Governance Spotlight - Charitable RPs: your charitable status needs to feature in your strategic decision making

If you are a board member of a charitable registered provider (RP) then it is worth reflecting on how much you talk about your charitable status when making strategic decisions.

Mind the regulatory ‘gap’

The vast majority of registered providers of social housing are community benefit societies and exempt charities. This means that they aren’t registered with the Charity Commission and instead obtain their charitable status by:

• adoption of charitable rules at the Financial Conduct Authority, and
• recognition from HMRC as a charity for tax purposes.

Although exempt charitable RPs are regulated by the Regulator of Social Housing (RSH), they do not have a ‘primary regulator’ for charity law purposes. The Commission generally plays a very limited role in their regulation. Interestingly, the Charities Act 2011 does provide a power for the Secretary of State to designate a primary regulator, but to date this power has not been taken up to either extend the remit of the Commission or the RSH.

This is occasionally discussed in Parliament and the Social Housing (Regulation) Bill does provide for enhanced interaction between the RSH and Commission (admittedly in relation to registered charitable RPs). With increasing focus on RPs in the press and with Government, it will be interesting to see if this regulatory ‘gap’ gets more attention.

The legal position

Irrespective of whether there is a ‘primary regulator’ or not, all charities, exempt or not, must comply with the principles of charity law. They must be established for charitable purposes for the public benefit, and the vast majority of their activities must be ‘primary purpose’ activity i.e. aimed at direct achievement of their charitable objects. Whilst there is no hard and fast rule, it is generally accepted that at least 80% of activity should be primary purpose.

The National Housing Federation (NHF) Model Rules 2015 have model charitable objects approved by the Charity Commission which cover the provision of housing, including social housing, and associated amenities and services. Most RPs also have a ‘catch all’ object which allows them to do ‘anything else’ permitted as a charitable RP. Powers must be exercised in such way as the board sees as ‘necessary and expedient’ to achieve these objects.

Boards therefore typically have wide discretion over which activities they undertake and what communities and beneficiary groups they focus on, provided they comply with their equality law duties and enable access for ‘the poor’: a fundamental element of charity law is that no individual should be prevented from accessing services because they cannot afford to do so.

Tax liability is often seen as the main risk of non-compliance (as a result of removal of charitable status) – charities are taxed on non-charitable trading activity. However, whilst the RSH does not have ‘primary regulator’ status for charity law, the Regulatory Framework does weave in compliance obligations and elements of charity law, making these central to the RSH’s expectations around good governance. The NHF Code of Governance 2020 emphasises the need for the board to lead in delivery of a strategy that achieves its social and charitable purposes. It is therefore likely that any breach of charitable status would lead to regulatory engagement and potential downgrade.

We should also remember that board members as charity trustees owe fiduciary duties to their organisations. Breach of these duties can lead to personal liability. Although it is rare for charity trustees to be personally pursued, we should remember that charity trustees are traditionally unpaid volunteers. There has been a strong policy justification not to deter individuals putting themselves forward for these roles. However, where board members are ‘professional’ non-executives, paid for their role and expertise, there may be less hesitation in the future to pursue them personally.

Practical application

So, if you haven’t stopped reading to check with your Company Secretary about your directors’ liability insurance - how can you make sure charitable status is central to your decision-making?

A word of reassurance: most board members do this without realising. They became non-executives for the very reason that they want to make a difference to people’s lives. However, the need to increasingly cross-subsidise core activity with trading activity has resulted in the need to strike a balance. Even the smallest RPs usually have some element of non-charitable activity to supplement their income.

The question is therefore assurance and what this should look like. Some ideas:

1. Start with the basics: read your charitable objects and make sure you understand your powers and the parameters within which your activities can be undertaken.
2. Consider your strategy: what is the mix of charitable and non-charitable activity? You should take into account non-charitable investments made (market rent, on-lending to or equity in commercial subsidiaries) as well as any non-charitable trading.
   Within this, ask yourself whether this is the ‘right’ balance for your organisation from a strategic perspective. As the Charities Code of Governance puts it, the strategy should aim “to achieve the organisation’s charitable purposes” and should be “clear about the desired outputs, outcomes and impacts.” Of course, you will be reviewing your strategy regularly in line with the external environment – priorities will change depending on what the business needs, what your charitable beneficiaries need and what risks you are exposed to.

3. Set parameters and monitor: some organisations set ‘golden rules’ around the level of charitable to non-charitable activity (by reference to turnover, asset base etc) which then feeds into the board’s decision-making around new and existing activities. This should be looked at in the round – for example: when you are considering a new commercial activity, consider what it means for your existing commercial activities or investments. Does it change the risk and return balance?
4. Take advice: board reports should highlight where there are charity law implications and risks for your organisation, and professional advice should be taken where needed to assist decision-making.
   The Charity Commission’s guidance should also be used as an indication of best practice – there are some helpful notes covering key areas such as the guidance for charities with a connection to a non-charity (including trading subsidiaries).

5. Review: Undertake regular reviews of your current and planned activities. This kind of exercise can be helpful to identify where there may be risks or ‘pinch points’ around the amount of non-charitable activity being undertaken, ensuring issues are not considered in isolation, as well as identifying tax and risk efficiency gains through your structure.

Boards have been encouraged to focus on strategic issues and move away from operational matters in recent years. This has arguably led to primary purpose activity not having as much board time. However, charitable RPs exist to deliver their charitable objects: discussing this as a matter of course is vital, and will naturally ensure there is a robust focus on your charitable beneficiaries and customers at board level.

Watch this space for our upcoming webinar on diversification where we will consider this topic in further detail. In the meantime, the BB team is experienced at advising charitable RPs on their charity law obligations – from conducting annual charity law ‘health checks’, providing vires opinions on specific projects, through to wholesale group structure reviews.

If this is something you are interested in, please contact one of our Housing Corporate Governance team to discuss how we might be able to assist you.

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