Everything’s changing in charity law: Part four

Remuneration for the supply of goods and the power to award equitable allowances

The Law Commission published its report on Technical Issues in Charity Law in September 2017 following a public consultation which revealed that many charities struggle with a range of technical issues in the law leading to unnecessary expense and preventing charities from dedicating their full resources to the public good. On 22 March 2021, the Government published its long-awaited response to the Law Commission’s recommendations and accepted most of the recommendations.

The Law Commission’s report made recommendations about remuneration for the supply of goods and the power for charities to award equitable allowances and we set out the detail below.

Remuneration for the supply of goods
There is an important general principle in charity law that trustees must not make personal gains from their position as trustees unless authorised in specific circumstances.

Section 185 of the Charities Act 2011 allows trustees to be paid for providing services to the charity. For example, a trustee who is a painter decorator can be paid out of the charity’s funds for painting the charity’s offices. However, nowhere in the Charities Act is there a power for a trustee to be paid for providing goods to the charity. So whilst the trustee who paints the charity’s office can be paid for his service, the legislation does not authorise his payment for solely providing the charity with the paint or equipment even if it was for a favourable price.

It is for this reason that we recommend the inclusion of an express power in our clients’ governing documents allowing trustees to be paid for the supply of goods to the charity. This allows the charity to access goods that might be offered at more favourable terms for the charity.

To address this inconsistency in the legislation, the Law Commission has recommended, and the Government has accepted, that s.185 be extended to allow charity trustees to be remunerated for the supply of goods. Once enacted, this legislative power will supplement any existing express powers contained in a charity’s governing document, allowing charities to pay certain trustees for the supply of goods to the charity, subject to controls and the management of conflicts of interest. Although a number of charities have this power in their governing documents already, it was recognised that by including it in legislation a number of older charities who do not have the power in the governing documents can benefit from it and it provides further clarity to the sector as to the appropriateness of such provisions.

Equitable allowances
The Government has also accepted the Law Commission’s recommendation that the Charity Commission should have a statutory power to authorise an ‘equitable allowance’. This may be required where a charity trustee has obtained a benefit in breach of their fiduciary duty. They may have either:

• carried out work for the charity for which they have not received payment because payment is not authorised but it would be inequitable not to be remunerated; or
• received an unauthorised payment for the charity already for which they would normally have to account to the charity.

At present, it is only the courts that can award an equitable allowance, not the Charity Commission. The Charity Commission can only relieve the trustee from liability for a breach of trust if they have acted honestly. Applying for a court order can be costly and time-consuming and most applications are dealt with by the Charity Commission who will assess the application and confirm that it will not pursue the trustee for an account of profits. This provides some comfort but without a court order for equitable payment, there is a risk that a third party will pursue the charity or the trustee for the unauthorised payment. The new recommendation will allow the Charity Commission the power to award an equitable allowance in addition to their current powers. This power will be subject to challenge by way of judicial review.

For more information

If you have any questions in relation to any of the matters covered above, please do contact your usual contact in the charities team or Safa Murad.

The full list of our series of ebriefings can be found below:

• Everything’s changing in charity law: Introduction
• Part one: Charity registration financial thresholds
• Part two: Permanent endowment 
• Part three: Changing purposes/amending governing documents 
• Part five: Acquisitions, disposals and mortgages of charity land 
• Part six: Cy-pres schemes and the proceeds of fundraising appeals

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