Charity Commission releases new guidance on paying trustees

The Charity Commission recently published guidance on paying trustees for goods and/or services as part of a series dealing with payments to trustees. The guidance aims to help charities comply with the proper procedure for remunerating trustees for the provision of goods and/or services and avoid making any ‘unauthorised payments’. 

Samantha Pritchard, partner, and Eleanor Amies-King, trainee solicitor, both in our charities team, summarise the guidance and the rules to be aware of. 

What is the guidance for? 

Sitting on a charity's board of trustees is generally a voluntary role, which helps to inspire trust and confidence in charities and ensure the charity’s funds are applied for its charitable purposes. However, sometimes situations arise where it would be in the charity’s best interests to pay a trustee or a ‘connected person’ for goods and/or services they can provide to the charity. 

Examples of goods include the provision of items the charity needs to operate. Services include administrative work, professional and trade services and consultancy services, amongst others. It is important to note that this guidance does not cover payment for employment or discharging normal trustee duties – these are each governed by different rules. 

Payment can take several forms, including financial remuneration or other benefits such as free use of equipment and services.

What is a connected person?

The rules on paying trustees for goods and/or services also apply to people and organisations that are connected to a trustee. The definition of a connected person can be found in section 188 of the Charities Act 2011. It covers the following people:

·        A child, parent, grandchild, grandparent, brother or sister of a trustee.

·        A spouse or civil partner of a trustee or of one of the relatives above.

·        Organisations in which a trustee and/or any of the persons mentioned above have a controlling or substantial interest. 

What are the rules?

Charities can pay trustees or connected persons for the provision of goods and/or services using a statutory power set out in s185 Charities Act 2011, as long as they follow the conditions connected to the exercise of that power. These conditions are explained in the Charity Commission guidance as follows:

Rule 1: No prohibition

Some charities’ governing documents include provisions expressly prohibiting trustees from receiving any type of payment or benefit from the charity. If this is the case, a charity must seek permission from the Charity Commission (the Commission) to amend its governing document before it can use this statutory power.

Rule 2: Best interests

The procurement of the goods and/or services must be in the best interests of the charity. Charities should consider factors such as the availability of other providers, the price of the goods/services and the risks to the organisation of purchasing from a trustee or a connected person rather than an unconnected third party, when making their decision. Trustees can read more about decision-making here.

Rule 3: Reasonableness

The remuneration paid to the trustee or connected person must be reasonable in the circumstances. Trustees should consider what the charity has paid in the past in similar circumstances, or what would be charged by independent providers. If charities have a policy for obtaining comparable quotes, this should be followed as usual. 

Rule 4: Written agreement

The relationship must be documented in a written agreement between the charity and the provider of the goods/services. The agreement should accurately describe the goods or services being provided, stipulate the amount or maximum amount payable, include other key points stipulated in the guidance, and be signed by all parties. 

The agreement will constitute part of the charity's financial records and should therefore be retained for a minimum of six years. The reasons for deciding to proceed should be carefully documented in the board’s minutes. 

Rule 5: Minority of trustees

Only a minority of trustees may be paid by the charity at any one time – for example, if you have a board of five trustees, the charity can only remunerate two trustees at any one time. 

Remuneration under this rule includes not just payment for goods/services but also remuneration to any trustee who is employed by the charity, and remuneration to any connected person or organisation. 

Rule 6: Conflicted trustees

A conflicted trustee (i.e. a trustee that receives remuneration directly from the charity or is deemed to receive remuneration indirectly via a connected person) cannot take part in any discussions or decisions about whether to engage them (or a person connected to them), the terms of the agreement, or any decision to end the arrangement, and must be absent from the meeting whilst the unconflicted trustees deliberate and vote. 

If you aren't sure if a trustee is conflicted, it is best to treat them as though they are or to obtain legal advice to confirm the position, to avoid inadvertently falling foul of the rules. 

What happens if the rules aren't followed?

If a payment is made to a trustee or a connected person without following the rules, the payment will be classed as ‘unauthorised’. This can mean the trustee or person receiving the payment may be required to repay the money to the charity, or in a worst-case scenario, those who purported to authorise the payment may have to account to the charity for repayment from their personal funds. 

If the Charity Commission finds that unauthorised payments were made knowingly or that serious misapplication of charitable funds has occurred, trustees ultimately risk disqualification, and the Commission can order a charity not to make (further) payments in such circumstances. If you are considering paying a trustee or connected person, we strongly recommend that you seek legal advice before doing so. Please contact Samantha Pritchard via [email protected] or 0191 2117905