Feature / Giving advice

Nigel Davies and Alex Young outline what’s new in Charity Commission guidance and look at governance pitfalls to avoid in the management of charitable funds in England and Wales.

The governance arrangements and some of the issues facing NHS charitable funds are unique to the NHS, so special guidance has been developed by the Charity Commission. The Draft guidance on NHS charities will be a valuable addition to any induction pack for new trustees, NHS board members and NHS staff managing charitable funds.

The consultation on the draft closes this month and the final version is expected in the autumn. Delegates attending the HFMA NHS charities conference in October will get an insight into the guidance, which addresses the key pitfalls that have come about as a result of staff changes and health service reorganisation:

Knowing who the trustees actually are For those NHS charitable funds with separate NHS trustee bodies, special trustees, section 11 and section 51 trustees, knowing who the trustees are is self evident. For corporate trustees however the boundaries can become blurred. 

Where the trustee is a corporate trustee, it is the NHS body itself that is the trustee and is accountable for what happens. In practice the mind of the NHS body is the board. The board may delegate the management of NHS funds to a charitable funds committee and to fund advisers, but none of these people are trustees. Neither is the board the trustee. But as the board is the corporate mind, if there is a problem with the way funds are managed, ultimately the board will be required to explain the arrangements that it authorised.

Distinguishing charitable funds from exchequer funds in their management and use  It is a legal principle that a charity is an entity established exclusively to further charitable purposes for the public benefit. An NHS body is not a charity but a statutory body. Charitable funds can only be used to further the charity’s purposes to the benefit of NHS patients for the area in the charity’s governing document.

Charitable funds cannot be used as corporate assets to further corporate priorities, such as clearing a deficit. An NHS corporate trustee, in controlling and directing the charitable funds, acts solely in the charity’s best interests to further the charity’s purposes.

Blurring the boundary risks a breach of trust. In 2005 an interim finance director was concerned about previous practice, discovered where an NHS trust was the corporate trustee and asked the Charity Commission to intervene. The inquiry resulted in the trust repaying more than £460,000 of unauthorised transfers of funds back to the charity.

Being aware of what charitable funds can be spent on Provided the decision to spend the funds furthers the charity’s objects and is reasonably made – for example, within any delegated authority given by a charitable funds committee – then it can be spent for that purpose. Such spending might relieve the exchequer of buying equipment or refurbishing patient facilities. Also where spending benefitting the staff will enhance patient care, that is also allowed.

Spending outside the charity’s objects – for instance, enhancing management salaries – would be inappropriate because the benefit to the patients is too distant and the motive is corporate benefit not that of furthering the charity’s objects.

Distinguishing restricted funds from unrestricted funds It is important that the nature of the funds is identified at the point of receipt to distinguish genuinely restricted donations – which must be spent on a specific charitable purpose – from unrestricted funds. The guidance offers practical advice about receipting donations to avoid unintentionally creating restricted funds and looks at how governing documents shape the trusts on which funds are held and how charitable appeals are handled.

Accounting for transfers of charitable funds With reorganisations of the NHS, the Department of Health or Welsh ministers can direct that some or all charitable funds are transferred from one NHS trustee to another. The character of the transfer defines how the accounting treatment is best handled and the guidance rehearses several scenarios and offers practical advice as to how to record transfers in the accounts.

Allocating support costs and governance costs to charitable funds With the exception of endowments (capital gifts that have to be invested under the terms of the gift) that only bear investment management costs, all other funds attract their fair share of support costs and governance costs. The guidance goes through the practicalities of how this is done and explains that restricted funds do bear a fair share of support and governance costs. However, the trustee has flexibility as to how to allocate the balance across unrestricted funds and can show a transfer of unrestricted funds to recompense (offset)  these recharges if the trustee so desires. The guidance notes that governance costs are reported as a separate item in the final accounts and, in practice, governance costs may prove to be immaterial, in which case simply charging them against unrestricted funds may be pragmatic and appropriate.

Allocating investment gains and losses Investment gains and losses (whether realised or unrealised) from investing in non-cash investments have to be allocated between endowment, restricted and unrestricted funds and the guidance sets out how this should be done and explains that any portion associated with unrestricted funds is allocated at the trustee’s discretion.

COMMON GROUND

However, while governance arrangements may be unique, in many ways NHS charities are no different to any other. Similarities include the requirement to prepare a trustees’ annual report and the accounts, the development of reserves, investment and risk management policies and the general duties of trustees.

For financial years beginning on or after 1 April 2008, all charities must take account of the guidance on public benefit produced by the Charity Commission. This change happened as a result of the Charities Act 2006. For NHS trustee bodies this means that in framing decisions about how to use the charitable funds they must have read and considered Charities and public benefit.

For corporate trustees this requires that those making decisions about the use of charitable funds are familiar with the guidance. To help in those briefings, a summary form of the guidance is also available.

Trustees will have to frame their trustees’ annual report with the public benefit achieved in mind. And larger charities (gross income exceeding £500,000) must provide ‘a review of the significant activities undertaken by the charity during the relevant year to further its charitable purposes for the public benefit’.

All charities must also confirm that they have read the guidance, but the reporting burden is lighter for smaller charities.

For more information refer to Commission publication CC15a Charity reporting and accounting: the essentials. The three NHS model examples will be updated to show the changes by  December 2008 in good time to help NHS trustees write their 2008/09 reports the following April.