Memorandum from Michael Gwinnell (DCH
180)
1. I am currently a charity trustee of four
charities ranging from a small family grant-making trust which
I established myself in 1988, through a local mental-health self-help
charity (Charity A) (gross income about £40,000 pa)
of which I am treasurer, to two arts organisations, one with a
gross income approaching £200,000 (Charity B) and
the other with gross income of about £3 million. While the
last has a significant professional staff and trustees of wide
professional knowledge and experience, Charities A and B each
employ only two or three (full- or part-time) staff and rely to
a large extent on volunteers without specialised professional
knowledge for their administration and compliance. The family
trust employs no staff and I administer it myself.
2. Professionally, after 20 years investment
banking in the City of London I spent 12 years as the head of
investments for a major international grant-making foundation
and then four years as a grant-maker for the same organisation.
Although not a lawyer I am an active member of the Charity Law
Association and take particular interest in the investment of
charitable funds and the proper governance and administration
of charities.
3. I wish to submit evidence on the following
specific proposals in the draft bill:
a. Clause 22—annual audit or
examination of accounts of unincorporated charities and Clause
25—annual audit or examination of accounts of charitable
companies
b. Schedule 6 draft clause 69B (4)—requirement
for a CIO to have members
Thresholds for independent examination and accountant's
report
4. The proposals are welcome to raise the
audit threshold up to which independent examination of the accounts
of an unincorporated charity is allowed from £250,000 to
£500,000 gross income (subject to a gross asset test), and
to insert an intermediate threshold of £250,000 gross income
beyond which the examiner must be a member of a specified professional
body.
5. However, for charitable companies the
rules are still very different—a charitable company is still
to be exempt from audit and the requirement for a reporting accountant
under £90,000 gross income, compared with the £10,000
threshold below which unincorporated charities do not require
independent examination. While an audit is to be required beyond
£500,000 gross income (subject to an assets test), the same
as for unincorporated charities, the definition of the reporting
accountant required in the intervening zone is narrower than that
proposed for independent examiners of unincorporated charities
over the £250,000 intermediate threshold, and there is no
provision for a lighter touch below such a threshold.
6. The Strategy Unit report did not directly
address this issue, although recommending that all charities with
income over £10,000 should be subject to the independent
examination requirement. The Government response was to reduce
the proposed increase in audit threshold both for charitable companies
and for other charities from that recommended and to introduce
an asset test, and it accepted a further consultees' suggestion,
that professional qualifications should be required for independent
examiners at an intermediate level.
7. It does not make sense for different
thresholds and definitions to apply to charitable companies and
to other charities, and this was the thrust of the Strategy Unit's
recommendations about the need for simplification, as well as
for an increase in thresholds.
8. It is difficult enough for small unincorporated
charities (such as Charity A was until recently) to find qualified
volunteers to act as independent examiners under the current regulations.
Charity A has recently incorporated (see comments below on the
CIO form) but our previous independent examiner is not qualified
to act as reporting accountant. While we are at present below
the £90,000 threshold at which an accountant's report is
required for audit exemption for charitable companies, we should
like to continue to have our accounts examined so as to reassure
our trustees and funders that the accounts have been properly
drawn up. And in time we hope to grow beyond that threshold. This
means finding a new volunteer from among the narrow set defined
in the Companies Act. If we had remained an unincorporated charity,
under the new proposals we could have continued to use our volunteer
independent examiner (an accountant with an overseas qualification
who is professionally perfectly competent, but not authorised
to practise in the UK) until our gross income reached £250,000.
9. A close reading of the Bill and the Charities
Act 1993 is needed for it to be realised that a CIO falls within
Section 43 of the 1993 Act (a CIO is not a company as defined
in the 1993 Act and is therefore not excluded by Section 43(9)).
The heading and wording of Clause 22 referring to unincorporated
charities are thus misleading, since a CIO is a body corporate.
10. I accordingly strongly recommend that
consideration be given
a. to extend to reporting accountants
of charitable companies the same provisions as apply to independent
examiners, in each case below the £250,000 threshold; and
b. to harmonise at £10,000/£250,000/£500,000
the thresholds for an independent examiner's/accountant's report
and the qualifications of the examiner/reporting accountant for
both charitable companies and other charities. It might highlight
the distinctions and avoid confusion if the phrases and their
definitions "independent examiner" and "independent
examination" applied only within the £10,000-£250,000
band, and "reporting accountant" and "accountant's
report" only within the £250,000-£500,000 band,
for all charities.
c. to amend the heading of Clause 22
and subclause (1) thereof to read "annual audit or examination
of unincorporated charities or CIOs" in order to clarify
that those provisions are applicable to CIOs.
Requirement for a CIO to have members
11. Schedule 6 of the Bill inserts a new
clause 69B in the Charities Act 1993 which requires (subclause
5) that a CIO shall have one or more members.
12. This seems unnecessary and a source
of continuing confusion. The Strategy Unit report noted that "The
CLG is unwieldy for charities in which the directors are the same
people as the members since they have to make some decisions in
one capacity and other decisions in the other capacity" and
recommended that the new legal form should include both "Foundation
and membership formats, so that it is appropriate for charities
with and without a membership structure". There was nothing
in the Government's response that disagreed with this recommendation.
13. As a trustee of Charity A, I was recently
responsible for organising its transfer from unincorporated to
incorporated status, and as a trustee of Charity B (which has
always been incorporated) I set in motion a year or so ago the
adoption of an updated memorandum and new articles of association.
In both cases the members and the trustees are (and will remain)
the same, but they found it very difficult to understand the distinction
between membership and trusteeship (company directorship) and
the need to meet sometimes as members, at other times as trustees.
In one case they have to approve the annual accounts as trustees
and then receive them after the relevant notice period as members,
a complete waste of time. The formalities of requiring trustees
to accept membership and the guarantee liability attached to it
as well as trusteeship, and to resign from both offices, is often
misunderstood or overlooked. Another issue arises because under
some articles of association trustees have to be appointed by
the members or reappointed by them if co-opted by the trustees,
when these bodies are the same. In one case in my experience only
one of the trustees (out of 12) had been validly appointed, as
the rest were not members, as required by the articles!
14. While I have, with the assistance of
legal counsel, been able to facilitate the adoption of new articles
for both these charities which conflate the two roles of member
and trustee as far as possible and avoid some of the more tiresome
difficulties and distinctions alluded to above, it would make
life much simpler for all concerned if there were an alternative
CIO form available (perhaps with scope for conversion to a membership
organisation if desired) for CIOs where it is intended that the
trustees should be self-appointing, as already can be the case
with charitable trusts.
15. The wording of new Clause 69C(3) is
rather abstract and impersonal, seeming to attempt to state in
an exhaustive manner that all combinations of Trustee and member
are permissible. It seems unlikely that there is any need for
a constitution to require all members to be Trustees except in
the case where only Trustees are to be members. It follows that
it would be simpler and clearer if the wording were changed to:
"A CIO's constitution may provide that a Trustee must be
a member, or that the Trustees and the members are identical,
but neither is obligatory." This could be further simplified
if the suggestion is accepted that provision is made for a non-membership
form of CIO.
16. I accordingly strongly recommend that
provision is made for CIOs to be formed without members (and for
conversion to and from the membership form). There would need
to be consequential changes to the draft provisions for conversion
to CIOs of charitable companies limited by guarantee where the
conversion is to non-membership form. The wording of draft Clause
69C(3) to be inserted in the 1993 Act by Schedule 6 would also
benefit from simplification, as described above.
June 2004
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