnaall FFiinnaanncciiaall CCoonnttrroollss ffoorr CChhaarriittiieess (CCCC88).)

• Have we put mechanisms in place to ensure that any future legacies that may be received arestill applied to those beneficiaries for whom the money was intended?


3399

TTaabbllee 11:: YYeeaarr iinn wwhhiicchh ssuurrvveeyyeedd cchhaarriittiieess wweerree eessttaabblliisshheedd ((nnoott nneecceessssaarriillyy yyeeaarr rreeggiisstteerreedd))..

AAnnnneexx BB -- SSuurrvveeyy ffiinnddiinnggss

RReesseeaarrcchh tteecchhnniiqquueess

The data used in this report was derived from the Charity Commission's records and extensivecasework archive. Meetings with individual charities and umbrella bodies also informed theresearch. In addition, Martin Hamblin GfK, an independent research company, undertook a postalsurvey of over 4000 charities registered with the Charity Commission in 1995. The survey achieveda response rate of 35%.

SSuurrvveeyy ffiinnddiinnggss

YYeeaarr eessttaabblliisshheedd NNuummbbeerr ooff cchhaarriittiieess %%

Before 1900 40 3

1900-1970 321 20

1971-1980 145 9

1981-1990 281 17

1991-1995 626 38

1996-2002 80 5

Not answered 129 8

BBaassee:: 11662222

TTaabbllee 22:: CCuurrrreenntt ssoouurrcceess ooff iinnccoommee aanndd ssoouurrcceess tthhaatt cchhaarriittiieess wwoouulldd lliikkee ttoo ddeevveelloopp..

IInnccoommee ssoouurrccee %% cchhaarriittiieess %% cchhaarriittiieess SSoouurrcceess SSoouurrcceesswwiitthh eeaacchh wwiitthh eeaacchh aass cchhaarriittiieess cchhaarriittiieess hhaavvee

iinnccoommee ssoouurrccee** MMAAIINN iinnccoommee wwoouulldd lliikkee ttoo aabbiilliittyy ttoossoouurrccee** ddeevveelloopp ((%%))** ddeevveelloopp ((%%))**

Contract 10 5 7 5

Donors 56 24 24 15

Grants 37 15 26 14

Investments 18 7 4 3

Members 39 22 11 11

Trading subsidiary 4 1 4 3

Rent 1 1 0.2 0.2

Fees/sales 25 15 5 6

Sponsorship 1 0.2 0.2 0.2

Nothing 0.2 - 0.1 0.2

Others - - - -

Don’t know - - 0.1 0.1

Not answered 4 11 51 64

BBaassee:: 11662222

* Columns may add up to more than 100% because respondents could give more than one answer

4400

TTaabbllee 33:: EExxtteenntt ooff ggrraanntt ffuunnddiinngg..

TTaabbllee 44:: WWhhaatt cchhaarriittiieess rreeqquueesstt aanndd rreecceeiivvee ggrraanntt ffuunnddiinngg ffoorr..



% of charities

Currently grant funded 25

Have been grant funded but not at present 16

Never been grant funded 55

Not answered 4

BBaassee:: 11662222

%% cchhaarriittiieess %% cchhaarriittiieess %% ffoouunndd iittrreeqquueesstteedd** rreecceeiivveedd** mmoosstt ddiiffffiiccuulltt

ssoouurrccee ttoosseeccuurree**

Project costs plus related core costs 46 41 17

Project costs only 39 41 5

General running costs 46 40 34

Feasibility study costs 8 7 2

Consultancy fees 8 7 1

Financial aid for transport 1 1 1

Building work/refurbishment 1 1 -

Equipment 1 1 -

Never had difficulty securing funding - - 11

Not answered - - 33

BBaassee:: 666633

4411


EExxppeerriieennccee %% cchhaarriittiieess**

Directed charity’s activities so as to be eligible for a grant 22

Felt that charity’s independence was compromised by terms of a grant 12

Rejected grant funding to avoid loss of independence 3

Had difficulty responding to changes in circumstances because of grants being tightlyallocated or not available 15

Had grant application turned down because of charity’s reserves 12

Had difficulty with recruitment or retention of staff 20

Found that charity’s capacity was insufficient to deliver a grant funded project 5

Had difficulty meeting costs of deficit funded project 10

Had deficit funding withheld because charity didn’t meet outcomes 1

Had difficulty meeting additional costs incurred as a result of getting a grant 9

Felt that time spent completing grant application and monitoring forms was excessivein relation to charity’s work 40

None of the above 34

Not answered 5

BBaassee:: 666633

TTaabbllee 55:: GGrraanntt--rreellaatteedd eexxppeerriieennccee ooff cchhaarriittiieess..

TTaabbllee 66:: LLeevveell ooff ppllaannnniinngg..



LLeevveell ooff ppllaannnniinngg TToottaall %% ooff %% ooff cchhaarriittiieesscchhaarriittiieess wwiitthh eemmppllooyyeeeess**

We have a yearly and a long-term plan (eg 3-5 years) in place 19 26

We plan 1 year at a time 30 33

We make plans on an ad hoc basis, as seems appropriate at the time 14 15

We respond to events as they occur 10 10

We see no need for a strategic plan because activity is fairly constant 24 19

Others 2 -

Not answered 1 -

BBaassee:: 11668877

4422


TTaabbllee 77:: TTyyppee ooff aaccttiivviittyy bbyy lleevveell ooff ppllaannnniinngg..

TTaabbllee 88:: FFaaccttoorrss tthhaatt ccoommpprroommiissee aabbiilliittyy ttoo ppllaann..

* Rows may add up to more than 100% because respondents could give more than one answer


TTyyppee ooff aaccttiivviittyy LLeevveell ooff ppllaannnniinngg ((aass %% ooff ttoottaall ffoorr eeaacchh aaccttiivviittyy))**

Total % Yearly and One year On an ad Respond as No need for a Othersfor activity longer term at a time hoc basis event occur strategic plan

Provision of financialassistance (eg grantawarding) 22 10 29 17 17 30 1

Provision of a service/support direct tobeneficiaries (eg care,aid, advice, education) 65 23 32 14 8 24 2

Acting as an umbrellaor resource body 5 29 26 20 10 17 1

Sponsoring orundertaking research 1.3 24 33 19 5 14 -

Housing/accommodation 0.4 14 29 14 - 29 14

Conservation 1 7 21 29 21 29 -

Arts/theatre/choralsocieties/visitorattractions 3 20 41 8 6 26 -

Not answered 4 16 26 10 14 35 -

Base: 1622

TToottaall %%** %% ooff ggrraannttffuunnddeedd cchhaarriittiieess**

The current level of planning is satisfactory 43 28

Volatility in income and/or expenditure 26 34

Dependence on short term grant funding 23 69

Daily running of the charity takes up all available resources 22 40

Uncertainty about beneficiaries’ future needs 9 9

Inability to get funding for feasibility studies or consultation work 6 12

Lack of specialist knowledge within charity 6 6

Inability to borrow money 4 9

Insufficient volunteer help 1 1

BBaassee:: 11662222

4433


LLeevveell ooff PPllaannnniinngg %% ooff tthhoossee tthhaatt hhaadd %% ooff tthhoossee tthhaatt hhaaddmmaaddee cchhaannggeess ttoo mmaaddee cchhaannggeess ttoo

mmaannaaggeemmeenntt// ttrruusstteeee bbooaarrdd**ggoovveerrnnaannccee ssttrruuccttuurree**

Yearly and longer term plan in place 40 26

Plan one year at a time 31 32

Plan on an ad hoc basis 11 14

Respond to events as they occur 7 10

No need for a strategic plan 12 19

Others 2 2

BBaassee:: 11662222

TTaabbllee 99:: CChhaarriittiieess tthhaatt hhaadd mmaaddee cchhaannggeess ttoo mmaannaaggeemmeenntt//ggoovveerrnnaannccee ssttrruuccttuurree oorr ttrruusstteeee bbooaarrdd,,bbyy lleevveell ooff ppllaannnniinngg..


TTaabbllee 1100:: FFaaccttoorrss cchhaarriittiieess uunnddeerr aanndd oovveerr eessttiimmaatteedd dduurriinngg tthheeiirr ddeevveellooppmmeenntt..

TTaabbllee 1111:: EEvveennttss eexxppeerriieenncceedd tthhaatt wweerree uunneexxppeecctteedd oorr hhaadd uunneexxppeecctteedd ccoonnsseeqquueenncceess ((ooppeennqquueessttiioonn))..

%%

UUnnddeerr AAccccuurraattee OOvveerr DDoonn’’tt NNootteessttiimmaatteedd eessttiimmaatteedd kknnooww aannsswweerreedd

Income 15 69 7 7 2

Expenditure 14 75 3 5 3

Complexity of accounting 18 69 2 6 5

Time required to manage the charity 39 52 1 5 3

Time required from trustees 25 61 2 7 5

Extent of regulatory and legislativerequirements 34 45 1 16 4

BBaassee:: 11662222

UUnneexxppeecctteedd eevveenntt %% cchhaarriittiieess tthhaatt hhaavveeeexxppeerriieenncceedd iitt

Change in government/council policy or legislation 25

Funding: failure to obtain/reduction/need for sudden increase 39

Changing costs of rent/insurance/maintenance of premises 16

Staff shortages/problems 13

Others 7

BBaassee:: 226611

4444


TTaabbllee 1122:: MMoosstt ssiiggnniiffiiccaanntt kkeeyy eevveennttss ffoorr cchhaarriittyy ((ooppeenn qquueessttiioonn))..

TTaabbllee 1133:: NNuummbbeerr ooff cchhaarriittiieess iinnccoorrppoorraatteedd,, bbyy yyeeaarr eessttaabblliisshheedd..

TTaabbllee 1144:: MMaaiinn iinnccoommee ssoouurrccee,, bbyy wwhheetthheerr iinnccoorrppoorraatteedd..

MMiilleessttoonnee eevveenntt %% cchhaarriittiieess tthhaattrreeppoorrtteedd iitt**

Acquiring/repairing/planning/leasing/selling property 30

Securing grant/contract 25

Setting up as a charity/registration/registration as a charitablecompany 19

Employing/losing staff/problems with staff 12

Setting/exceeding financial targets/thresholds 8

BBaassee:: 11662222

* Charities could give up to 3 responses

%% eessttaabblliisshheedd iinn eeaacchh ttiimmee ffrraammee

Total % Before 1900 1900-1970 1971-1980 1981-1990 1991-1995 1996-2002

Charity is not acompany 84 82 91 88 79 83 66

Charity is a companyand was a companywhen originallyregistered 9 5 2 3 9 13 23

Charity is a companybut originallyregistered as anunincorporated andlater re-registered as acharitable company 5 11 5 7 10 3 4

Not answered 2 2 2 2 2 1 7

BBaassee 11662222 3388 332211 114455 228811 662266 8800

%% cchhaarriittiieess wwiitthh eeaacchh mmaaiinn iinnccoommee ssoouurrccee

Contract Donors Grants Investments Members Trading Othersubsidiary

Charity is incorporated 59 11 31 9 3 36 8

Charity is notincorporated 40 88 68 88 94 64 90

Not answered 1 1 1 3 3 0 2

BBaassee 8855 339922 224455 110099 334499 1144 226600

4455


TTaabbllee 1155:: LLeevveell ooff ppllaannnniinngg,, bbyy wwhheetthheerr iinnccoorrppoorraatteedd..

TTaabbllee 1166:: RReeaassoonnss ggiivveenn ffoorr bbeeccoommiinngg aa cchhaarriittaabbllee ccoommppaannyy..

%% wwiitthh eeaacchh lleevveell ooff ppllaannnniinngg**

Yearly and Plan one Plan on an Respond as No need for Otherslonger term year at a ad hoc event occur a strategic

plan time basis plan

Charity is incorporated(base 224) 53 23 11 4 10 2

Charity is notincorporated (base 1358) 15 32 15 12 28 1

* Rows may add up to more than 100% because some charities gave more than one answer

* Column may add up to more than 100% because respondents could give more than one answer

RReeaassoonn %% cchhaarriittiieess**

To protect the current trustees 60

On advice from a solicitor 49

On the basis of a risk assessment 34

Because the charity employs staff 33

On advice from an umbrella body or advisory body 30

Because the charity deals with vulnerable people or expects to in the future 26

To assist in the recruitment of trustees 22

Because the charity is complex or is likely to be so in the near future 17

To create a corporate identity for holding contracts 15

To create a corporate identity for holding land and/or shares 13

Don’t know 6

Best way to manage the charity 3

For trading purposes - charging for services/rents 1

Not answered 2

BBaassee:: 222244

TTaabbllee 1177:: WWhheetthheerr cchhaarriittiieess tthhiinnkk iinnccoorrppoorraattiioonn wwaass tthhee rriigghhtt cchhooiiccee..

%% cchhaarriittiieess

YYeess NNoo DDoonn’’tt kknnooww NNoott aannsswweerreedd

Charitable companies 79 3 15 3

BBaassee:: 222244

4466


TTaabbllee 1188:: CChhaarriittiieess wwiitthh ssttaaffff aanndd//oorr vvoolluunntteeeerrss,, bbyy aawwaarreenneessss ooff ccuurrrreenntt lleeggiissllaattiioonn..

TTaabbllee 2200:: CCoonnssiiddeerraattiioonn ooff wwiinnddiinngg uupp..

TTaabbllee 1199:: CChhaarriittiieess tthhaatt hhaavvee mmaaddee cchhaannggeess ttoo tthheeiirr mmaannaaggeemmeenntt//ggoovveerrnnaannccee ssttrruuccttuurree oorr ttrruusstteeeebbooaarrdd..

%% cchhaarriittiieess ccoonnffiiddeenntt tthhaatt tthheerree iiss aann uupp--ttoo--ddaattee uunnddeerrssttaannddiinngg ooffeemmppllooyymmeenntt lleeggiissllaattiioonn wwiitthhiinn tthhee cchhaarriittyy

TToottaall %% YYeess NNoo DDoonn’’tt NNAAkknnooww

Charities with paid staff and/or volunteers 66 58 18 21 3

BBaassee:: 11006688

CChhaannggeess mmaaddee ttoo mmaannaaggeemmeenntt// %% CChhaannggeess mmaaddee ttoo ttrruusstteeee %%ggoovveerrnnaannccee ssttrruuccttuurree cchhaarriittiieess bbooaarrdd cchhaarriittiieess

Yes, as part of a strategic plan 14 Yes, as part of a strategic plan 18

Yes, in response to unforeseen factors 8 Yes, in response to unforeseen factors 19

No changes made 69 No changes made 54

Don’t know 3 Don’t know 3

Not answered 6 Not answered 6

BBaassee:: 11662222 BBaassee:: 11662222

HHooww oofftteenn ddooeess yyoouurr cchhaarriittyy ccoonndduucctt aann aasssseessssmmeenntt ooff %% cchhaarriittiieesswwhheetthheerr iittss aaccttiivviittiieess sshhoouulldd ccoonnttiinnuuee??

At every AGM 22

Only in a crisis 26

At regular intervals 10

Never 7

Occasionally, eg when considering a change of direction 22

Not answered 13

BBaassee:: 11662222

4477

AAnnnneexx CC -- GGlloossssaarryy ooff tteerrmmss

CCaappaacciittyy bbuuiillddiinngg is the development of structures, systems, skills, knowledge and resources sothat charities are better able to achieve their objectives and realise their full potential.

CChhaarriittaabbllee ccoommppaannyy means a company:

• formed and registered under the Companies Act 1985; or

• to which the provisions of the 1985 Act apply as they apply to a company so formed andregistered;

aanndd

• which is established for eexxcclluussiivveellyy charitable purposes.

A ggoovveerrnniinngg ddooccuummeenntt is any document which sets out the charity's purposes and, usually, how itis to be administered. It may be a trust deed, constitution, memorandum and articles of association,conveyance, will, Royal Charter, Scheme of the Commission, or other formal document.

IInnssoollvveennccyy. Charitable companies are 'legal persons', can incur liabilities, and can become'insolvent'. Such a charity can be deemed insolvent either:

• when it is unable to pay its debts as they fall due; or

• when the value of its assets is less than the amount of its liabilities taking into account itspossible and prospective liabilities.

These two tests have a legal basis for cchhaarriittaabbllee ccoommppaanniieess, as they are aspects of the definition ofinability to pay debts in s.123 of the Insolvency Act.

Unincorporated charities are not 'legal persons' and cannot technically incur liabilities, which areinstead incurred by their trustees, acting on their behalf. Unincorporated charities cannot, therefore,technically become insolvent. However, a charity may reach the financial state where the value ofthe assets in the trust, which are available to the trustees to settle their liabilities, are insufficient. Inthe context of unincorporated charities 'insolvency' is used to describe this situation.

PPeerrmmaanneenntt eennddoowwmmeenntt means property of the charity (ie land, buildings, investments or cash)which the trustees may not spend as if it were income. It must be held permanently, sometimes tobe used in furthering the charity's purposes, sometimes to produce an income for the charity.Trustees cannot normally expend permanent endowment without our authority.

PPrriimmaarryy ppuurrppoossee ttrraaddiinngg is a trade exercised by a charity in the course of the actual carrying out ofits primary purpose. The following are examples of what might be regarded as trading in thismanner:

• The provision of educational services by a school or college in return for course fees.

• The provision of residential accommodation by a resident care charity in return for payment.

• A trade in which a primary purpose of the charity is carried out by beneficiaries.

4488

GGlloossssaarryy ooff tteerrmmss

SScchheemmee. A Scheme is a legal document which amends, replaces or amplifies the trusts of a charity.It may be:

• a fully regulating Scheme which deals with all aspects of a charity's administration andbecomes the governing document of the charity; or

• a non-regulating Scheme dealing with some particular aspect of the charity's purposes oradministration by amending or amplifying the charity's governing document, or byauthorising a particular action prohibited by the trusts of the charity.

SSuubbssiiddiiaarryy ttrraaddiinngg ccoommppaannyy means any non-charitable trading company owned by one or morecharities to carry out trading activities on behalf of the charity(ies) with a view to raising funds ina tax efficient manner.

CChhaarriittyy ttrruusstteeeess are the people responsible under the charity's governing document for controllingthe management and administration of the charity (s.97(1) of the 1993 Act). They may be calledtrustees, managing trustees, committee members, governors, or directors, or they may be referredto by some other title. In the case of an unincorporated association, the members of the executiveor management committee are its charity trustees; in the case of a charitable company it is thedirectors.

TTrruusstteeee bbooaarrdd. We use the word 'board' to refer to a charity's governing body.

UUnniinnccoorrppoorraatteedd cchhaarriittyy means a charitable trust (other than a CIF or a common deposit fund) or acharitable unincorporated association, and for present purposes includes any other charity whoseproperty is held on a trust (eg a company incorporated by Royal Charter).

MMuusstt is used to refer to actions that trustees, or their agents or employees, are obliged to take bylaw.

SShhoouulldd is used to suggest actions which we consider to be good practice and which we expecttrustees to follow.

4499

AAnnnneexx DD -- RReessoouurrcceess ffoorr ttrruusstteeeess

There are many resources which charity trustees can tap into to help them manage theirorganisation. Whilst this is not a definitive list of all the sources of information available it doesoffer a useful starting point. The publications listed in Annex E may also be useful.

OOrrggaanniissaattiioonnss

�� TThhee CChhaarriittyy CCoommmmiissssiioonn ffoorr EEnnggllaanndd aanndd WWaalleess

Further information can be obtained from the Commission:

• by visiting our website www.charitycommission.gov.uk;

• or by contacting Charity Commission Direct.

Telephone: 0845 300 0218Typetalk: 0845 300 0219Email: [email protected]

Or write to:

CChhaarriittyy CCoommmmiissssiioonn DDiirreeccttPO Box 1227LiverpoolL69 3UG

�� AAssssoocciiaattiioonn ooff CChhiieeff EExxeeccuuttiivveess ooff VVoolluunnttaarryy OOrrggaanniissaattiioonnss ((aacceevvoo))

acevo provides good practice resources and information on sector issues.

1 New Oxford StreetLondonWC1A 1NY

Tel: 0845 345 8481www.acevo.org.uk

�� AAssssoocciiaattiioonn ooff CChhaarriittaabbllee FFoouunnddaattiioonnss ((AACCFF))

ACF promotes and supports the work of charitable grant-making trusts and foundations.

Central House14 Upper Woburn PlaceLondonWC1H 0AE

Tel: 020 7255 4499www.acf.org.uk

5500

RReessoouurrcceess ffoorr ttrruusstteeeess

�� CChhaarriittiieess AAiidd FFoouunnddaattiioonn ((CCAAFF))

CAF helps non-profit organisations in the UK and overseas to increase, manage and administertheir resources.

25 Kings Hill AvenueKings HillWest MallingKentME19 4TA

Tel: 01732 520000Website: www.cafonline.org

�� CChhaarriittyy FFiinnaannccee DDiirreeccttoorrss’’ GGrroouupp ((CCFFDDGG))

CFDG provides information for its members and others on a range of issues and specialises inhelping charities to manage their accounting, taxation, audit and other finance related functions.Benefits of membership include regular members' meetings, monthly mailings and access toinformation and services.

3rd FloorDownstream Building1 London BridgeLondonSE1 9BG

Tel: 0845 345 3192E-mail: [email protected]: www.cfdg.org.uk

�� DDiirreeccttoorryy ooff SSoocciiaall CChhaannggee ((DDSSCC))

The Directory promotes positive social change and provides a wide range of resources for trustees.

LLoonnddoonn24 Stephenson WayLondonNW1 2DP

LLiivveerrppoooollFederation HouseHope StreetLiverpoolL1 9BW

Tel (books): 08450 77 77 77Tel (training and events): London 020 7391 4800 & Liverpool 0151 708 0117Website: www.dsc.org.uk

5511


�� HHMM RReevveennuuee && CCuussttoommss

For information on tax issues relating to charities.

St John's HouseMerton RoadBootleMerseysideL69 9BB

Tel: 0845 010 9000Website: www.hmrc.gov.uk

�� IInnssttiittuuttee ooff FFuunnddrraaiissiinngg

The Institute of Fundraising aims to promote the highest standards of fund-raising practice.

Park Place12 Lawn LaneLondonSW8 1UD

Tel: 020 7840 1000E-mail: [email protected]: www.institute-of-fundraising.org.uk

�� NNaattiioonnaall AAssssoocciiaattiioonn ffoorr VVoolluunnttaarryy SSeerrvviiccee aanndd CCoommmmuunniittyy AAccttiioonn ((NNAAVVCCAA))

The NAVCA network provides a wide range of information and support for charities through itslocal CVSs.

NAVCAThe Tower2 Furnival SquareSheffieldS1 4QL

Tel: 0114 278 6636E-mail: [email protected]: www.navca.org.uk

5522


�� NNaattiioonnaall CCoouunncciill ffoorr VVoolluunnttaarryy OOrrggaanniissaattiioonnss ((NNCCVVOO))

NCVO provides information on fund-raising and governance issues and a range of general supportservices.

National Council for Voluntary OrganisationsRegent's Wharf8 All Saints StreetLondonN1 9RL

Tel: 0800 279 8798E-mail: [email protected]: www.ncvo-vol.org.uk, www.askncvo.org.uk

�� VVoollRReessoouurrccee

This internet only resource for charities offers quick links to useful organisations concerned withthe effective running of charities.

E-mail: [email protected]: www.volresource.org.uk

�� WWaalleess CCoouunncciill ffoorr VVoolluunnttaarryy AAccttiioonn ((WWCCVVAA))

WCVA supports charities and the voluntary sector in Wales.

Baltic HouseMount Stuart SquareCardiff BayCardiffCF10 5FH

Tel: 029 2043 1700Helpline: 0870 607 1666E-mail: [email protected]: www.wcva.org.uk

5533


JJoouurrnnaallss,, mmaaggaazziinneess aanndd nneewwssppaappeerrss

�� CChhaarriittyy FFiinnaannccee

3 Rectory GroveLondonSW4 0DX

Subscriptions - Tel: 020 7819 1204E-mail: [email protected]: www.charityfinance.co.uk

�� CChhaarriittiieess MMaannaaggeemmeenntt

Subscriptions - Tel: 020 7729 6644

�� CChhaarriittyy TTiimmeess

Subscriptions - Tel: 020 7426 0636Website: www.charitytimes.com

�� TThhee GGuuaarrddiiaann//SSoocciieettyy

The Society section in Wednesday's edition of The Guardian is particularly relevant.

Website: www.SocietyGuardian.co.uk

�� TThhee TTiimmeess//PPuubblliicc AAggeennddaa

The Public Agenda section in Tuesday’s edition of The Times is particularly relevant.

Website: www.timesonline.co.uk

�� TThhiirrdd SSeeccttoorr

Subscriptions - Tel: 020 8606 7500E-mail: [email protected]: www.thirdsector.co.uk

5544

AAnnnneexx EE -- BBiibblliiooggrraapphhyy

Burnell, Managing People in Charities, 2nd Edition, ICSA Publishing, London, 2001.

Carleton, J, Subject to contract, Charity Finance, October 2002.

Charity Commission, Accounting and Reporting by Charities: Statement of RecommendedPractice, HMSO 2000.

Charity Commission, Acquiring Land (CC33), 2003.

Charity Commission, Amending Charities' Governing Documents: Orders and Schemes (CC36),2006.

Charity Commission, Charities and Public Service Delivery: An introduction and overview (CC37),2007.

Charity Commission, Charities and Fundraising (CC20), 2006.

Charity Commission, Charities and Insurance (CC49), 2007.

Charity Commission, Charities and Local Authorities (CC29), 2005.

Charity Commission, Charities and Risk Management, 2002, website only.

Charity Commission, Charities and Trading (CC35), 2006.

Charity Commission, Charity Reserves (RS3), 2003.

Charity Commission, Choosing and Preparing a Governing Document (CC22), 2006.

Charity Commission, Collaborative Working and Mergers (RS4), 2003.

Charity Commission, Disaster Appeals: Attorney General's Guidelines (CC40), 2003.

Charity Commission, Disposing of Charity Land (CC28), 2007.

Charity Commission, Exempt Charities (CC23), 2002.

Charity Commission, Incorporation of Charity Trustees (CC43), 2004.

Charity Commission, Internal Financial Controls for Charities (CC8), 2006.

Charity Commission, Investment of Charitable Funds (CC14), 2004.

Charity Commission, Managing Financial Difficulties and Insolvency in Charities (CC12), 2007.

Charity Commission, The Essential Trustee: What you need to know (CC3), 2007.

Charity Commission, Registering as a Charity (CC21), 2006.

Charity Commission, Small Charities: Transfer of Property, Alteration of Trusts, Expenditure ofCapital (CC44), 2006.

5555

BBiibblliiooggrraapphhyy

Charity Commission, The Hallmarks of an Effective Charity (CC60), 2006.

Charity Commission, The Independence of Charities from the State (RR7), 2007.

Charity Commission, The Register of Charities: Information and services available (CC45), 2003.

Charity Commission, Trustee Recruitment, Selection and Induction (RS1), 2006.

Charity Commission, Users on Board: Beneficiaries who become trustees (CC24), 2006.

Cornforth, C, The Governance of Public and Non-Profit Organisations - What do Boards do?,Routledge 2003.

Dalton, D, Keeping the board on board, Charity Finance, June 2002.

Davy, P, Too much of a good thing, Charity Times, May 2002.

Dickinson, S, Avoid the start-up, Third sector, November 2002.

Gaines, S, Size matters - What happens when small charities outgrow themselves? The Guardian,August 15 2002.

Harris, J, The Good Management Guide for the Voluntary Sector, NCVO, 2002.

Hind, A, The Governance and Management of charities, The Voluntary Sector Press, High Barnet1995.

Hill, N, Risky business, Charity Times, Legal and Accounting supplement, December 2002.

HM Treasury, The Role of the Voluntary and Community Sector in Service Delivery, A Cross-Cutting Review, HMSO 2002.

HM Treasury, futurebuilders: An investment Fund for Voluntary and Community Sector PublicService Delivery, HMSO 2003.

Home Office, Charities and Not-for-Profits: A modern Legal Framework. The Government’sresponse to 'Private Action, Public Benefit', HMSO 2003.

HSE, Charity and Voluntary Workers, A guide to health and safety at work (HSG192), HSE Books1999.

Hudson, M, Managing without profit, 2nd Edn, Penguin, London 1999.

Hunt, J, How to get ahead in charities, Third Sector, September 2002.

Hussey, D & Perrin, R, How to Manage a Voluntary Organisation - The Essential Guide for the Not-for-Profit Sector, Kogan Page Ltd, London 2003.

James, J, Cause to save, Guardian/Society, May 1 2002.

Lamont, H, Accentuating the positive, Charity Finance, June 2002.

5566

AAcckknnoowwlleeddggeemmeennttss

We would like to thank everyone who has co-operated in the production of this report, especiallythe charities that gave their time to speak to our staff.

Special thanks also to Mike Hudson of Compass Partnership for his advice and support.

BBiibblliiooggrraapphhyy

Lloyd, SJG et al, A Practitioner's Guide to Powers and Duties of Trustees, Tolley LexisNexis, 2002.

Peacock, G, Study the past to make a plan for the future, Third Sector, June 2002.

Peacock, G, Think capacity not core costs for the sector, Third Sector, July 2002.

Picarda, H, The law and practice relating to charities, 2nd Edition, Butterworths, London 1995.

Piper, A, Receiving a visit, Charity Finance, October 2002.

Streets, P, Income growth can undermine your real aims, Third Sector, April 17 2002.

Warburton, J, Tudor on Charities, 8th Edition, Sweet & Maxwell, London 1995.

WCVA, Faith and hope don't run charities (trustees do): a practical guide to voluntary members ofmanagement committees, Cardiff 2002.

5577