The Regulator for Charities in England and Wales
(Version February 2008)
1. This guidance is for charity trustees who are considering paying one or more of their number, either:
or:
Whilst this guidance contains basic information about payment of trustees for goods and services and the power in the Charities Act 1993 which allows this, we have published more detailed guidance about such payments on our website. See the reference page at the back of this booklet.
2. In this guidance:
Trustees means charity trustees. Charity trustees are the people responsible for controlling the management and administration of the charity (s.97(1) of the Charities Act 1993). They may be called trustees, managing trustees, committee members, governors, or directors - or they may be referred to by some other title. In the case of an unincorporated association, the members of the executive or management committee are its charity trustees; in the case of a charitable company, it is the directors.
Governing document means any document setting out the charity's purposes and, usually, how it is to be administered. It may be a trust deed, constitution, memorandum and articles of association, will, conveyance, Royal Charter, Scheme of the Commission or other formal document.
Must or need to are used to refer to actions that trustees, or their agents or employees, have to take by law.
Where we use terms such as the trustees should, or we suggest, recommend or advise, we are referring to actions which the trustees, their agents or employees could take and which we consider to be good practice, but which are not legal requirements.
3. The law states that trustees cannot receive any benefit from their charity in return for any service they provide to it unless they have express legal authority to do so. 'Benefit' includes any property, goods, or services which have a monetary value, as well as money. This legal authority will come from:
4. The rule that a trustee cannot receive any benefit from his or her charity trust without explicit authority is based on the principle that trustees should not be subject to any conflict between their duties to their charity trust and their personal interests, unless the possibility of personal benefit which gives rise to that conflict is transparent. Transparency is achieved by requiring explicit authority for the benefit, and by ensuring any potential conflict of interest is properly and openly managed.
5. The principle does not apply to reimbursement of reasonable out-of-pocket expenses for trustees (see paragraphs 13-19). Nor does it extend to benefits that are freely available to all. For example, access to a local community centre or village hall by a trustee of that organisation would not require authority, since the facilities are available to the whole community. Similarly, in a charity with an open membership, all of the trustees could be drawn from that membership and still be entitled to the same benefits as any other member. (See our publication Users on Board: Beneficiaries who become trustees (CC24) - available on the Publications section of our website.)
6. The concept of unpaid trusteeship has been one of the defining characteristics of the charitable sector, contributing greatly to public confidence in charities. However, there may be circumstances in which it is in the interests of a charity for one or more of the trustees to be paid. If this is to happen, trustees will first need to consider whether or not the governing document of the charity contains a power to pay trustees.
7. Unless expressly prohibited in the governing document, trustees now have a power in law which allows them to pay one or more of their number - or individuals or businesses connected with them - to provide specific goods or services to their charity. In the case of trustees, this must be over and above normal trustee duties. Our Information Sheet Trustee Payment - new power for charities to pay for services provided by a trustee sets out the conditions that must be met when using the power. These are, in summary:
If the trustees decide there is a clear advantage to the charity in paying a trustee, they must arrange for the goods or services to be supplied to the charity under a wriiten agreement, which may be in the form of a contract. Although the terms and conditions of the agreement must obviously be acceptable to both parties, the paid trustee cannot act as a trustee in relation to any aspect of the arrangement, and must not be a party to any discussion or decision of the trustee body concerning the terms and conditions.
8. In other cases, a trustee professional (eg a solicitor or an accountant) may have the power or right to charge the charity for providing their professional services to the charity, or for merely acting as trustee. Services provided under this type of authority do not always require any formal contract or agreement, but the service must be strictly within the scope of the power and limited to reasonable charges.
9. Without a suitable power to pay a trustee, the charity will need to approach us for authority in good time,before proceeding with any proposal to benefit a trustee. The factors listed in the Annex will help to establish whether the payment is clearly in the interests of the charity.
10. Payment means money or other material benefit given to a trustee out of a charity's funds
in return for a service the trustee has performed for the charity. An honorarium, even if it is a modest or token sum not intended to reflect the real value of a trustee's service, is a form of trustee payment.
11. The issue most commonly arises where the trustees as a body wish to:
12. The first two examples can also include payment of the spouse, partner, close relative or other person connected with the trustee. The first example also extends to the employment by the charity of businesses owned by a trustee, or in which he or she is a partner, and of businesses where a trustee is a managing director or has a significant interest. (See also paragraphs 29 - 36.) (Note: The first example cannot include the provision of an audit of the charity under the Charities Act 1993 or the Companies Act 1985 - a trustee cannot legally act as an auditor for his or her charity.)
13. Expenses are not payments in return for services. There can often be confusion over this.
14. Expenses are refunds by a charity of payments which a trustee has needed to meet personally (or which would otherwise be met on his or her behalf) in order to carry out trustee duties. Even in the absence of any specific authority in the governing document, the law clearly entitles a trustee to reimbursement of expenses that have been properly incurred.
15. As a general rule, claims for expenses should be supported by bills or receipts from third parties, except where it is unreasonable to expect this (eg where small amounts are claimed). Any costs that are reasonably necessary to allow trustees to carry out their duties can be classed as expenses, and repaid to them or met directly by the charity.
16. The following are examples of legitimate expenses:
17. The following are examples of items which are not legitimate expenses, but rather trustee payments requiring explicit authority:
18. The following are examples of payments which are neither legitimate trustee expenses, nor are they payments which could be authorised out of a charity's funds:
19. If a payment is not allowed for by an express power in the governing document or by law, and the trustees are in doubt over whether it is a legitimate expense, they should contact us for advice, as our authority may be needed (see paragraphs 46-49).
(See also A Guide to Conflicts of Interest for Charity Trustees, available on the Publications and Guidance section of our website.)
20. All trustees must act only in the interests of their charity, and not for their own private interest or gain. There may be situations where a trustee's own interest and the interests of the charity arise simultaneously or appear to clash, such as when a trustee is receiving payment from the charity. The issue is not the integrity of the trustee concerned, but the management of any potential to profit from a person's position as a trustee.
21. There needs to be an express written authority for benefit to a trustee. A trustee must repay or return any benefit taken without authority. Proper authority is not obtained merely by the trustee concerned disclosing the conflict of interest, and withdrawing from the discussion and decision-making - although formal authorities are often conditional on either or both. If a trustee is paid, or receives any other benefit without authority, claims for restitution may arise (see paragraphs 57-59). It is the paid trustee's responsibility to ensure that he or she has proper authority to retain a benefit obtained from trusteeship.
23. In the case of a trustee being employed without a suitable authority in a separate paid post within the charity, the conflict of interest may again result in a liability to repay salary or other related benefits. It should not be assumed that such conflict can be overcome merely by the person concerned resigning as a trustee, either before or after taking up the post. The only instance where authority may not be needed is where, practically, it can be shown there is no conflict of interest. In our view, this will be the case where the trustee concerned:
(* This includes any situation where the trustee or ex-trustee canvassed for the post, or was involved in devising the job specification, or with advertising for the post. It also covers involvement in settling its terms and conditions. However, the mere fact of the trustee voting with the majority of trustees for the creation or retention of the post is not in itself 'significant' involvement.)
24. Even where there is an express authority which enables a trustee to be paid, the potential for a conflict will still exist. A key aspect in minimising the effect of a conflict of interest is to be open and transparent about such situations whenever they arise. We recommend that all trustees disclose to their fellow trustees any benefit they obtain from their position as trustees, even where that is not actually a condition attached to the authority enabling them to receive the benefit.
25. We also recommend that charities establish a policy on how they will deal with any conflicts which may arise as a result of the work they undertake. This can include guidance on when a trustee should withdraw from a discussion, even where that is not actually a condition attached to the authority for payment.
26. If conflicts of interest are ignored (even though there is a valid provision enabling decisions to be taken notwithstanding a conflict) there may still be a risk of a decision being challenged, and the charity could be damaged as a result.
27. We strongly recommend that all charities disclose benefits received by trustees in their report and annual accounts. This can help protect trustees from accusations that they are benefiting in a hidden way. It is a legal requirement for charities that prepare their accounts on an accruals basis to disclose benefits to trustees whether those benefits are authorised or not (see our guidance Charity Reporting and Accounting: the essentials April 2008 (CC15a)) - available on the Publications and Guidance section of our website).
28. See also paragraph 49 for conditions relating to conflict of interest where we authorise trustee payment.
29. The legal concept of the 'shared purse' means that if a trustee is a party to appointing his or her spouse or partner to a paid post within the charity, or to contracting with that person to provide a paid service to the charity, or in any way to assist in securing payment for that person from the charity's funds, then the trustee could be said to profit indirectly from the arrangement. If there is any financial interdependence between the parties, such payments can be a trustee benefit requiring explicit authority - in just the same way as a direct payment to the trustee.
30. If the payment is to a connected person within the terms of the legal power to pay for the provision of goods or a service, there is unlikely to be any problem - unless the conditions of an agreement under the power cannot be met (in which case the charity should contact us for advice).
31. But if a payment of this nature involving a contact for continuous employment is made without an express authority, the trustee concerned is liable to make good any payment made to the spouse or partner in just the same way as if the trustee had received the payment directly. In practice, the actual recipient of the payment is jointly liable.
32. Trustees may argue that, because the trustee concerned has withdrawn from any discussion of the appointment, a properly impartial decision has been taken to remunerate the spouse/partner. If the charity's governing document or the law provides authority for the payment conditionally on doing this, and if the conditions are followed, there is no problem. But trustees who are in any doubt are advised to contact us for authority.
33. Even if there is no close financial connection between the parties, there is still a potential conflict of interest if a charity seeks to employ other members of a trustee's household, close relatives or other connected parties. This includes the child, parent, brother or sister of a trustee. It is necessary to ensure that no improper influence is exerted in favour of family or household connections.
34. In the case of a more distant relative being employed by a charity, issues of self-interest or adverse influence by a trustee are less likely to arise, unless there is any direct evidence to the contrary. But trustees still need to manage the issue in a way that does not expose the charity to outside criticism. For this reason, any arrangement with a related party should be transparent, so that it can be seen that it has been made in the charity's interests, and that the potential conflict of interest has been declared.
35. Express authority is also needed before a business connected with a trustee is able to profit directly from employment by a charity. This applies to businesses owned by a trustee, or in which he or she is a partner, or where a trustee is a managing director, or has any significant interest.
36. Trustees should therefore be aware of the need for proper authority for such payments, and of the need to ensure that no improper influence has been brought to bear on the trustees' decision by any of the parties involved.
37. The law requires us to treat charities which have a power to pay their trustees in their original constitutions differently from charities without such a power, but where the trustees wish to be given a power. Our authority is not required where a reasonable power permitting a trustee benefit is included in a governing document when a charity is created. At any later stage, however, our authority to include such a power is needed.
38. This is because promoters of new charities can include all the powers they consider desirable for the effective administration of their charity, but trustees of a charity which has already been established cannot - without authority - confer a benefit upon themselves.
39. In deciding whether to sanction the introduction of a trustee payment power, the prime consideration will always be the good administration of the charity, and what will best enable it to carry out its charitable work effectively.
40. We must refuse to register an organisation as a charity if it is not established for exclusively charitable purposes. All the powers of a charity must be exercised solely in the best interests of the charity. The existence of a power to pay a trustee (or a right of a trustee to be paid) which would allow a trustee to be paid more than is reasonable, looking only at the interests of the institution, would prevent that institution from being established for exclusively charitable purposes. This is because the private benefit of the trustee would be a non-charitable part of the institution's purposes.
41. Where someone is settling his or her own assets on charitable trusts, that person can include in the governing document all the powers and provisions which are thought necessary for the trustees to administer the charity properly, and to carry out its objects effectively. This can include a trustee payment authority, so long as it does not authorise payments clearly in excess of what might be considered reasonable for the services to be provided.
42. Where charitable trusts are being declared over assets donated by the public, we recommend the terms of the appeal make it clear whether the trustees of the appeal funds can be paid for services they provide. If the terms do not cover this point, a trustee payment authority should only be included in the governing document where it is reasonably considered normal practice to do so for that particular type of charity. For example, professional trustee charging clauses are a normal feature of modern governing documents of charities where the relevant experience and qualifications of trustees are likely to make the charity more effective.
43. The simple fact that trustees have authority to be paid does not by itself justify payment. Our interest with charities that have a power to pay trustees is to ensure that it is exercised properly. Trustees need to make a positive, justifiable decision in the interests of the charity. This applies whether they are taking up the services of a trustee professional under an explicit charging clause, or exercising a discretionary power to employ a trustee for a specific service. Payment must always be at a reasonable level in relation to the service provided, and the service must be clearly within the terms of the power.
44. The trustees need to keep this under review - it will not always be right to employ a trustee to provide a service simply because a predecessor was employed in the same way. The trustees will need to be satisfied that the advantages of promoting the good administration of the charity outweigh the disadvantages created by employing a trustee, including the potential conflict of interest. For example, the trustee who is to be employed might, under the terms of the payment authority, have to withdraw from consideration of some of the issues on which his or her expertise could be helpful. Again, trustees may in practice find it difficult to pursue issues of quality with other trustees.
45. We will continue to monitor the use of a power to pay trustees through the Annual Returns. We may ask trustees for details of why they consider the use of the power is in the best interests of the charity.
46. When we consider providing authority for payments to trustees in relation to an existing charity without a power to pay trustees, we take into account the fact that the founder or promoter decided to establish the charity without such a power. However, we are primarily looking to see whether providing the authority will be in the interests of the charity in the light of its current circumstances.
47. Practically, this means that we will only authorise payment provisions (either for a general power or a 'one-off' authority) where the trustees can show there will be a clear benefit to the charity, in terms of cost or otherwise, that will outweigh the disadvantages. These can include the need to manage any potential conflict of interest, and loss of expertise of the paid trustee when the trustee body is discussing matters in relation to the contribution provided by that trustee.
48. In a situation where there is no favourable cost comparison with an outside agent or firm and no special expertise or knowledge possessed by the trustee concerned, there is unlikely to be any clear advantage to the charity, and the trustees would be expected to look outside the trustee body.
49. A fundamental condition of our authority in all cases will be that a paid trustee cannot represent the charity as a trustee in relation to matters which affect his or her paid employment. In other words, the trustee cannot take any part in the trustees' discussions and decisions which affect the settling of terms and conditions, the decision to hire, the review of performance, the 'signing off' of the work, any action to deal with unsatisfactory performance, or any strategic or other decisions for the charity which are connected with that employment. The trustee concerned must withdraw from all discussion of these issues, and must not vote on them, or be counted as part of the quorum necessary to validate a meeting at which a relevant decision is taken.
50. Where we are required to consider a detailed case for payment, we will take into account any relevant factors detailed in the Annex, and the trustees will need to demonstrate that they have considered whichever are appropriate in their application to us. (The factors are also available in checklist format on the Publications section of our website.)
51. If trustees have a power to pay one (or more) of their number for carrying out the normal duties of a trustee, they should ensure of the charity the amount spent on paying trustees is appropriate. This will obviously vary depending on the overall level of income of the charity, and the type of work it is carrying out.
52. The amount should be proportionate to the needs of the charity, and should avoid creating a perception that the interests of the trustees are regarded by them as of greater importance than the interests of the beneficiaries.
53. Levels of payment for providing a specific service to the charity (whether under an explicit charging power or a discretionary power) are usually less problematic, since these can usually be compared with the charges which would be made by others providing a similar type of service.
54. Similarly, when an employee is also a trustee, it is clear that the payment he or she is receiving is made for the employed post, and not for being a trustee. Again, comparisons can be drawn with levels of payment for similar services.
55. It is always good practice for a trustee body to have procedures to review the contribution of each trustee (including the chairman). This is particularly important if one or more of the trustees receives any payment from the charity, as the trustees collectively need to ensure that the work is being done to an acceptable level, and that the charity is receiving value for money.
56. Where a trustee is entitled to be paid for services which he or she provides (ie the payment for the service is not discretionary) it is particularly important that the other trustees scrutinise carefully the claims for payment made by the trustee in question. The object is to ensure that:
57. A trustee who receives any benefit must repay it to the charity unless the retention of the benefit is expressly authorised, either by the charity's governing document, or by us or the Court. The charity's right to have returned to it any unauthorised payment to a trustee is an asset of the charity, and it is the responsibility of all the trustees to ensure that the asset is claimed, where practicable.
58. This principle applies even though a trustee has provided services in exchange for any payment received, and even where the charity has received value for money. It does not make any difference that the trustee in receipt of the payment was absent from the meeting which agreed the arrangements (or was present at the meeting but abstained from voting), unless these are conditions attached to a payment authority.
59. The Commission or the Court can authorise a trustee to keep an unauthorised payment, but trustees should never act on the assumption that such authority will be given. We are likely to take into account factors such as whether:
This feature is to help readers already familiar with our guidance to identify significant changes made in any revised version, so that they can assimilate these changes quickly.
Minor and consequential amendments have been made to update the text.
It is important that before trustees make a detailed consideration of the factors listed below, they have first carefully explored whether there are any better alternatives to employing and paying a trustee to provide a service to the charity.
Those factors which we could expect all charities to consider, regardless of their size or type, are marked with an asterisk. But we acknowledge that, with such a wide variety of charities, the considerations surrounding the payment of trustees will vary: not all factors will apply in all cases, whilst in some cases other factors may also be relevant.
We expect trustees to recognise that a conflict of interest exists (which may also include conflicts with outside commitments, eg other trusteeships, business interests), and take adequate steps to minimise its effects. We recommend that trustees develop a written policy on how they deal with the issue.
The trustees should be aware of the requirements of the Charities SORP (Accounting and Reporting by Charities: Statement of Recommended Practice (SORP 2005)) in this area. If the trustees prepare accounts on an accruals basis, there is a requirement to list in the notes to the charity's accounts the individuals receiving payment, together with details of the amounts of the payments. We strongly recommend that all charities disclose payments made to trustees. See the Publications section of our website for both the Charities SORP and our guidance Charity Reporting and Accounting: The Essentials April 2008 (CC15a).
Trustees need to consider the impact their decision to pay a trustee might have on those with an interest in the charity.
Depending on the size and constitution of the trustee body, we generally recommend that no more than one or two trustees should be employed and paid. The higher the proportion of paid trustees, the greater the risk of potentially damaging conflict of interest.
The trustees may wish to consider taking impartial and independent advice to help them decide on pay arrangements. This is particularly important if a majority of the trustees are to be employed and paid.
As a matter of good practice, we would expect trustees to obtain a number of quotes so they can ensure (and demonstrate) that they are obtaining value for money.
If trustees are in doubt about the validity of an invoice, they may wish to have procedures in place to verify it, possibly including independent scrutiny.
We recommend that trustees who are tendering for work should absent themselves from the meeting or part of the meeting at which related matters are discussed, even if that is not actually a condition of the trustee payment authority. This includes discussions leading up to the decision to go to tender.
The trustees should be able to demonstrate the steps they have taken to recruit an unpaid trustee, eg by advertising the vacancy and approaching individuals and organisations. Trustees may, however, wish to attract trustees from social and economic backgrounds who cannot afford to act as a trustee unless paid. We appreciate there may be good reasons for recruiting trustees on lower incomes, and that employing and paying them for carrying out the duties of a trustee may be more in the interests of the charity than the use of volunteers.
Trustees should consider what other options there are apart from paying a trustee.
We recommend that paid trustees are in the minority. The trustees may wish to consider taking impartial and independent advice to help them decide on the pay arrangements, and to check that the charity is obtaining value for money.
The trustees may wish to set a time limit for the paid arrangements to continue. This will enable the trustees to review the situation at the end of the period and to extend the period of payment, if necessary.
A higher standard of care is expected of a paid trustee.
If the trustees consider that one of their number would be particularly suited to the job, they would need to say why, in relation to the abilities of that individual.
Trustees should take steps to compare rates with similar employment elsewhere, take independent advice where appropriate, and ensure that there is a system of periodic review.
There is nothing to prevent employees or advisers attending trustee meetings to give advice and guidance on relevant matters. Trustees would need to demonstrate why the roles of employee and trustee should be combined.
The trustees should consider whether the person holding that particular post (for example, an artistic director or chief executive) should always be a trustee, or whether an exceptional person who currently happens to occupy that post would bring vital skills to the trustee body.
The trustees should ensure there is an objective and independent performance appraisal system in place.
The trustees should give particular attention in the contract of employment to any performance element in the pay, commissions or compensation for loss of earnings.
Trustees need to consider whether the connection is sufficiently close to involve a potential conflict of interest. There will be a potential conflict wherever a charity employs parties related to a charity trustee, including members of the immediate household of the trustee, or any close relative. This ordinarily includes the child, parent, brother, or sister, of a trustee. It also extends to the employment by the charity of businesses where a trustee is managing director or has a significant interest as an employee or shareholder, and to any businesses owned by a trustee, or in which he or she is a partner.
These factors are primarily important for minimising the conflict of interest, but in our experience they also drastically reduce the potential for acrimonious dispute within the trustee body.
The trustees may also need to consider whether there is any likelihood of any termination of the spouse/partner's contract affecting the continuing trusteeship of the other spouse/partner - or otherwise having an adverse effect on trustee relations.
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