Many English charities operate both within the UK and internationally, and indeed a significant number of English charities may carry out all of their charitable objects outside the UK. Registration as an English charity brings significant benefits for entities even when they will not operate in the UK, as the English charity regime provides registration in a well-regulated environment and sophisticated tax reliefs for charity assets and investments. English charities which operate internationally will, however, need to be aware of the obligations on them under English Charity and Tax laws.
Trustees are legally required to ensure that charitable funds are used in accordance with the charity’s objects. They must also ensure that funds which have been donated to an English charity must always be used for purposes which are considered “charitable” under English law if they wish to benefit from charity tax reliefs. Unsurprising, the concept of what might be “charitable” differs from country to country so the trustees will need to be diligent when applying funds overseas.
Trustees are under certain duties under the Charities Acts, breaches of those rules may leave the charity trustees open to investigation and potential penalties from the Charity Commission. The charity trustees also have obligations under the relevant tax legislation. Breach of those rules may result an investigation by HMRC, and the charity may lose some or all of its tax reliefs.
This is an area of interest and concern to the Charity Commission given the increasing use of English charities for overseas aid and emergency responses, for example in 2023 the Charity Commission opened an inquiry into Saba Relief & Development Foundation Limited, an English registered charity with the purpose of alleviating poverty in Yemen. The Charity Commission have been investigating whether the trustees have ‘adequately accounted for' the end use of charitable funds spent.
The Charity Commission and HMRC have developed guidance to assist trustees with their duties, which all charity trustees should be familiar with.
The main points trustees should keep in mind are:
- Development of internal financial controls:
As a starting point, all charities shall develop and apply internal financial controls to ensure that funds are spent in compliance with the charity’s objects.
These controls can include:
- Keeping accurate records of receipt and spending of all funds;
- Recording trustee meetings where financial decisions are made;
- Requesting periodic financial activity reports from staff;
- Creating budgets and monitoring actual spending against such budgets.
- Verifying the end use of funds:
While verifying the end use of funds may take a variety of forms depending on the charity, it will usually involve steps such as:
- Ensuring there is an audit trail that shows expenditure, and where necessary following up with site visits;
- Documenting that the project or charitable work that the fund was intended for has actually been carried out.
- Knowing the charity's partners:
Where a charity works together with individuals or organisations, the trustees must carry out due diligence checks to satisfy themselves that such individuals or organisations have compatible goals with the charity, that the funds will be used for their intended charitable purpose and in ways which qualify as charitable under English law.
The charity should have controls and policies in place where they are providing funds to other entities. The charity trustees will need to be able to demonstrate to HMRC that they have taken steps which HMRC consider to be “reasonable in the circumstances to ensure that the payment is applied for charitable purposes”. The level of oversight required will depend on the nature of the underling activities and the funds involved. The approach to take when making very small “one off” donations will be very different to the requirements when a charity wishes to provide ongoing support or large payments. Charities should consider putting grant agreements in place to govern the use of funds which are transferred to partners overseas.
- Knowing the charity's beneficiaries:
Trustees shall also satisfy themselves that they know and understand who the charity's beneficiaries are. This can be achieved by carrying out due diligence check to ensure the beneficiaries are genuine, and developing an understanding of the beneficiary's organisation to ensure that the organisation's goals align with the purpose of the charity.
- Reviewing financial statements:
Lastly, trustees are also responsible for reviewing the charity's annual accounts to ensure that they accurately reflect the charity's financial activities.
For further information, please get in touch with Khalid Sofi, head of our Charities Team, Anna Gaston or your usual contact in our Charities Team, and they will be able to assist you.