Caution required: Understanding the Charity Commission’s updated guidance on trustee payments

Whilst charities have been treading carefully when considering payments to trustees, the updated guidance reinforces how high the bar is and how easily it can be missed.

The guidance now spans five distinct scenarios in which a trustee might receive or be deemed to receive a payment. Across these scenarios, the message is clear: any payment is the exception, not the rule, and must be carefully justified to show it is in the charity’s best interests.

Payments to those connected to trustees

Payments to those connected to trustees count as payments to trustees. The rules on who qualifies as a ‘connected person’ can be complex and depend on the legal authority for the payment, e.g. statutory or in a charity’s governing document.

‘Connected persons’ are likely to be:

• close relatives (such as a spouse, partner, child, sibling or parent);
• business partners or employees/employers; and
• companies or LLPs controlled by the trustee or connected persons.

It is important to note that if a charity controls a company or LLP (e.g. its trading subsidiary), payment by that company or LLP to a trustee will be a trustee benefit/payment.

The rule is that if a payment is going to any person or organisation linked to a trustee, it is important to pause and ascertain if this is deemed to be a payment to a trustee. If it is, it should be determined how/if the payment can be made. Conflicts of interest should also be declared and managed transparently.

Throughout this article, any reference to payments to trustees also includes payments to those connected to them.

Key considerations before making a trustee payment

Before looking at the five scenarios, two underlying principles should apply to all payments to trustees.

1. Authority – do you have the legal power to make the payment? This must come from:
   • your charity’s governing document;
   • a specific order from the Commission or the court; or
   • a statutory power, e.g. section 185 of the Charities Act 2011 (for payment for goods/services).
2. Best interests of the charity – is the payment in the charity’s best interest? For example:
   • can the same goods/services be sourced on better terms from a non-trustee; or
   • what are the reputational and operational risks of paying a trustee? Have/can you manage conflicts of interest etc?

If a charity cannot satisfy both tests, it must not proceed, regardless of how well-intentioned the payment may be.

The five payment scenarios explained

It is important to remember that these rules apply equally to payments to those connected to a charity’s trustees. Payment to someone connected to a trustee:

• has to be authorised as if it were a payment to the trustee; and
• will mean that the trustee is deemed to be receiving a payment when considering how many trustees are paid at any one time.

None of these payments can be made unless:

• your charity has the power to make the payment; and
• the trustees are satisfied that the payment is in the charity’s best interests.

Payment to trustees for goods/services (excluding any payment for fulfilling trustee duties)

This is the most commonly encountered scenario and is one that can often be misunderstood. Examples might be payments to trustees for catering, plumbing or legal advice.

It is potentially permissible under section 185 of the Charities Act 2011. However, if a charity’s governing document expressly prohibits such payments or any trustee benefit/payment, then section 185 cannot be used. In that case, a charity should be able to remove the prohibition either under a statutory power to alter its governing document or with the Commission’s consent.

This scenario does not allow payment for fulfilling a trustee’s duties. Therefore, any services being paid for must be distinct from the person’s role as a trustee. This distinction can be particularly tricky where a charity wants to pay the chair of trustees for their services as a chair over and above their duties as a trustee. This scenario also doesn’t allow for payment as an employee of the charity.

The authority must be in place before the trustee begins providing the services or goods. A written agreement is required and the trustee must not participate in decision-making regarding the arrangement. The payment must not exceed what is reasonable in the circumstances and other trustees must be satisfied that it would be in the best interests of the charity for the trustee to provide the goods/services.

The total number of trustees being paid (not just for goods/services) by the charity must be a minority.

Employment of a trustee by the charity

Where a charity proposes to employ a trustee, this generally requires the prior authority of the Commission unless the charity’s governing document permits such employment and you can comply with any conditions it specifies.

Be wary of wording in a governing document that says a trustee can be ‘remunerated for services’. This might mean payment for providing services to the charity and not payment as an employee of the charity.

If you do want to potentially employ a trustee, you will also need to:

• Appoint the best person for the job, usually following a genuinely open recruitment process.
• Manage the conflict of interest during the recruitment and once the trustee is employed.
• Ensure the terms and conditions of employment and salary are reasonable.

Remember, if you start the process of writing a job description and/or recruitment and a trustee is involved, they cannot then simply step down as a trustee to enable them (or someone connected to them) to be employed. Their employment is very likely to require the prior consent of the Commission.

Payment for trustee duties (as a trustee)

This will only be allowed in very limited circumstances and the Commission guidance is clear that fulfilling trustee duties is a voluntary role. Very occasionally, a charity’s governing document might allow a trustee to be paid for fulfilling their duties as a trustee, but this is rare and, in most cases, the prior consent of the Commission will be required. It can be extremely difficult to get that consent as the Commission considers such payments to be high risk, particularly concerning a charity’s reputation.
Any payment that might be authorised will need to be:

• for a limited period;
• reasonable;
• in a written agreement; and
• in the charity’s best interests, with conflicts of interest managed.

Compensating a trustee for loss of earnings

Again, this will only be allowed in limited circumstances. The Commission guidance is clear that fulfilling trustee duties is a voluntary role, however, if a trustee can’t afford to lose their income when attending trustee meetings or training (e.g. they’re self-employed) then the Commission may agree.

To make such a payment, a charity will need to have:

• the power in its governing document (this is rare); or
• the consent of the Commission.

Some key points to consider:

• Can trustees’ meetings be moved to a time and date which means a trustee doesn’t miss income from their job?
• How is the payment in the charity’s best interests and why is it key that they don’t lose this trustee’s skills and experience?
• How can you manage conflicts of interest?
• The loss (and amount of the payment) must be clearly evidenced and linked directly to trustee activity.

Other types of trustee payments

Some payments do not fit into the above categories but are still subject to strict rules.

Examples include:

• buying or renting land from a trustee or connected person;
• paying a trustee for work already carried out; or
• small payments or honorariums (such as to acknowledge their service as a trustee upon retirement).

These are covered in the fifth part of the Commission’s guidance. In all cases, the trustees must consider that it is in the charity’s best interests to make such payments. However, the rules for each differ.

One point to note in relation to the Commission’s guidance on small payments or honorariums is that it says that the Commission’s consent is not usually required if:

• for non-company charities, the individual payment is £1,000 or less; or
• for charitable companies, the individual payment is £200 or less; and
• the total payment to all trustees of the charity (regardless of type) during the financial year does not exceed £1,000.

Whilst the guidance is not clear, the final condition means total payments of any type (except expenses) made to trustees or connected persons. Therefore, for example, if the charity pays one trustee £950 a year for goods or services, then the payment of an honorarium to a trustee of £200 will need the prior consent of the Commission as it will take the total paid to trustees in that year to over £1,000.

Key takeaways

The revised guidance does not change the law relating to payments by charities to trustees or those connected to them, but it raises the accountability bar.

Before considering any form of payment to a trustee or someone connected to a trustee:

• Check your powers – this can be your governing document, Commission authority or statutory.
• Put the charity first – consider if you would make the same decision if no personal connection existed.
• Manage conflicts scrupulously – trustees with a personal interest must be absent from discussions and decisions and their personal interest must be minuted.
• Connected persons – if the payment is going to anyone linked to a trustee, such as their relatives or employer, pause and ascertain if this is deemed to be a payment to a trustee. If it is, can it/how can it be made? Also it should be ensured that any conflict of interest is declared and managed transparently.
• Document everything – keep clear, detailed minutes of decisions, agreements and how they were reached.
• Report transparently – disclose all payments in the charity’s annual accounts and to the Commission if required.

The Commission’s updated guidance reflects a clear intention to scrutinise trustee payments more closely. Even well-intentioned arrangements can lead to regulatory consequences if the proper safeguards are not in place. Charities must approach any such payments with caution, transparency and focus on the charity’s best interests.

For more information on payments to trustees and connected persons, please contact Edwina Turner on 07760 776224.

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