Following last year's consultation on the 2018 annual return, the Commission has created The Charities (Annual Return) Regulations 2017 (the Regulations) and published a report on the consultation. What follows is a summary of the changes and the Commission's reasons for introducing them. The Regulations came into force on 1 January 2018 and will apply to financial years ending on or after that date.
The consultation report begins by pointing out that the Commission will be expanding its "Update Charity Details" (UCD) service. In future, charities will need to use this to notify changes to its registered details; the Annual Return will be limited to gathering financial and regulatory information, with questions targeted at charities to which they are relevant.
The changes fall under the following headings.
The Commission already asks charities if they raise funds from the public and asks for information about whether they work with, and have an agreement with, a commercial participator. In future, it will also ask whether charities work with a professional fundraiser and, if so, whether they have a signed contract with the fundraiser" .
According to the Commission, newer and medium-sized charities are likely to have weaknesses in their arrangements with professional fundraisers. Asking these questions will, it says, help it to target charities at risk of non-compliance with guidance and support. It will share relevant information with the Fundraising Regulator and publish charities' answers on their public register pages.
Income from central or local government
The annual return already asks how much charities receive from these sources. In the 2018 version, charities that say they receive funding from central/local government will be asked further questions about the number of contracts and grants concerned.
The aim here is to address the risk of over-reliance on public sector funding. As with the fundraising question, the Commission plans to use the information provided to target guidance at charities identified as being at risk and will publish the information on the register pages of the charities that answer these questions. It also intends to monitor the extent to which information from these questions enables it to target advice and support.
Currently, the annual return asks if charities are registered with HMRC for Gift Aid. This question will be moved to the UCD.
Income received from outside the UK
The Commission wants to know how much registered charities receive from overseas to assess the sources and volume of income from higher risk jurisdictions, identify charities that are financially dependent on overseas funding, and monitor any loss of European/EU funding following Brexit. This is the first time the annual return has asked questions about overseas funding.
All charities will be asked if they receive funding from overseas. If they answer "yes", they will need to name the countries from which they had received money and, in relation to each country, how much they received from:
- overseas governments and quasi government bodies;
- overseas non-profit organisations; and
- unknown sources.
The Commission also wants to know how much charities receive from foreign individual donors and private institutions, but:
- charities with an income of £25K or less will only be asked to report on single payments from individual donors or institutions if those payments constitute 80% or more of the charity's gross income for the financial year; and
- charities with an income over £25K will only be asked for the total value of all single payments from overseas individuals or institutions that are more than £25K.
Because it may take some charities a while to make the changes necessary to collect this information, the questions relating to individual donors and private institutions will be voluntary for the 2018 annual return. They will be mandatory from 2019 onwards.
The information will not be put on the register of charities.
The Commission will be asking charities to say whether any of their staff receive a remuneration package"  above £60k and, if so, how many employees (and how much their total packages are worth), and how much the highest paid employee receives. Charities will not have to disclose exact salaries; they will need to say how many people receive remuneration packages within different income bands.
In the consultation, the Commission said that it wished " to make clear that it does not have the intention of intervening in a charity simply because a salary is within a certain band. It will continue to operate in accordance with its risk framework and look at all the circumstances of a charity before considering whether or not any other steps should be taken".
The consultation report says this:
"The Commission has a regulatory interest in information which relates to whether the charity is carrying out its purposes for the public benefit. This includes ensuring that any personal benefit is 'incidental' where (having regard both to its nature and to its amount) it is a necessary result or by-product of carrying out its purposes."
Whilst the two statements are not contradictory (and the question of whether executive pay constitutes a legitimately incidental private benefit is reasonable), the statement in the consultation response puts a rather different slant on matters.
Payments to trustees
The annual return already asks if charities pay their trustees for acting as such. From this year, the Commission will also ask if trustees have been paid for providing services to the charity or received other material benefits from it. The annual return will also ask if any employees used to be trustees.
The Commission explains that it wants to use this information to get a picture of the extent and nature of trustee payments, and to raise awareness of the circumstances in which trustees can be paid. The "benefits" in the questions are defined as including "a direct or indirect benefit of any nature", so it's a pretty broad term. The Commission will publish the information provided on charity register pages.
Expenditure in countries outside England and Wales
The Commission has added to the current questions about the destination and amounts of expenditure in other jurisdictions. The annual return will now also ask if charities have transferred funds outside the regulated banking system and, if so, what methods they used. It will also ask what arrangements charities have in place to monitor overseas expenditure and if the trustees are satisfied that the charity's risk management policies and procedures adequately address the risks arising from its activities and the geographical areas in which it operates.
The Commission maintains that this information will help it build up a picture of how charities transfer money abroad, get a sense of the risks across the sector associated with money transfers, and target advice to relevant charities. The Commission goes out of its way to explain that the question captures expenditure in Scotland and Northern Ireland, as well as countries outside the UK.
As with the questions about income received from outside the UK, the Commission accepts that, to produce this information, charities may need to make changes to their record systems, and so is making this question voluntary in the 2018 annual return. It will be mandatory from 2019 onwards.
This information will not be put on the register.
Managing charity assets
Land and buildings
The current questions, which ask if charities have land/buildings used for charitable purposes, will be moved to the UCD. The Commission intended to add a question about whether charities receive rating relief. This stemmed from concerns about rating relief being claimed inappropriately: a few years ago, HMRC brought a number of cases against charities that had rented premises from commercial land owners who – wanting to avoid paying business rates on empty properties – had leased them to the charities on non-commercial terms. The charities, in turn, had claimed business rate relief. In some of those cases, the charities were not entitled to the relief, since they were not, in any real sense, occupying the properties.
Having considered the consultation feedback, the Commission now acknowledges that the proposed question would not enable it to address possible abuses of charitable status. As a result, it will not ask this question, but the consultation report says that the Commission "will continue to explore this issue as it has the potential to create concern about the benefits which charities receive.
Charities are already asked if they have trading subsidiaries. In future, the annual return will ask charities that do have subsidiaries how many of their trustees are also directors of those subsidiaries.
The answers will be published on each charity's public register page.
The Commission already asks charities if they have a safeguarding policy. This question will now be in the UCD. In the annual return, charities that work with children or vulnerable adults (and are not regulated by another body in relation to safeguarding) will be asked if they have obtained DBS checks for trustees, staff and volunteers who work in positions that are eligible for such checks.
At present, the Commission does not plan making this information public. However, it will "monitor how this question is answered to ensure that the question is properly understood by charities. We will then consider whether it will be helpful to publish the information on the charity's page to promote accountability and transparency".
Serious incidents were not mentioned in the consultation. The annual return will continue to ask trustees about them, though the wording of the question will be slightly different. Trustees will be asked: "In the financial year to which the return relates, were there any serious incidents that have not been reported to the Commission?" So, trustees with an income exceeding £25K will still need to disclose any serious incidents when they complete their annual return, if they have not already done so. For more information on reporting serious incidents, please see the Commission's guidance. You may also want to read our article on the guidance, published in December last year by Laetitia Ransley and Rachel Holmes.
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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2018.
 The terms "professional fundraiser" and "commercial participator" are both defined in the Charities Act 1992. See the Code of Fundraising Practice for a brief description of the law relating to commercial participators and professional fundraisers.
 Including employee benefits.