Almost a scandal
January 2010
Hannah Candlin reviews the regulation and enforcement of the expenses rules in the charity sector and anticipates a tightening of controls in 2010
When the Daily Telegraph first began publishing the uncensored details of MP’s expenses in May, few people would have predicted the intensity of sustained public outrage that would ensue. While the parliamentary expenses affair continues to occupy the front pages, many organisations are now re-evaluating their system for claiming expenses and their reporting of them.
The overwhelming majority of charity trustees give their time freely but have their expenses met from the funds of the charity. Employees and volunteers may also be claiming expenses.
A matter of trust
The Charity Commission has long counselled the need for clear and transparent policies on the payment of expenses
[1]. Not least because such policies indirectly help to ensure that the opportunity to be a trustee is open to all.
Following the MPs’ expenses brouhaha, fast.MAP conducted an online survey asking whether charity executives should disclose their expenses: 84 per cent of the respondents said ‘yes’ and only 4 per cent said ‘no’. In this context, and as the reputation of charities is so fundamentally important to them, all charities should be reviewing their expense policy and procedures and considering to what extent expenses are reported in their accounts
[2].
The current law: Charity Commission guidance
The law entitles charity trustees to claim legitimate expenses. No separate authority is needed in the charity’s governing document. The Commission’s guidance regarding trustee expenses and payments was last updated in June 2008.This guidance is derived from legal authorities and outlines the Commission’s view of best practice. Above all, the guidance is based around the simple concept that trustees have a duty to act in good faith in the best interests of their charities.
Essentially, trustees may expect to be reimbursed from charity’s funds where they have necessarily incurred reasonable expenses in the course of charitable business (see figure 1 below for examples). Where such expenses are likely to be high, trustees are well advised to agree expected figures with their colleagues in advance. Such claims are made to reimburse trustees where they are out of pocket and they should therefore be distinguishable from ‘wages’ or ‘remuneration’ of any kind.
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Reimbursing people for purchases they have personally and properly made on behalf of the charity is just normal charitable expenditure, not payment of expenses.
Best practice
Charities should have a written expenses policy which clearly states what expenses are recoverable and what is not. Expenses claims should normally be supported by bills or receipts, unless it is impractical to expect this, for example, where the amounts claimed are very small.
If trustees are in any doubt as to whether something qualifies as an expense they should seek advice. See figure 3 below for examples of unacceptable expenses. If the payment would be a trustee benefit, rather than an expense, but it is in the best interests of the charity to make the payment there may be power in the governing document or the Commission may approve the payment.
It is possible to make an advance payment to cover expenses, particularly if the exact cost is known. This may be particularly helpful for trustees with low incomes who do not wish to pay up front and await repayment. The trustees must ensure that any sums not spent are returned to the charity.
Many trustees do not claim their expenses and in some charities expenses may not be openly offered. The National Council for Voluntary Organisations (NCVO) believes that this practice deters people from becoming trustees or causes embarrassment to those who need or wish to claim. NCVO recommends that out of pocket expenses should always be claimed – if they don’t want or need the money then they can Gift Aid it back whereupon the charity claims the tax refund
[3].
The current law: SORP
All corporate charities and any other charity with income of more than £250,000 must prepare accruals accounts and follow the Statement of Recommended Practice 2005 (SORP 2005) which sets out accounting requirements for charities. The Commission recommends that all charities follow the requirements of SORP 2005 when accounting for expenses
[4];
see figure 4 below for details.
Paragraphs 231 to 232 of SORP 2005 outline some specific rules regarding trustee expenses. Though some routine costs need not be disclosed. Trustee expense claims generally should be aggregated. Where no expenses have been claimed, the accounts should state this.
The Charities SORP committee, in which the Commission plays an active part, is working on the next update to the SORP 2005 which is expected to be published in 2010. It is widely known that the Committee has discussed the possibility of recommending the disclosure of charity chief executives’ expenses. A Commission spokesman has said that in any discussion of this issue ‘the need for transparency and the administrative burden on charities should be kept in an appropriate balance.’
Though the Commission’s guidance and the requirements under SORP 2005 are quite straightforward, too many charities for a variety of reasons still fail to comply. See figure 4 below for some example case studies.
Consultation
In the aftermath of the MPs’ expenses scandal and the above cases, NCVO and CFDG have set up an independent panel to report on how registered charities disclose expenses. The panel launched a public consultation which closed at the end of October. Early indications suggest that the response rate was high. The panel indicated that they aimed to publish guidance on the reporting of expenses by the end of February 2010.
The consultation’s questions focused on three facets of disclosure by charities of their trustee expenses. First, were charities listing the different types of expenses claimed for? Secondly, were the sums for each type of expense being individually identified? Finally, were the expenses disclosed limited to those of the trustees, or did they include those of other participants such as volunteers?
The consultation has itself been subject to some controversy, with a number of organisations strongly against the suggestion that charities should consider reporting the expenses of senior staff. Others stated that reporting expenses would be virtually meaningless without providing details of the process for signing off expenses and an analysis of what the expenses were for. The final report is eagerly awaited.
Commission expenses
In line with its ‘commitment to transparency and openness’ the Charity Commission recently published the expenses incurred by its board members and senior executive team. Expenses for the last financial year totalled £36,137.21 for the executive team and £11,306.25 for the board members, though a footnote (in considerably smaller print) reveals that further £25,403 was incurred for the chairwoman’s hotel and travel costs
[5].
The summary provides an interesting example of what could become the standard format for expense disclosure after the consultation concludes. There are ten categories of expense and each individual has their personal figures listed and aggregated.
The summary also confirms that such expense reports make compelling reading. No matter how hard you try to restrain yourself you can’t help but start to compare the figures for
different individuals and note that some appear to take the train and others a taxi!
Conclusions
So what steps should charities take to avoid criticism? Expense claims should be unimpeachably valid. Charities need to start with a well drafted expense policy and an appropriate process for submitting expenses. Keeping receipts and maintaining good records of expense claims will assist in dispelling any rumours of impropriety. Following professional advice, establishing solid financial controls and accounting in compliance with SORP 2005 will also help.
Cynicism, mistrust and apathy are the enemies of all voluntary organisations, so it is imperative that the UK’s voluntary sector maintains and builds on its reputation for good governance. That said, at least one charity may have benefited from the publicity given to MPs’ expenses claims. In May the charity Centrepoint advertised its achievements, employing the memorable strap-line ‘all our expenses are essential’. All charities should ensure that they can make the same boast.
[1] www.charity-commission.gov.uk/publications_and_guidance.asp
[2] www.thirdsector.co.uk/Channels/Communications/Article/926065/Charities-affected-MPs-expenses-row-says-survey
[3] https://shop.ncvo-vol.org.uk/governanceandleadership/?id=746&terms=taxable
[4] www.charity-commission.gov.uk/investigations/sorp/sorp05docs.asp
[5] www.charity-commission.gov.uk/tcc/expenses.asp
Author: Hannah Candlin
Hannah Candlin is a solicitor at Speechly Bircham LLP. She specialises in charity law and in particular on constitutional, governance and management matters. She is an active member of the Charity Law Association (CLA), Society of Trust and Estate Practitioners (STEP) Charities Special Interest Group and The Association of Contentious Trust and Probate Specialists (ACTAPS) and has taken part in a number of CLA working parties.
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