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Operating a charity in Scotland

Graeme Dreghorn and Mary Coughlan look at the differences between operating a charity in Scotland and in the rest of the UK.

Money jar full of coins for charity and a couple of heart shapes

by
Charles Stanley

in Features

24.06.2020

Whilst the day to day needs of running a charity in Scotland are mostly the same as the rest of the UK, as Scotland has its own legal system, the regulations and organisations involved differ. Graeme Dreghorn and Mary Coughlan look at the differences.

While general advice will still stand, for the important statutory requirements and also for the specific nuances of working in Scotland, it’s a good idea to be aware of the differences. In Scotland, charities are regulated by the Office of the Scottish Charities Regulator (OSCR), the body incorporated as a result of the Charities and Trustee Investment (Scotland) Act 2005. This act contains three broad principles charities north of the border should adhere to.

  1. Charities should operate in a manner consistent with the charity's purpose.
  2. Charities must act with care and diligence.
  3. Charities must manage any conflict of interests between the charity and any person/organisation the charity appoints.

Fundraising

Funding is one of the key concerns in the third sector. Due to shrinking public-sector budgets, funding levels are becoming tighter. In a recent paper from the Scottish Council for Voluntary Organisations (SCVO), 91% of respondents felt that both planning for the future and sourcing funding is a significant issue. This means that both acquiring sources of revenue and the efficient management of any reserves is crucial.

In this environment, it pays to be smarter. For those charities with legacy funds, having them performing optimally is key. Another strategy is to increase funding. Charities have always relied upon legacies as an important funding source. Using some financial planning knowledge, one area that charities can increase revenues is through legacy gifts. Whilst most people know that all gifts to charity are exempt from Inheritance Tax (IHT), what is less common knowledge is that if a gift is over 10% of the net estate it reduces the level IHT is charged from 40% to 36%.

Example:

  • If someone were to leave a £100,000 estate (after allowances) the standard 40% rate leads to a £40,000 bill to HMRC, leaving £60,000 to the beneficiaries.
  • If a £10,000 gift to charity is made, the remaining £90,000 is charged at 36%. This reduces the IHT bill by 19%, with £32,400 going to HMRC and the beneficiaries receiving £57,600.

This is a relatively small £2,400 drop to the beneficiaries, but one that provides a much larger benefit to the charity. Good Financial Planners will be aware of this legislation and encourage individuals to take advantage of this, so the charities they cherish benefit. Charities can also be aware of this and try, where possible, to encourage larger gifts from supporters to increase funding levels.

Managing Assets

The responsibilities of managing charities’ assets lands on the trustees. An important first check is to understand the scope of these powers. Under Scottish law, this can be ascertained from the powers laid out in the governing document. It is important to state that Trustees are not legally bound to chase the highest returns, decisions should be measured in both the financial and non-financial factors for any investment. This applies to both stock market investments and also cash reserves. In the low-interest environment that we are in today, there is a real question as to whether holding large cash reserves that erode against inflation would align to the first two principles of the law.

Involving professionals

It is unlikely that most charities will have expertise in the legal, accounting and investment sectors from the trustees in place. As the responsibility on the trustees is to act with care and diligence, appointing professionals to each sector where this is skillset is not present is enshrined in the legislation. Whilst the involvement of solicitors and accountants is commonplace, holistic wealth management provides the third pillar when charities have assets to manage.

Investment Managers and Financial Planners can offer a number of benefits to a charity. Managing an investment portfolio is as complex a process as completing annual accounts, and for any charity with even reasonable reserves not having professional involvement risks non-compliance. Even the most experienced self-select investors can be led to making poor decisions that a professional would not make. The recent example of the problems faced by the once star fund manager Neil Woodford highlights this problem. 

There is a good reason that we have to sit so many exams and gain experience before we practice - the investment marketplace has become vast with a significant number of options available. It can be very hard to ensure the right decisions are made, and even when they are made, they still require stringent monitoring.

Investment Management is at its core, making educated decisions on which stocks to buy and why, and also which to avoid. This is a very full-time job, involving vast amounts of research and ongoing monitoring and amendment based on the ever-changing world. The first step in this for a charity is set a clear investment policy statement so the manager has a framework. The Trustees can ensure good outcomes for the charities assets by setting clear, realistic criteria for where monies should be invested, detailing what level of returns and risk are acceptable and expected and what distributions can be made by the charity. In a world of reduced funding, Investment Managers who can provide better returns on the charity’s assets can be crucial. Better returns mean greater distributions, which can be made to support the charities core activities.

Investment Managers are also able to do Ethical Screening or make thematic moves in a portfolio such as Ethical, Social and Governance (ESG) investing. In Scottish law, there is no definition of social/ethical investment or ESG, but the regulator does make it clear that you should consider whether this should be part of the investment process, both for financial and reputational reasons.

Some traps, such as greenwashing – where investments are labelled as ethical or ESG but may not be as green as they appear – is more common than you may think. Without the specialist knowledge to interrogate this, charities may unwittingly invest in funds which do not meet their stated position. This can lead to reputational problems, such as those faced by Church of England, who indirectly investing in payday lender Wonga after the Archbishop of Canterbury had criticised the lender.

Involving a Financial Planner can also bring in a number of benefits to charities and also to its trustees. Fundamentally, as a planner, we are involved in the creation of investment policy statements and the investment strategy, working in tandem with an investment manager and trustees. A planner will also be involved in the stress testing and forecasting of any plan to check its long-term viability.

There are also other benefits to involving Financial Planners. There is a shortage of leaders in Scotland third sector, and they are both working harder and taking on more responsibility as a result of reduced funding. This has led to a dependency on a small population, making them harder to replace.

Good financial planning is focused on getting the best outcome for the individual by understanding their lifestyle and what is important to them. Typically, people become involved third sector leadership because of deeply held beliefs, and by working hand in hand with trustees or executives, a planner can then address lifestyle issues that can help keep key staff members happy and engaged with the charity. In practice, this can take the form of managing step-downs into semi-retirement or reducing hours, providing comfort on when and how a person retires, and as previously mentioned managing gifts to charities to provide funding to those causes that a person holds dearest. This then allows discussion with the organisation on how to manage succession planning and creates a more stable environment with which to operate.

Resources

In Scotland, there are a number of excellent resources available from the regulators.

  • Office of the Scottish Charities Regular (OSCR) provides excellent guides that cover all of these areas, including guides on trustee responsibilities and managing investments
  • Scottish Council for Voluntary Organisations (SCVO) provide both support material for running charities and through Funding Scotland can be a gateway to funding.
  • The Association of Chief Officers of Scottish Voluntary Organisations (ACOSVO) can be excellent sources of guidance for chief executives of charities, providing networking and support through the sharing of best practices in a confidential manner.

It’s also key that all the parties involved in the charity – Trustees, Solicitors, Accountants, Investment Managers and Financial Planners – have the relevant experience and support and are happy working with each other. Doing this allows the charity to then really focus on the important work that it does as the legal and regulatory work is well managed.

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