SocialEconomyIssue no. 93September - November 2008

A quarterly bulletin of information for charities,voluntary organisations and social enterprises

To view SocialEconomy online visit:www.unity.co.uk or www.wrigleys.co.uk

With the Government suggestingthere are insufficient affordablehomes to rent or buy, guidance asto when affordable housing is acharitable purpose is essential.The Charity Commission hasteamed up with HMRC and theHousing Corporation to produceguidance on “Affordable HomeOwnership - Charitable Status andTax”. The guidance discussesvar ious af fordable hous ingalternatives in terms of charitableactivity and public benefit.It explains when the provision ofaffordable housing for rent andaffordable housing for sale can be

charitable for the public benefitand when it will not be charitable.

Charities will need to be particularlycareful when building houses forsale, since if it is not charitable thenit is a trading activity which will betaxable. The guidance suggestssome income parameters forpurchasers and property prices indifferent parts of the country belowwhich the sale of property would beconsidered a charitable activity. Italso outlines how HMRC clearancecan be obtained to ensure that theact iv i ty is pr imar y purposecharitable trading.

The so called small charitiesprovisions in the Charities Actwere updated with effect fromMarch 2008. All unincorporatedcharities (small or otherwise) nowhave a statutory power to amendtheir governing documents. Asmall charity is defined as anunincorporated charity withannual income of up to £10,000and which does not hold landthat is held for par t icularpurposes of the charity. They cannow transfer their property toanother charity or charities withsimilar purposes and amend theirobjects clauses without obtainingthe consent of the CharityCommiss ion , a l though theCommission must be notified andcan raise objections. A similarthough slightly longer procedurecan be used where the charityholds permanent endowment.

Permanent endowment has been amuch vexed subject for many years.Happily there are now much broaderpowers to spend permanentendowment. The procedure variesdepending on the size of the charity.If the charity has an income in thelast financial year of not more than£1,000 or the value of theendowment fund is not more than£10,000 (or if the endowment wasnot entirely given to the charity), thetrustees can spend the endowmentas if it were income withoutobtaining consent or even informingthe Charity Commission. This isparticularly focused at small charitieswith endowments that do notproduce enough income to fulfil theirpurposes, but due to the wording ofthe Act it also covers thosepermanent endowments which areinvested in failing investments whichdid not produce £1,000 income in

the last year. It is foreseeable,particularly in the current markets,that this may cover significantlylarger charities than perhaps thedraughtsmen originally intended.

Where the income is over £1,000and the value of the endowment isover £10,000 there is still a powerto spend the endowment, but theCommission will need to concurwith the resolution of the trustees.Although these provisions areaimed at small charities, thelegislation and procedures are notstraight forward. Professionaladvice should be sought wherea p p r o p r i a t e . T h e C h a r i t yCommission’s guides on thesesubjects CSD1346A, CSD1347Aand CSD1348A1 are available atwww.charity-commission.gov.uk/common/applyforit.asp

CharitiesAffordable home ownership -when is it charitable?

SocialEconomy is published by Wrigleys Solicitors in association with Unity Trust Bank

Small charities provisions

www.charity-commission.gov.uk/supportingcharities/homeown.asp

The Charity Commission hasrevisited its guidance CC60, theHallmarks of an Effective Charityand renumbered it as CC10. Theguidance is designed to set outstandards to help to improve theeffectiveness of a charity. It isbased on the structure used forthe Charity Commission’s reviewvisits and sets out the principles ofgood practice for charities that theCharity Commission supports.

The guidance is divided into six‘hallmarks’ (or principles) and foreach o f these , the Char i t yCommission has listed a number ofways in which the hallmarks can bedemonstrated (although they accept

that not every example will apply toevery charity). The guidance isdesigned for trustees to use as ameans of reviewing how theircharity is performing and to helpthem to identify the areas in whichthe charity is strong and those areaswhich need further development.

There are other codes whichtrustees may find useful whenrev iew ing the i r gove rnancep r o c e d u r e s . T h e C o d e o fGovernance for the Voluntary andCommunity Sector is one of theseand is endorsed by the CharityCommission, which contributed toits development, in partnershipwith NCVO, Acevo, Charity Trustee

Ne two rks and ICSA . CC10and the Code are intendedto be comp lemen ta r y. TheC o d e c a n b e f o u n d a twww.governancehub.org.uk.

The guidance can be found at:http://www.charity-commission.gov.uk/Library/publications/pdfs/cc10text.pdf

The Hallmarks of an effective charity – revisited

An informal consultation into thefuture of the Compact between theGovernment and the voluntarysector was launched last month.The aim is to improve therelationship between the thirdsector and the public sector andmake it more effective. Thequestions asked include: what sortof agreement should the Compactbe in the future? How could theform and content of the Compactbe enhanced to make it fit for the

future? How could the Commissionfor the Compact change to ensureb e t t e r imp l emen t a t i o n o fthe Compact?

Commissioner for the Compact, SirBert Massie’s own views seem to bethat currently there is not the desirein both sectors to make theCompact a legal obligation. Indeed,he seems to prefer a voluntaryCompact “Because it works betteras a flexible agreement”. Hesuggests that it may be useful to

have a champion for the Compactand to this end believes that theCommission for the Compactshould have more independenceand the power to investigate localdisputes. If the Commission for theCompact could mediate in disputesbetween the public and third sector,the re wou ld po ten t i a l l y beconsiderable savings of both timeand money.

Phil Hope, minister for the ThirdSector, who invited Massie to carry

out the consultation stated as hisintention that the Office for theThird Sector will lead the debatewithin government whilst thereview is going on. He sees this ascrucial given that the Compact is atwo-sided agreement. The HomeOffice has indicated that 2010 willbe the earliest date from which anychanges will be carried out. Tocontribute to the debate, emaildebate@thecompact.org.uk(Third Sector 22.08.08)

Statutory Compact?

Draft guidance on professional fund-raisingand commercial participation

The Office of the Third Sector produced draft guidance for consultationearlier this year, on professional fund-raising and commercialparticipation, to highlight the key provisions that came into force on 1April 2008. The consultation threw up some fairly major issues,particularly in relation to those parts of the guidance dealing with thecommercial participator rules. These rules deal with commercial entitiesentering into a promotional venture with a charity to raise funds, forexample by selling particular products where part of the purchase priceis then paid over to charity.

There are a number of rules whichapply to the relationship betweenthe charity and the commercialentity – and the wording which canbe used in the marketing materials.The new legislation is not clearlydrafted and the result of theconsultation was that the guidanceshould be reviewed to try to clarifymatters. Final guidance was to be

produced before the summer butthis has been delayed. It isunfortunate that the guidance wasnot finalised before the change inthe legislation rather than monthslater and we hope that this will beremedied soon.

www.cabinetoffice.gov.uk/third_sector/law

Communities in control: White Paper

Social Enterprise…

July’s community empowermentWhite Paper seeks to deliver powerto communities and individuals.

The Communit ies and LocalGovernment website describes theaims of the White Paper as being “topass power into the hands of localcommunities, to encourage vibrantlocal democracy in every part of thecountry, and to give real control overlocal decisions and services to a widerpool of citizens.” What does thismean in practical terms?

There is a proposal to set up anEmpowerment Fund of at least £7.5million to support national thirdsector organisations turn proposalsinto actions. The Department forWork and Pensions is looking at waysto encourage those on benefits andwith disabi l i t ies to take upvolunteering opportunities. TheDepartment for Communities and

Local Government also intends tocarry out a survey of third sectororganisations, including faith-basedorganisations, to understand thedifficulties they face. To make iteasier for citizens to influence theagenda there will be a new duty forcouncils to respond to petitions.There will also be a £70 million fundto boost community enterprise.

Community empowerment expert, DrGraham Gardner sees Hazel Blears’proposals as being a “far cry” fromJohn Prescott’s 2005 proposals tohand over partial control of publicservices to neighbourhood-basedorganisations. The vision seems to bethat communities will become moreinvolved in local affairs. Whether ornot this vision will become a realitywill depend on how effectively theseproposals are implemented.www.communities.gov.uk(Regeneration & Renewal 18.07.08)

Reform of Industrial and ProvidentSociety Law

Industrial and Provident Societiesare the unsung heroes of socialenterprise. A legal form which hasbeen used since the 1840’s, it isnot surprising that the assets ofthis sector are around £9 billion.Most frequently used by housingassociations, co-operatives andcredit unions - the legal form hasproved ve r y innova t i ve ins u p p o r t i n g c ommu n i t ydevelopment in regeneration,community renewables, villageshops, village pubs and is beingwidely used by community landtrusts. Unfortunately, with thehistorical anomaly of HM Treasury

as the lead department, seriousreform of the law has never been ahigh priority.

The latest consultation documenton proposals for legislative reformcontinues the long established andbelated piecemeal approach whichcan be contrasted with thewholehearted support of the ThirdSector and Government for theintroduction of the communityinterest company. There are onlytwo significant proposals in theproposed reform. Firstly, theabolition of the limit on the amountof transferable share capital whicha society can issue to each member,but the retention of the limit forwithdrawable share capital at

£20,000. Welcome as this is, itmeans that the limit of £20,000 forwithdrawable share capital has notkept pace with inflation.

The second welcome reform isthe introduction of the freedomfor societies to set their accountingyear ends at any time duringthe year rather than during aprescribed window.

The consultation document alsoproposes more significant changesfor credit unions which wouldpermit corporate membership andwider bonds of membership. Theconsultation document is availablefrom HM-Treasury.gov.uk and isentitled Proposals for a LegislativeReform Order for Credit Unions andIndustrial and Provident Societies inGreat Britain.

Match-making between businessangels and social enterprise

Seventy-five investors, eight to tensocial enterprises, deals rangingfrom £750,000 to £1 million. Thisis the vision Equity Plus has for itsfirst year. Equity Plus has none ofthis money itself. Rather its role ismore that of match-maker. Threeinvestment organisations cometogether as Equity Plus to enableh igh ne t wor th ind iv idua l s(“business angels”) to invest in the

social enterprise sector. The idea isthat these business angels are ableto make investments whichcombine financial and social return.

So which organisations make upEquity Plus? Community InnovationUK i s a s o c i a l e n t e r p r i s econsultancy organisation whichprovides fundraising, businessdevelopment, strategy and financialmanagement services and training.Celarben Ventures contributesspecia l is t business advisor yservices in the areas of businessstrategy, corporate finance andfinancial management. Resonanceworks with value-based businessesin the areas of investment, businessdevelopment and property-basedproject management.

The Equity Plus scheme is aboutsharing both the risks and therewards - both of which arepotentially higher for the investorunder this scheme than undera loan scheme. There is alsoflexibility in terms of the type ofinvestment. The business angelmight buy property for the businessor give money as well as offeringt h e i r e x p e r t i s e . Fo r mo r einformation on Equity Plus seewww.equityplus.org.uk(Social Enterprise)

Where organisations lose grantfunding or contracts for projects arewithdrawn or come to an end andno more funding is available,redundancies are likely to result.The obvious candidates forredundancy are the staff working onthe project which is to end, but infact, in a redundancy situation, anyemployee whose role is the same ors imi la r as the ro le that isdisappearing (even if you treat it asa different project or team) is apotential candidate for redundancyand should be included in the poolof employees to be considered.

For example, if an organisation wasrunning two projects, each with itsown administrator, and the fundingfor one came to an end, the properredundancy pool would potentiallyinclude not just the administrator ofthe project coming to an end butalso (assuming their roles wereroughly the same) the administratorof the project that is to continue,together with any other employeewi th a s imi la r ro le . I f theadministrator of the cancelledproject had more experience, ormore skills than their colleague onthe other team (if so how have youassessed their relative capabilities -avoid making assumptions as thiscould be discrimination), it could bereasonable to retain the bettercandidate, move that person intothe continuing role and make theless qualified colleague redundantinstead. This is known as ‘bumping’and should be considered in everyredundancy s i tuat ion. Also,remember that employees onmaternity leave have specialprotection. Whilst they may beproperly selected for redundancy,they must be offered any suitablealternative role otherwise thedismissal will amount to sexdiscrimination.

Failure to correctly identify the poolcan render an otherwise perfectlyvalid redundancy as an unfairdismissal. It will often be useful toexpand the selection pool to avoidthis potential issue but you need tobe mindful of the uncertainty thismay cause to your staff. In any event

it is essential that staff know whatisgoing on and why so that they canbe properly prepared. Employers whoare in any doubt should seekspecialist advice before making staffredundant and ideally before youhave actually made any decision thatredundancy is necessary.

Redundancy can present particulardifficulties for the sector, from thepotential financial impact on trusteesof unincorporated organisations, tothe practical difficulty of identifyingthe correct pool for redundancywhen funding is withdrawn orcoming to an end for one or more ofseveral different projects.

Unincorporated organisations donot have what is referred to as aseparate legal status; they aresimply a collection of individualmembers governed by thei rconstitution or rules which will vestmanagement and control in a selectnumber, the trustees. Staff areemployed directly by the trustees. Ifstaff are made redundant, thetrustees become liable for theredundancy payments, althoughthe costs should be met from theorganisation’s funds. If those fundsare insufficient then the trusteesremain liable to pay any shortfallfrom their own pockets. If Tribunalclaims are made (for exampleunfair dismissal or discrimination),the same principles apply.

Trus t ees o f un inco rpo ra t edorganisations should regularlyreview the risk of personal liabilityand look to incorporate (forexample, set up as a companylimited by guarantee) as a means ofproviding some, limited, protectionfor the trustees. Key triggers, or riskareas, are where an organisation isfirst starting to employ staff or enter

into valuable contracts. Trusteesshould consider setting asidespecific reserves to meet liabilitiessuch as redundancy costs. Wherepossible, redundancy costs shouldbe built into project funding.

Stopping pay wasn’t a dismissal

An employee was placed onsuspension pending the outcome ofthe disciplinary procedure. Acompromise agreement wasnegotiated, on a without prejudicebasis, but never finalised. When aclaim for unfair dismissal wasbrought the Tribunal had todetermine when was the effectivedate of termination of employment.

The Employment Appeal Tribunaltook the view that the employee'snon-attendance at work, failure tohave a disciplinary meeting andnon-receipt of pay when removedfrom payroll, were all consistent withthe suspension and the negotiationsto terminate his employment. Theact of removing the employee frompayroll and the failure to pay werepotential breaches of the contract ofemployment capable of bringing thatcontract to an end, but were requiredto be accepted by the employee ashaving that effect. On the question ofwhether or not the employee’s claimto the Tribunal was presented intime, the important issue was,therefore, when had the employeeaccepted the employer’s breach asterminating his employment.

This case highlights a number ofdanger areas for employers,including that the employer shouldneve r a l l ow a d i s c ip l i na r yprocedure to be delayed whilsttermination negotiations are beingconducted. The existence of suchproceedings can be used to providea timetable for reaching finalagreement. If matters are delayed,the employer faces a claim whichthey cannot defend for failing todeal with a disciplinary matter in atimely fashion. This issue appliesequally to grievances. Terminationnegotiations should exist entirely

separately from the proper conductof disciplinary and grievanceprocedures. The employer ’sposition was made more difficultbecause of the suspension. Had theemployee failed to return to workonce he had been removed frompayroll this could have been treatedas an acceptance of the employer’sbreach. Here, the employee wasabsent from work at the employer’srequest. A similar situation canarise with sickness and maternityabsence, where proper proceduresneed to be in place to ensure thatsuch absences are managed andtha t absen t employees a renot s imply forgot ten about.Radecki -v- Kirklees MetropolitanBorough Council

TUPE and Equal pay breaches forthe transferee

There are a number of cases runningthrough the Tribunals at the momenton equal pay claims with localauthorities and NHS Trusts. Suchc l a im s h a v e f a r r e a c h i n gconsequences. The EAT has recentlyheld that an employer’s failure to giveequal pay gives rise to a contractualliability so that where that employeetransfers under TUPE to a newemployer, TUPE protects the paywhich the individual employeeshould be paid, rather than the payactually paid at that time. Thismeans that transferred employeescontinue to have a claim against theirnew employer for the equal paybreach. Of course, the new employer,even where they have fully followedrecognised procedures in TUPEsituations, will have no way ofknowing what the proper level of payshould be, or even that this issueapplies to any particular employee.

These cases shou ld be o fconcern to any organisationwhich has accepted staff onTUPE t r ans f e r s f r om loca lauthorities or the NHS, includingsecond generation tendering.Sodexho Limited -v- Gutteridge

Employment...by Chris Billington and Joanna GreenRedundancy and the Credit CrunchThere is some debate whether the present economic situation brings aboutanything new for the sector. As businesses struggle to absorb the effects ofthe credit crunch, charities and voluntary, community and faith organisationsface the usual uncertainty of funding rounds and tender opportunities thatoften fail to deliver. However the sector is not immune from the credit crunchand forward planning, as always, is essential particularly when it comes todealing with staffing levels and the possibility of redundancy.

The UK Intellectual PropertyOffice has launched a newconsultation on certain copyrightexemptions which apply to playingrecorded music in public. TheMu s i c L i c e n s i n g R e v i e wConsultation is seeking views fromusers, music rights holders andrepresentative bodies of users andrights holders.

There are three opt ions foramending the exemptions whichcu r r e n t l y a l l ow cha r i t a b l eorganisations to pay for only one ofthe two licences normally requiredfor playing music in public. Optionone is to recast the exemptions sothat they apply only to smallercharities. Option two is to introducean alternative scheme whereby

c h a r i t i e s p a y e q u i t a b l eremuneration for playing music.Option three is the repeal of theexemptions. Consultation ends on31 October. See the IntellectualProperty Office website for a copy ofthe consultation document.www.ipo.gov.uk(Third Sector 02.07.08)

Consultation on copyright exemptionsfor small third sector bodies

Companies Act 2006 –October 2008 implementation: directorsThe principal changes to beintroduced in October 2008 by theCompanies Act 2006 relate tocompany directors. The main focusis on directors’ conflicts of interestand so we will consider this first,then look at some other changes.

Directors already have a duty to avoidconflicts of interest, but from October,this duty will be confirmed inlegislation. Conflicts of interest includesituations where:

• a director has any personalfinancial interest in a transactionwith the charity (such as where adirector receives payment from thecharity for services or goods); or

• a director has a conflict of duty (forexample where a director is also adirector or trustee of another charityor company and a transactionwould affect both).

If a charity’s memorandum andAr ticles of Association allowconflicts of interest, or if theyallow a director who is notconflicted to authorise conflicts onthe part of others, then theabsolute duty does not apply.Whilst many existing memorandaand Articles of Association ofchar i t ies conta in prov is ionsdealing with conflicts, they do notalways expressly allow them. TheCharity Commission takes theview that many of these provisionsare likely to permit any conflicts ofloyalty to be properly dealt witheven after the new legislation hascome into force on 1 October2008. However, it is unlikely thatexisting provisions would covertransactions or arrangements withtrading subsidiaries from which atrustee may take some benefit or

where the i r dut ies to eachcompany may conflict.

Despite the Commission taking anenabling interpretation of existingprovisions, as a matter of goodgovernance and for clarity manycharities will want to review theirArticles of Association. One benefit ofthe legislation for trustees is that,where the Articles set out the conflictof interest procedures and it isfollowed, they cannot be in breach oftheir duty. Trustees who are not surewhether they have the power shouldtake advice, as it is possible for theCharity Commission to authorisesomething that would otherwise be abreach of duty.

Another change relates to theminimum age of directors, which willbe 16 years. If a company has adirector who has not reached this age

when the restriction is introduced,that person will automatically cease tobe a director. Finally, under the newrules, at least one director must be a‘natural’ person (in other words ahuman being and not a company).http://www.charitycommission.gov.uk/supportingcharities/compact.asp

As the Companies Act is slowlybrought into force, charity trusteesof charitable companies shoulduse the opportunity to review theirmemorandum and Articles ofAssociation, to ensure both thatthey are adequate for the purposesof the charity and that they reflectthe changes in company law.

Notice periods for meetings havebeen shortened by the new law, forexample, but this will only apply ifthe articles do not specifically referto the longer period – and most

char i t ies ’ ar t ic les do. Otherprovisions to consider are that since1 October 2007, the chairpersoncannot be given a casting vote atg e n e r a l m e e t i n g s i n n ewcompanies. Where your articlescontain a provision allowing this, itwill continue to operate unless youremove it, however. Companies willno longer need to have eithercompany secretaries or annualgeneral meetings, although theycan chose to continue to have oneor both if they wish to.

Do you need to review yourArticles of Association?

Renewable Energy…Relaxation of rules over local energy generation?

The Government is increasing the

pressure on Ofgem, the energy

regulator, to support rather than

hinder the development of

renewable energy. It is doing this

to ensure the government meets

its targets for reduction in

CO emissions. This is the context

in which the Ofgem consultation

“Distr ibuted Energy-Fur ther

Proposals for More Flexible Market

and Licensing Arrangements” was

issued in June. Distributed energy

(DE) could make an important

contribution to reducing carbon

emissions, improving security

of energy supply and alleviating

fuel poverty.

So what is DE? It is sometimes

referred to as distributed generation

or decentralised energy. Ofgem

describes it as “renewable electricity

generation which is connected

directly into the local distribution

network, as opposed to connecting

to the transmission network, as well

as combined heat and power

schemes of any scale.” Some of the

key environmental benefits of this

means of energy generation are that

DE can: make use of waste heat

from electricity generation to heat

and cool buildings; reduce electricity

losses by locating generation near to

electricity demand; facilitate the use

of local renewable energy sources;

encourage increased consumer-

awareness of energy usage.

Given the benefits, it seems that

DE is to be encouraged. There are

currently, however, a number of

barriers to entry for potential DE

developers including licensing

costs, complex codes, the risks

and costs of energy imbalance

(cash-out), network charges and

the underdeveloped provision of

supplier services for DE schemes

to operate on the public network.

Ofgem’s consultation identified a

number of proposals to attempt to

overcome these barriers to entry

and encourage DE to grow.

The i r p r e f e r r ed p r opo sa l s

i n c l u d e d : r e p l a c i n g t h e

requirement for compliance with

high-cost and high-competency

i n d u s t r y c o d e s w i t h D E

alternatives; encouraging the

development and provision of

alternative arrangements from a

licensed third party to enable DE

schemes and small suppliers to

operate on the public network;

identifying areas for the industry

to lead on as regards cash-out

reform; and speeding up the

introduction of a system of

charging which reflects costs so as

to encourage development on

public networks over constructing

new private wires.

Consultation closed on 31 July.

Ofgem will seek to implement

appropriate proposals by the end of

the year. If implemented these

proposals should make it both easier

and cheaper to have more local

renewable energy generation.

www.ofgem.gov.uk

Could we help with your banking needs?Contact Unity Trust Bank, Nine Brindleyplace, Birmingham, B1 2HB, tel: 0845 140 1000 or visit www.unity.co.uk

If you require legal advice on charity and social economy lawPlease contact Malcolm Lynch at Wrigleys Solicitors, 19 Cookridge Street, Leeds, LS2 3AG, tel: 0113 204 5724, or visit www.wrigleys.co.uk

If you are subscribed to receive Social Economy through Unity Trust Bank, infuture we’d be delighted to send you the same version as a PDF but you’ll needto send us your email address to register tomarketing@unity.co.uk. If you alreadyreceive an email version from Unity Trust Bank you don’t need to take any action.

Contributors to this edition of Social Economy were Chris Billington,Joanna Green, Natalie Johnson, Malcolm Lynch and Sylvie Nunn ofWrigleys Solicitors LLP.