When it comes to administering a small charity, the costs and administrative burden can sometimes outweigh the charitable cause it was set up to benefit. This has recently come into focus for some small charitable trusts now facing HMRC Trust Registration Service compliance. When established, these charitable trusts may have had a relatively low administrative burden and the settlor would simply not have foreseen the future regulatory landscape.
In these circumstances, there are several options for small charities including:
For each set of trustees faced with these decisions, there will be a different balance to strike. Often, any decision that may bring the charity to an end will be bound up with a sense of moral duty to the settlor, which can make this an incredibly difficult, personal decision.
In these circumstances, charity trustees must act dispassionately and in the interests of the charity and its beneficiaries only. While their sense of moral responsibility to the settlor is likely the admirable quality that led to them being appointed as a trustee, it must ultimately take second place to their legal duties in the role.
Where the financial costs of administration and compliance exceed what is reasonable for the charity in all the circumstances, an assessment that is unique to each charity, some form of partnership, merger or possibly its dissolution are sensible alternatives.
The first question is often: “Well, if we’re going to consider bringing our charity to an end, who should the funds go to?”
This is sometimes easily answered, as the charity may have been making grants to other charities over the years that have similar objects, and which are natural recipients of the funds. In this case, bids could be invited from previous grant recipients or other aligned charities to determine how best to apply the funds. Alternatively, if the costs burden of inviting bids will also be too high, then the trustees can simply make individual donations.
It may be that the charity has objects that align well with another charity which is happy to take on the entirety of the funds and continue any projects. This then raises the question of how to manage the transfer and whether to merge or dissolve.
When considering whether to carry out a formal merger or not, there are costs and administration considerations. If Charity Commission approval is required (eg, if both parties are CIOs), then the process itself can take many months and may become disproportionately costly. This may, however, be the right option for the charities in question, after consideration of their individual circumstances. In particular, a formal merger may have more options for preserving the history of both charities, for example, by both charities’ names being incorporated in a new name. This may be an important consideration in securing future fundraising, or if a charity knows that is likely to receive legacies.
A simpler solution is for one charity to transfer funds to the other, with a retention for final costs, and then, once this is complete, complete their final reporting before winding up. This can save both time and money, although may perhaps lack the integrated sense of both charities continuing their work that can be achieved by a merger.
Other options that could achieve this sense of continuity without a formal merger could also be explored, such as distinct funds within the recipient charity carrying the name of the donor charity, or a specific project bearing the name of the donor charity. These are not legal points as such, but are important to bear in mind when helping trustees balance their conscience and sense of duty to the settlor with their legal duties as charitable trustees.
Paying attention to these considerations at the planning stage can help everyone keep a sense of perspective and allow any retiring trustees to leave with the satisfaction of having balanced their legal and moral duties. The simple step of considering these points, even without taking up any of the options, gives retiring trustees a positive choice to make and can help smooth the process of transition and provide closure on winding up.
There are many small charities that work directly with beneficiaries, rather than with other charities, and this makes the situation a little different. In this case, in addition to considering grants to other charities, the charity in question could consider whether there may be a natural potential successor - perhaps a partner organisation it has been working with which, though not a charity itself, may welcome the acquisition of a charitable arm.
This could, for example, be the case where a small charity, that has fund-raised to set up a club for the provision of sporting activities for vulnerable young people, passes the funds and the running of the club to a local community organisation. That community organisation then gains a charitable arm for fund-raising to ensure the ongoing running of the club, but shares some administration costs. This may make the charitable arm a viable adjunct to the community organisation rather than a stand-alone entity with difficulty balancing its books. In this case, the charity would continue to exist, and the trustees may then have the choice of whether to stay on for a handover period or long term, or to step down and retire.
There are many difficult decisions that charity trustees must face during their tenure, and, for smaller charities, the costs of new regulatory changes can alter the charity’s financial situation sufficiently to bring its continued existence into question.
The realisation that the continuation of a charity in its current form may not actually be the best course of action can be a dispiriting one for the trustees. But, with some consideration of the options available, this process can be smoothed for all concerned and, hopefully, provide trustees with a solution they are happy with, in fulfilment of both their legal and moral obligations.
If you would like advice on the issues raised in this article, whether on the regulatory side of HMRC registration or to consider any circumstances you are facing as a charity trustee, then our charities team would be delighted to discuss this with you. Please do contact Lucy Edwards or Rachel Spruce.