OG515-2 The statutory power to pay for services provided by a trustee

Last reviewed:
31 October 2014
Last updated:
19 November 2014

Policy Statement/Overview

Introduction

The Commission’s overall policy on payments to charity trustees is set out in Trustee Expenses and Payments (CC11). Case officers need to read CC11, to familiarise themselves with our published policy, before advising trustees on any aspect of trustee payment.

Section 185 of the Charities Act gives a limited power to pay trustees for providing services to a charity, this includes goods supplied in connection with a service. In the context of payments to trustees this is referred to as ‘the statutory power’. The statutory power allows charity trustees or persons connected with them (including family members or businesses) to receive payment for the provision of goods or services to their charity. This power cannot be used to authorise payments for serving as trustee or to authorise payments related to the contracted employment of a trustee.

Section E of CC11 deals specifically with paying trustees for providing services to a charity and sets out our approach to these cases. This section of CC11 is our published guidance concerning the use of the statutory power and it is this guidance that trustees must 'have regard to' when considering making payments under the statutory power, as required by s185(4).

If the statutory power is used correctly, and in accordance with our published guidance, qualifying payments can be made without referring to us. Our regulatory role in the context of s185 is simply to:

  • publish guidance for trustees as required by s185(4)
  • take appropriate action where the power has been misused.

Summary of the guidance

This guidance includes three sections in the Casework Guidance tab but its primary purpose is to set out Q&As for staff regarding the statutory power. These Q&As deal with points of policy and law additional to those that are set out in CC11.

We have no role with trustees where the statutory power applies but we do need to be familiar with the scope of the power. This is because we need to be able to decide if any particular payments fall outside of the scope of the power. If this is the case, we must decide if we can authorise ongoing payments or if we should consider using our regulatory powers, where the power has been misused recklessly or deliberately to benefit the trustee rather than the charity.  

Within this guidance, where we refer to payments made to a trustee, this includes any payment, or other benefit, made to a trustee or to a person connected to a trustee.

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Casework Guidance

B1. What to do where we are asked to advise regarding the statutory power

If we are asked to advise regarding the statutory power we should signpost the enquirer to our web guidance and to section E of CC11. This will give trustees all of the information they need to decide if the proposed payment falls under the statutory power and, if so, how to use this. We should also refer the enquirer to the trustee payment application form that will help to decide if the statutory power can be used. If the statutory power applies, the online form allows a user to create and save a certificate stating that the proposed payment falls within the scope of the power.

B2 What if the payment cannot be made using the statutory power?      

If the proposed payment cannot be made using the statutory power (see F3) then the trustees will need to seek authority before making the payment. In this case we expect the trustees to complete the online application form. When we receive a completed application form we will consider this using the appropriate guidance from the OG515 series.

B3 What should we do if the statutory power is misused? 

Where we come across a case where the statutory power appears to have been misused, because payments have been made outside of the terms of the statutory power, we need to consider what further action might be appropriate. Broadly, we need to decide if making the payments outside of the power was a decision that was taken by the trustees recklessly, or deliberately to benefit the trustee rather than the charity, or if making the payments without authority was genuinely an error.

To help to decide what action might be appropriate we will consider the case against our Risk Framework

Legal/Policy Framework

Legal background  

Section 185 of the Charities Act

Section 185 gives a power to pay trustees, or persons connected to trustees, for the provision of services to the charity. This also covers payments made for goods supplied in connection with the provision of a service. Trustees can only rely on the statutory power if they can fulfil certain conditions:  

Condition A

  • the exact or maximum amount to be paid is set out in a written agreement between the charity and the trustee or connected person; and
  • the payment is reasonable in relation to the service to be provided

Condition B

  • the trustees are satisfied that making the payment is in the best interests of the charity

Condition C

  • the total number of trustees who are receiving any payment, or who are connected to someone receiving any payment, are in a minority

Condition D

  • there is no express prohibition against the payment of a trustee in the charity’s governing document.

In addition to these four conditions, before entering into an agreement, s185 also states that the trustees must:

  • follow the 'duty of care' set out in the Trustee Act 2000; and
  • 'have regard to any guidance given by the Commission concerning the making of such agreements'. ‘Guidance’ in this context means section E of CC11. This means the trustees must be able to demonstrate that:
    • they are aware of this guidance; and
    • in making a decision where the guidance is relevant, they have taken it into account, if they have decided to depart from the guidance, they have a good reason for doing so.

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Section 186 of the Charities Act

Section 186 applies where trustees rely on the s185 power to pay trustees. this section states that:

  • a trustee who is paid under s185 is disqualified from acting in 'any decision or other matter connected with the agreement'
  • if a person does act while disqualified, the Commission can make an Order to require repayment of all or any part of the money paid out by the charity, or a sum equivalent to any payment 'in kind' (this Order can be appealed to the Charity Tribunal)
  • the making of an Order to require repayment does not invalidate the acts undertaken on behalf of the charity as a result of making the payment.         

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Sections 187 & 188 of the Charities Act

Section 187 defines, 'benefit', 'maximum amount', 'remuneration' & 'services' for the purposes of s185, while s188 defines 'connected person'.

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Q&As

These Q&As are in addition to those that are dealt with in CC11. Caseworkers should consider CC11 as well as these Q&As when dealing with common queries regarding the statutory power. 

F1. Does the power to pay trustees for the provision of services to a charity apply to all types of charity, irrespective of how they are constituted?

Yes - provided there is no express prohibition against trustee benefit in a charity’s governing document, and provided the trustees can comply with the conditions of the statutory power. (Note: Section 185(5) of the Act requires trustees to observe the duty of care set out in section 1(1) of the Trustee Act 2000 when using the statutory power. The Trustee Act 2000 does not usually apply to companies, however, as the directors of charitable companies are charity trustees, they are required to observe the duty of care in that Act.)

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F2. What kind of payments are within the scope of the statutory power to pay for services?

Any payment to a trustee for providing any service over and above normal trustee duties, this includes goods supplied in connection with the provision of a service. Some examples of the type of payments that fall within the scope of the power are set out in CC11. Other examples include:

  • regular payments, not linked to a contract of employment, for example providing secretarial support or playing a church organ
  • payments to a trustee's firm for maintenance services
  • non-cash benefits, for example, giving a trustee use of the charity's premises at a reduced rate.     

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F3. What payments are outside of the scope of the statutory power?

Examples of the kind of payments and circumstances that would mean the proposed payments cannot be made under statutory are set out in CC11, in the introduction to section E, and in section E3. In addition to these examples, other trustee payments that would not fall within the terms of the statutory power include payments to a trustee:

  • for serving as trustee (see OG515-5
  • as a contracted employee of the charity - ie where the trustee also holds a separate post within the charity, or is employed on a continuous contract of service by the charity
  • on the termination of employment
  • on the termination of trusteeship
  • to replace, or part replace, lost income (this includes any compensation paid to the employer of a trustee) (see OG515-6
  • as an 'honorarium', this is, effectively, a small ex gratia payment for which a trustee has no legal entitlement. (It would usually be the case that an honorarium would fall within our small payments policy, see OG515-7.)

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F4. Will we make a 'comfort' Order if trustees are not sure that the statutory power applies in a particular case?

No. If the trustees are satisfied that s185 applies, having taken professional advice if necessary, then the payment can be made without our authority. We will not make a comfort Order to confirm an existing power. However, if the statutory power cannot be used because this will result in at least half of the trustee board benefiting, we may still be able to give authority, but we will need a full case to be made as to why this is in the interests of the charity.

Where there is an express prohibition, this will, in all cases, require action to amend the governing document. Where this amendment requires our authority, we expect the trustees to apply for this using the online application form.

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F5. Should the agreement contain a statement that the level of payment does not exceed what might be considered reasonable for the service to be provided and that it is in the best interests of the charity to make the payment?

It is not essential for these factors to be included in the agreement, although, as a matter of good practice, we recommend their inclusion to show the trustees have complied with their duties when reaching their decision.

The key requirement is for the trustee board to properly consider these points before entering into the agreement and note, in the minutes of the meeting, that it is satisfied on both counts.

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F6. Under Condition D, the statutory power cannot apply where there is an express prohibition against trustee benefit in the charity’s trusts. How does this affect our model benefits and payments clause?

While an express prohibition against remuneration prevents the use of the statutory power, we regard our standard benefits and payments clause (or any similar provision where authority to pay a trustee is expressed to be subject to our prior written consent) as a 'qualified prohibition' or, in effect, a conditional power. Because this is not an express prohibition, we consider it does not prevent the use of the statutory power.

Where an express prohibition against trustee remuneration is coupled with an exception that may allow, say, the payment of a small honorarium, or the payment of the normal charges of a solicitor-trustee for legal services to the charity, this type of provision cannot be taken as a 'qualified' or 'conditional' authority. This is an express prohibition against any form of remuneration other than that specified so this clause would need to be amended before payments could be made under the statutory power.

Where there is an express prohibition, then, in the case of a charitable company, this can be overturned by special resolution of those company members who are not trustees. This resolution will amend the articles of association to remove the prohibition to the extent that the statutory power can be used (see question F7). However, where the charity is an unincorporated charity, the trustees cannot use the statutory power of amendment given by s280 to remove an express prohibition. In this case, the trustees will need to apply to the Commission to see if and how the prohibition can be lifted. We would expect an application to be made using the online application form. Where we receive an application, we will usually remove the prohibition, unless there is a clear reason why this would not be in the best interests of the charity. If we do agree to remove a prohibition, this will normally require a very short Scheme.

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F7. How does this apply to directors of charitable companies?

F7.1 Where there is no prohibition on trustee benefit in the articles

Where the articles of association contain:

  • no reference to
  • no prohibition against, or
  • a power to allow use of,

the statutory power, trustees can use the statutory power without amending the articles.

However, if the directors (trustees) want to explicitly include in the articles an express power to pay trustees for providing services under s185, for clarity, they can adopt this power without our consent. Even though s198(2)(c) states that any amendment to articles that would authorise any benefit to directors is a regulated alteration requiring s198 consent, s199 specifically excludes any payment made under s185 from the definition of ‘benefit’ under s198 so no s198 consent is required.

This applies even if there are insufficient members who are not trustees to form a quorum to vote on the resolution. This is because s185 payments are not seen as ‘benefits’ (s199) for the purposes of section 198. The rule in re French Protestant Hospital [1951] Ch 567 does not apply because the trustees are not conferring on themselves any power they cannot exercise anyway under the statutory power.

F7.2 Where there is an express prohibition

Where there is an express prohibition on any trustee benefit in the articles, this must be removed before the statutory power can be used (in order to be able to comply with Condition D of s185). This is not a regulated alteration, because of s199 of the Act, so the prohibition can be removed by the members, without the need for consent or authority from the Commission, as long as there are sufficient members who are not trustees to form a quorum.

However, where there are insufficient members, who are not trustees, to vote to remove the prohibition, the members who are trustees will need authority to vote to do this because of the rule in re French Protestant Hospital. We will give this authority by s105 Order because this is not a regulated alteration so 198 cannot be used. [In cases where we are giving s198 consent to a regulated alteration allowing trustee benefit beyond the scope of section 185 we consider that our decision-making takes into account any conflict of interest so there is no need for additional s105 authority for trustees to vote on the resolution.]

See section B8.1 of OG518 for more information about removing a prohibition from a company’s articles.

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F8. Under s186, if a trustee acts while disqualified, we can order repayment of any remuneration paid to him or her - or direct that no further moneys be paid over. In this context, what constitutes 'any decision or other matter connected with the agreement' that a trustee is disqualified from acting in?

We consider this would cover any matter which may actually or potentially affect the material benefit to the trustee (or connected person). The trustee should withdraw from any discussion of the trustees concerning the matter, and should not vote on any decision to engage his/her services, or to terminate them. Nor should that person substantively participate in any discussion or decision concerning the working out of terms and conditions relating to that service, or to their subsequent review, except to answer questions, and to provide relevant information, as required.

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F9. If a trustee or connected person breaches the agreement, will this mean, for example, that any legal work carried out by that person on the charity’s behalf would be invalid?

No, subsection (3) of s186 provides that any act on the charity’s behalf may stand, even if the trustee is disqualified and is in breach of the agreement. This will apply even though the trustee may still be liable to return the payment received to the charity.

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F10. Will a breach of the agreement by a 'disqualified' trustee be a criminal offence?

The statutory power does not in itself criminalise acting while disqualified in relation to the terms and conditions of the remuneration - unlike existing penalties for acting as a trustee whilst disqualified. We will need to consider the case against our Risk Framework before deciding to use our powers under s186. There may be many cases where we consider that a low-level breach has occurred, but that the outcome for the charity means that it is not appropriate to seek repayment of all or part of the monies received by the disqualified trustee. But it is possible that, in extreme cases, we will have to consider whether or not it might be appropriate to refer the case to a prosecuting authority on the grounds of fraud.

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F11. Suppose an agreement is entered into with a trustee enabling him/her to be paid for delivering lectures in the charity’s museum. Would that person be disqualified from decisions relating to fixing the scale of payments for lecturers? Would it extend to agreeing the museum’s policy on lectures and similar activities? Would it extend to any discussion about the development of the charity’s business plan, if this were to mention the lectures?

In all cases, yes - but only in relation to matters that specifically affect, or potentially affect, the benefit in question. The trustee concerned will be disqualified from acting as a trustee in any matter of policy that is likely to impact on the terms and conditions of his/her engagement. This means that the trustee’s expertise will be lost in any strategic or local decision-making process requiring a choice between competing options, or which may require a business decision to continue, dispense with, or scale down the activity in question. The trustee is also disqualified from acting in relation to the setting of fees or scales of payment within the charity for that activity.

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F12. Does use of the statutory power need to be mentioned in charity accounts?

Yes, see section E12 of CC11. [Note, even where a charity is not required to report under the Charities' SORP, because it falls under a different SORP eg the Housing SORP or the Further and Higher Education SORP, the trustees are still expected to follow the principles of the Charities' SORP when reporting trustee payments.] 

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