This is the fourth in our series of articles designed to provide you with practical guidance on the key changes under the Charities Act 2022 and, crucially, how they will affect you in practice.
In this article, we focus on changes to the power to buy goods and services from trustees and connected persons.
For a general introduction to the Act, please see our article Charities Act 2022: a practical introduction for charity trustees.
What are the current rules?
There is a very strict and fundamental principle in charity law that charity trustees should not benefit from their position as such. This principle derives from the fiduciary nature of the role of a charity trustee (this is explained in more detail in the Charity Commission’s document setting out the legal underpinnings applicable to its guidance on conflicts of interests).
As a result of this strict principle, charity trustees can only benefit from their charity where there is an explicit authority, obtained in advance. Authority may be conferred by:
- order from the Charity Commission court
- the charity’s governing documents.
It is very common for charities to wish to purchase services from their charity trustees or persons connected with them, particularly where the price to be paid for those services is heavily discounted when compared to other service providers. There is a helpful statutory power available to charities in these circumstances.
In summary, the statutory power permits the un-conflicted charity trustees to take a decision to purchase services (including goods supplied in connection with services) from a charity trustee or person connected with them, provided that they are satisfied that this is in the charity’s best interests, there is no express provision in the governing documents to prohibit it, the terms (particularly in respect of remuneration payable) are reasonable and set out in a written agreement, and no more than half of the trustees are either providing services to the charity or connected with someone who is doing so at any given time.
The statutory power does not currently extend to the provision of goods by charity trustees and connected persons where there are no services being provided. So, unless a charity’s governing document includes an express provision to authorise the purchase of goods from charity trustees and connected persons, this is only possible by applying for an order from the Charity Commission to permit the arrangement (or applying to amend the charity’s governing documents to add an express power to purchase goods from trustees and connected persons).
Additionally, the statutory power may only be used where a person is not entitled to receive remuneration by virtue of any express provision in the charity’s governing documents.
What is changing?
The Charities Act 2022 will change the rules so that the statutory power is available in situations where a charity wishes to purchase goods from a trustee or connected person where those goods are not to be supplied in connection with any services.
In addition, the amended statutory power will apply in addition to any express power that a charity might have to make those payments within its governing documents.
What does this mean in practice?
The changes will mean that all charities may make use of the statutory power to procure goods, services or both from charity trustees and connected persons without needing to rely on express powers in their governing documents. The key things to remember when making use of the power in practice are as follows:
- It is essential to appropriately manage conflicts of interests, so any trustees who are either proposing to provide services or are connected to persons doing so should not participate in the decision-making process.
- The term “connected person” is widely defined and includes family members, companies controlled by a charity trustee, companies in which a charity trustee has at least a 25% interest, and business partners of charity trustees.
- A decision to purchase goods, services or both from a charity trustee or person connected with them should be taken by the un-conflicted trustees in the usual way in which the charity trustees take decisions.
- The un-conflicted trustees should consider whether or not it is in the charity’s best interests to purchase the goods, services or both from the charity trustee/connected person, or whether some other supplier would be preferable, and they should take into account factors such as how well placed the proposed supplier is to meet the needs of the charity, the length of the proposed arrangement, the risks involved in the arrangement and how easily any dispute regarding the supply of goods, services or both may be managed if a trustee or connected person is the supplier.
- There must be an appropriate draft written agreement for the un-conflicted trustees to consider, and they must satisfy themselves that the proposed terms, in particular the level of proposed remuneration, is appropriate in the circumstances. Professional advice on the proposed terms should be sought, where required.
- The un-conflicted trustees should have regard to the Charity Commission guidance on paying trustees and connected persons for goods, services or both (the current guidance is available here, and will need to be updated in due course to reflect the change in rules).
- No more than half of the charity trustees may, at any given time, either be a supplier to the charity or be connected with a supplier to the charity.
For further guidance on the general charity law principles in respect of trustee benefits and the management of conflicts of interest, please see our free webinar on this topic, which is available on our YouTube channel (along with recordings of our other free webinars). Please get in touch with Liz Brownsell (Partner and Head of Charities) or another member of the Birketts Charities Team to discuss your requirements.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2022.