Regulation of the Charitable Sector and the Charities Act 2006

Written evidence submitted by HBA (CH 07)


About the HBA


HBA is a membership organisation, registered as a charity with the Charity Commission for England and Wales. It supports and promotes hospital broadcasting across the whole of the UK. Our members are independent hospital broadcasting organisations providing services to patients in their local hospitals and old people’s homes. Most of our members are registered charities, although a minority are unregistered. We currently have 196 members based in England and Wales, and another 29 members based in Scotland, Northern Ireland and the Channel Islands.

The majority of our member stations have an annual income below £10,000 per annum and almost all are below the £25,000 threshold. Many have an income well below £10,000 most years. To the best of our knowledge, all of our member stations are reliant entirely on volunteers, with no paid staff.

Summary of evidence


· Any charity should be able to register with the Charity Commission, irrespective of its level of income.

· Registration should be required for any organisation wishing to call itself a charity.

· All registered charities should be required to provide the Commission with copies of its governing document and its Trustees' Annual Report and Accounts; and the Commission should be required to publish these documents on its website. This requirement should extend to charities removed from the register.

· Registration should remain free of charge.

· There should be more joined-up working and data sharing between the Charity Commission, HMRC and Companies House.

· Payment of Gift Aid and other tax reliefs to a charity should be suspended for the duration of the time that the charity has not filed all the information it is obliged to do so with the Commission.

· Any fines for late filing should be payable by the Trustees of a charity personally, not from charitable funds.

· Accounting requirements should be standardised according to income level, irrespective of the legal form of a charity.

· The Register of Charities should include information relating to the period when a charity existed in a different legal form, or relating to the constituent charities of a merged charity.

Charity Registration Thresholds


1. Most of HBA's members which are registered charities greatly value the benefit that this status brings them – primarily the ability to prove their legitimacy and access funds from a wider variety of sources – and would not wish to lose this status.

2. In HBA's experience, those running small hospital radio stations which are not registered as charities fall into one of two groups:

· those who wish to register as a charity despite their income being below the registration threshold; and

· those who are not interested in registering as a charity, and see little or no benefit in doing so.

3. Most of those in the latter group, and many of those in the former group, do not realise that the organisation they are heading is, in fact, a charity, despite the lack of registration. They are thus unaware of their obligations, responsibilities and liabilities as charity trustees. Over the past 10 years, HBA has done much to try and educate all those running member hospital radio stations, irrespective of their registration status, of the legal position and requirements, and best practice, but it is sometimes difficult to interest people in this subject when it is clear that the Charity Commission takes little interest in registered charities with an income of less than £25k, and even less interest in unregistered charities despite, officially at least, being their regulator.

4. HBA welcomes Lord Hodgson's recommendation that charities be allowed to voluntarily register with the Commission whatever their level of income; this would address the aspirations of a number of our members. However, HBA disagrees with his recommendation to increase the mandatory threshold to £25k. This would mean that more than half of the charities in England and Wales would not have to register with the Commission, making it nigh on impossible for the Commission to do its job of regulating the sector – how can it effectively regulate organisations it knows nothing about?

5. Instead, HBA has a rather more radical suggestion: that the registration threshold be removed altogether, with registration being required by all charities. This is already the case in Scotland and will also be the case in Northern Ireland once the Charities Act (NI) 2008 is fully in force. Not only would this remove the lack of understanding of their position by those running small, unregistered charities, it would greatly improve both:

· the ability of the Charity Commission to regulate the sector; and

· the accessibility to information about these organisations, and thus their accountability.

Ultimately, this would improve the public's perception of the charity "brand".

6. All charities are legally obliged to produce a Trustees' Annual Report and Annual Accounts (although it is likely that many of those charities that are not obliged to submit copies to the Commission do not produce suitable reports). Given this existing legal requirement, and the simplicity of submitting these reports electronically using the Commission's online service, the additional burden on even small charities (that already meet their legal obligations) of having to submit these documents is de minimis, and surely outweighed by the benefit to the charity "brand" of the transparency afforded by the publication by the Commission as part of its Register of Charities.

7. To address any remaining concerns about unnecessary additional administrative burden on those running small charities, HBA would recommend a system akin to that adopted by Scotland, whereby organisations whose purposes are charitable can decide whether they wish to be a charity or not; if they do, they register and can call themselves a charity, but have to submit annual returns; if not, they don't register (and, in which case, they cannot call themselves a charity).

8. On the basis that the vast majority of annual returns are made electronically, and given that the Commission already has the online services in place to receive and publish such submissions, the ongoing cost to the Commission is no more than the cost of hard disk storage which today is, by any measure, negligible.

9. Whilst HBA does not agree with the introduction of annual registration fees for charities, optional registration would make it more acceptable for the Charity Commission to introduce both fines for late filing of returns, and to address any funding constraints it may have by imposing annual registration fees – those organisations that felt that they were not gaining sufficient benefit from registration could de-register and not pay the fee.

Joined-up Working between Regulators


10. HBA is constituted as a company limited by guarantee, as well as being registered as a charity. It is, thus, subject to dual regulation by both Companies House and the Charity Commission. As it is not in a position to claim Gift Aid or other tax relief, it is not subject to additional oversight by HMRC. Most of HBA's members (although not all), being small, local charities are unincorporated associations rather than companies, and thus do not have to deal with Companies House, although many of our members are registered with HMRC in order to recover Gift Aid.

11. This co-regulation of the charitable sector by three Government departments creates unnecessary administrative overhead, both for charities and the civil service. HBA welcomes the recommendation from Lord Hodgson that "[w]ork by Companies House and the Charity Commission to create a single reporting system for charitable companies […] should continue as a matter of urgency", as it was unaware of any such initiative. However, the work urgently needs to be extended to include HMRC, which recent developments have shown is so worried about fraudulent claims from charities that is putting in place a charity regulation scheme that in many ways parallels that of the Charity Commission, and appears unwilling to use any of the information already provided by charities to the Commission as part of its own regulatory process.

12. In order to claim Gift Aid, or any other tax relief from HMRC, charities' Trustees and other senior management have to meet the requirements of HMRC's "Fit and Proper Person" test. If HMRC decides that any of these people are not "fit and proper", the charity can be barred from receiving tax relief. The Charity Commission already has full details (minus National Insurance Number, an omission easily rectified) of all the Trustees of a charity, and it's a trivial exercise for charities to log-in to the Commission's website and update these details. Why cannot HMRC simply use this information already provided by the charity to the Commission (and all the other information that the Commission holds on charities) when making their assessment of fraud risk, rather than demand that it be provided again, in hardcopy form through the post?

13. Similarly, if HMRC has concerns about the fitness of a person to act as a Trustee of a charity, should not the Charity Commission and the charity's other Trustees be informed? If the charity "brand" is to be protected, surely it best that any concerns are addressed and dealt with as soon as possible. It addition, it surely cannot be right that the Charity Commission might be perfectly content that a person can act as a Trustee of a charity, but HMRC consider him/her not to be "fit and proper" to hold the same position; either the person is guilty of some sin, or is innocent: he/she cannot be both!

14. Ahead of providing evidence to the House of Commons Public Bill Committee on the Small Charitable Donations Bill, HBA conducted a quick survey of its members about their eligibility to claim under the proposed new scheme. Our survey suggests that 70% of our members will not be able to make any claim for funds through the new scheme in its first year of operation, and only 27% of small charitable donations made to our members would be eligible for reimbursement. These restrictions are simply down to the disproportionate counter-fraud measures imposed by HMRC. If there was appropriate joined-up working between the charity regulators and HMRC, as proposed by Lord Hodgson in his recent review of the Charities Act 2006, it would be possible for HMRC to use the compliance record of charities with the reporting requirements of charity law, perhaps together with a random sampling of annual accounts to assess the legitimacy of claims under the Small Donations Scheme.

15. Lord Hodgson also recommended that all charities that claim tax reliefs be required to register with the Commission. If such a requirement reduces the overall burden on charities, by enabling more joined-up working between HMRC and the Commission, then HBA would support such a recommendation. If such joined-up working is not possible, for whatever reason, then there would seem to be little point in requiring registration for all charities wishing to claim tax relief, unless there is seen to be a benefit in removing from HMRC the duty of determining whether an organisation is a charity for tax purposes, and leaving the three charity regulators to make this decision.

Reporting Requirements


16. HBA believes that all registered charities, irrespective of their income, should have to provide the Charity Commission with a copy of their governing document and their Trustees' Annual Report and Accounts. All charities, irrespective of their income or registration status already have to produce these documents, so the additional burden of having to file them with the Commission is miniscule, especially now that the Commission makes it so easy to file the documents electronically.

17. With the Commission encouraging charities to use its online services, the additional cost to the Commission of accepting these documents and making them available to the public via its website must also be miniscule – all the technical infrastructure is already in place, and the cost of the additional storage must be insignificant.

18. Any small additional burdens that HBA's proposals would impose on charities and the Commission are far outweighed by the benefit, to the charity sector as a whole, of the transparency and accountability that would be brought about by the ability for members of the public to easily access and scrutinise these documents. In these difficult financial times, the Commission does not have the resources to review the annual accounts of every charity, but if charities know that their reports will be published by the Commission and open to scrutiny, there is more chance of them producing a better quality report, and the publication provides the opportunity for members of the public to raise concerns that they have about the running of a charity with the Commission

19. This requirement on charities to file, and on the Commission to publish, should also be extended to the final accounts of a dissolved charity. HBA has first-hand experience of the Charity Commission not holding a copy of either the governing document or final accounts of a hospital radio station that had been removed from the register as having ceased to exist. HBA wished to check that the organisation's remaining assets had be correctly applied in accordance with the governing document, but the Commission said that it did not hold a copy of the governing document, and that it did not require trustees to submit final accounts, but just to complete an online form on its website stating that assets had been disposed in accordance with the requirements of the governing document.

20. This appears to HBA to be a substantial loophole; whilst a charity, such as a typical hospital radio station, might have a relatively small annual income, its capital assets (in terms of equipment, for example) may be quite significant (in the case of hospital radio stations, potentially several tens of thousands of pounds). The Commission, however, shows no interest in ensuring that these charitable assets are correctly disposed of, with the benefit being applied appropriately. Such indifference provides a disincentive for Trustees of a charity to ensure that its assets are correctly applied when it is being wound up, potentially resulting in assets being lost to charity.

21. In his recent review of charity law, Lord Hodgson recommended that sanctions for late filing of accounts and annual returns should include the withdrawal of Gift Aid and that consideration be given to the introduction of fines. Whilst HBA would not agree with the withdrawal of tax reliefs which are due to a charity, it would seem perfectly reasonable to withhold payment until all statutory reporting requirements have been met.

22. In the interests of transparency, and the application of the law, it is clearly important to incentivise Trustees to file their Annual Report and Accounts as soon as possible, and certainly within the 10-month period which the law permits. If fines were to be introduced, there would be a danger that funds given to the charity to further its objects would be misapplied in paying the fine. Unless it was made mandatory to state in the Trustees' Annual Report and Accounts that the charity had paid the fine, and to explain the reason for the filing delay that resulted in the fine, imposing a fine would likely create little or no incentive to wayward Trustees.

23. On the other hand, there may, exceptionally, be a good reason why a charity (especially a small charity with no paid staff, and no professional advisors) is unable to file within the permitted 10 months. If fines were to be introduced, it would be even more important than now that, where such exceptional circumstances existed, there was a mechanism whereby a charity could apply to the Commission for an extension to the permitted time.

24. If fines are to be imposed, consideration should be given to them being imposed on the Trustees individually, rather than on the charity. This might provide the necessary incentive to the Trustees without the danger of misapplication of charitable funds.

25. In a recent consultation, the Charity Commission suggested incentivising Trustees to file their charity's Annual Report and Accounts as soon as possible. Initially, this sounds like a more appealing approach than fines. However, if the extent of the incentive is a flag on the online register, as the Commission's consultation suggests, then this is unlikely to have the desired effect. It might be more effective to introduce an "amber" border to an entry on the Register for those charities which take a long time to file accounts, to sit alongside the current red and green borders.

26. Consideration should be given to the fact, however, that small charities may be relying on the goodwill of accountants to provide external scrutiny of their accounts on a pro bono basis, and this may entail them waiting for a quiet period in the financial year for their independent examiner to complete his work. The unintended consequence of incentivising early filing may be additional expenditure by small charities on external scrutiny or, where the law allows, the removal of the requirement for external scrutiny from governing documents, simply in an effort to score more "brownie points". Many hospital radio stations (and probably other small charities too) have their accounts externally scrutinised even though it is not a requirement of the Charities Act (it is often a requirement of the charity's governing document) because it is seen as best practice. Incentivising charities to stop submitting their accounts for external scrutiny would be counter to all the efforts of HMRC to tighten up on fraud.

Accounting Requirements


27. There is one aspect of the accounting requirements where a change would both reduce the burden on smaller charities, such as HBA, and improve transparency. Charitable companies, such as HBA, have to use accruals accounting. Due to the lack of understanding of this process, professional advisors have to be employed (costing the charity money) and trustees of the charity, members of the charity, and the general public are generally less able to understand the details of the accounts, and so are less able to query their contents. The ability for charities with an income under £250,000 to prepare accounts on a receipts and payments basis should be extended to charitable companies; the legal form of the charity should not affect the accounting regime.

Information published as part of the Register of Charities


28. HBA believes that, in the interests of transparency, and to protect to charity "brand", the Charity Commission should publish, as part of its online Register of Charities, the governing document and the last several years' copies of the Trustees' Annual Report and Accounts for every registered charity. All charities already have to produce these documents, so the additional burden of having to file them with the Commission is miniscule, especially now that the Commission makes it so easy to file the documents electronically.

29. Even if certain classes of charities continue to be exempt from the requirement to submit their Trustees' Annual Report and Accounts to the Commission, they should have the ability to submit these documents and, if they avail themselves of the option, the documents should be published by the Commission.

30. With the Commission encouraging charities to use its online services, the additional cost to the Commission of accepting these documents and making them available to the public via its website must also be miniscule – all the technical infrastructure is already in place, and the cost of the additional storage must be insignificant.

31. The governing document is, clearly, a very fundamental part of a charity's governance. As the sector regulator, the Commission should have an up-to-date copy of every registered charity's governing document on file. In the interests of transparency, the Commission should make this copy available as part of the online Register of Charities. With the reduced level of funding available to the Commission, it is understandably focussing its regulatory efforts on larger charities. Implicit in this is an increased reliance on reports from the public regarding apparent mismanagement (or worse) in smaller charities, perhaps after reading information in the charity's Trustees' Annual Report and Accounts. Without easy access to governing documents, it is very difficult for the public to determine whether mismanagement has taken place.

32. Where a charity has changed its legal form (e.g. it has changed from an unincorporated to an incorporated form) or has been created as a result of the merger of two or more charities, the Register of Charities should provide the details of, and information relating to, the predecessor charities. Being able to show a registration and compliance history going back beyond the point of a recent reorganisation can be important for charities seeking funding.

33. The governing document, Trustees' Annual Reports, Annual Accounts and the application to be removed from the register (together with any supporting documentation) should be available for any charity that has been removed from the register. Currently there is a legal requirement that the former Trustees of removed charities retain the records of the charity for a number of years after it has been removed, and to respond to requests from the public for copies of these documents. However, the Commission provides no means by which the public can contact the former Trustees, effectively making it impossible to contact those with the legal obligation to provide it. Of course, there is little incentive for the former Trustees to comply with any request anyway, so the Commission ensuring that it has obtained and published all necessary information prior to removing the charity from the register would seem sensible anyway.

September 2012

Prepared 17th October 2012