Permanent Endowment OG 44 B2 - EXPENDITURE AND RECOUPMENT ORDERS

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OPERATIONAL GUIDANCE

PERMANENT ENDOWMENT

EXPENDITURE AND RECOUPMENT ORDERS

OG 44 B2 – 18 March 2008

Purpose

This guidance explains the circumstances when we can consider making an Order that allows trustees to spend their charity’s permanent endowment, usually subject to replacement out of future income. We expect these cases to be relatively rare.

Functional responsibility

For action

CC Direct, Advice and Orders, Large Charities Division, Legal Division

For information

All operational staff

Contents

1. Introduction
2. Our power to make section 26 Orders
3. Case handling
4. Authorised staff
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. Introduction
	As described in OG 44 B1, sections 75, 75A and 75B of the 1993 Act (the statutory power) give trustees the power to spend permanent endowment without the need to replace it, provided certain conditions are met. But there will be cases where trustees’ plans will include the use of permanent endowment but the power is either not available or not appropriate. In these cases, we may need to provide authority by making an Order under section 26(4) of the 1993 Act or by scheme.
	What property constitutes permanent endowment is explained in our public guidance, which is reproduced in OG 44 A1. This is also available on our web site in the Apply for it area.
	As with all our casework, our approach to these cases should be proportionate and, risk based. This means that unless we have doubts about affordability or whether the proposals will serve the beneficiaries well, we should be supportive. We should also bear in mind that borrowing from its permanent endowment will probably be cheaper for the charity than borrowing money from some other source, such as a bank or building society. This is because the normal replacement terms that we authorise are based on a simple pound for pound replacement and no interest payment is involved.
	This guidance on replacement does not apply to charities that have adopted the Total Return approach to investments. The number of charities that use this approach is small and the differences when they are spending permanent endowment are explained in OG 83 B4 Endowed Charities: A Total Return approach to investment: Replacing expenditure from a charity's investment fund.

2. Our power to make section 26 Orders
	Our power to make section 26 Orders is explained in detail in OG 1 A1. Briefly:
	Section 26 Orders authorise trustees to carry out an act that they otherwise have, or may have, no power to do, and sub section (4) specifically covers the situation where permanent endowment is to be spent.
	We can only make a section 26 Order if we are satisfied that to do so is ‘expedient in the interests of the charity’, ie that the decision of the trustees that the interests of the charity are served by a particular course of action is a reasonable decision in the circumstances of the case.
	We cannot use a section 26 Order to authorise the trustees to do anything that overrides an "express prohibition" in the charity’s governing document or, if different, the document by which the charity acquired the property. Nor can we use it to change the purposes of a charity.

3. Case handling
	3.1 Applying for our authority 3.2 Initial consideration 3.3 Do we need to make an Order? 3.4 Case consideration when can we make an Order? 3.5 What is the purpose of the expenditure 3.6 How much do the trustees want to spend? 3.7 Why do the trustees need to use permanent endowment? 3.8 Are the trustees are balancing the interests of the existing and future beneficiaries of the charity? 3.9 How the trustees propose to replace the permanent endowment or why they think they should not have to replace it. 3.10 Authorising the expenditure

	3.1 Applying for our authority
	Trustees can apply for a section 26(4) Order that will enable them to spend capital by completing and sending to us form CSD 1347B. This is a form on which the trustees provide all the information we normally need to consider the application as a declaration that confirms the trustees believe that the expenditure is in the interests of the charity. The information provided should include:
	1.		the purpose of the expenditure and the length of its ‘life expectancy’;
	2.		the amount the trustees want to spend;
	3.		why the trustees need to use permanent endowment and what other funding options have been explored;
	4.		confirmation that the trustees are balancing the interests of the existing and future beneficiaries of the charity; and
	5.		how the trustees propose to replace the permanent endowment and confirmation that they believe they can make the payments or, why they think they should not have to replace it.
	We should also be provided with the charity’s accounts for the three preceding accounting periods if we have not already received them. Our public guidance CSD 1347A advises trustees that they need to provide these. The accounts should confirm the overall financial health of the charity and, if applicable, the trustees’ opinion that it can afford to make the proposed payments.
	Trustees can also provide this information in a letter or e-mail: this should not affect our consideration of the case

	3.2 Initial consideration
	Our first action when considering an application for a section 26(4) Order to spend some or all of a charity’s permanent endowment should be to check:
	if the property is actually permanent endowment; and
	whether there is an ‘express prohibition’ against the expenditure either in the charity’s governing document or, if different, the document that gave the property to the charity. Cases where there is such an ‘express prohibition’ are rare.
	Part A of OG 44 A1 explains when property may or may not be permanent endowment. If the guidance in OG 44 A1 does not provide sufficient clarity for the particular circumstances, legal advice should be sought. If it is still not clear after these steps have been taken whether the property is permanent endowment we can consider making an Order to remove any doubt that the trustees are acting within the law. These are sometimes referred to as ‘comfort’ or ‘tam valeat’ (that is, to give our authority if and in so far as it is needed) Orders.

	3.3 Do we need to make an Order?
	Trustees may not be able to use the statutory power to spend any part of their charity’s permanent endowment because:
	it is not allowed by the trusts of the charity, for example, the assets to be spent represent functional permanent endowment (see part A of OG 44 A1); or
	because either we and/or the trustees are not satisfied that the requirements of the statutory power are met, for example, the social and economic circumstances in which the charity is operating have not changed sufficiently for us to concur with a statutory power resolution.
	We may also occasionally encounter a case where trustees can use the statutory power to remove the bar on spending their charity’s permanent endowment, but have made a decision that they want to preserve it in the long term. This is the trustees’ decision and we should be prepared to make a section 26(4) Order if the trustees have made a case that it is ‘expedient in the interests of the charity’.
	Where the statutory power is not to be used, it may still be possible to make a case for spending permanent endowment, usually on terms of replacement (or always in cases where the trustees have indicated that they want to preserve the charity’s permanent endowment). For example, trustees of such a charity may need to raise money to pay for essential work or facilities that will either enable the charity to continue to, or improve its ability to, achieve its purposes.
	In cases where we cannot make an Order because the property represents functional permanent endowment or there is an ‘express prohibition’ in the governing document, it is possible that there may be grounds for the trustees to make a case for making a Scheme to us (see OG 1 A2). Examples of circumstances where we might consider that a Scheme is necessary might occur where:
	Land that is part of a playing field, but is not needed, has been sold and the proceeds are to be used to improve the facilities on the remaining land; or
	An almshouse charity has sold one of its almshouses and the trustees want to use the proceeds to refurbish the remaining properties.

	3.4 Case consideration when can we make an Order?
	We need to be satisfied that the proposals are in the interests of the charity before we can make an Order to give its trustees the necessary power to spend permanent endowment and (if needed) the authority to replace it,. This will usually depend on the answers to each of the factors listed in 3.1 being satisfactory.
	It should be noted that where a charity that could have used the statutory power chooses to apply for our authority under s.26(4), we should use the same criteria as we would for any other Order made under that provision, rather than those that apply to the statutory power, which are explained in OG 44 B1. Put simply, the decision not to use the statutory power does not affect our consideration of whether we make an Order.

	3.5 What is the purpose of the expenditure?
	In most cases where trustees need to spend permanent endowment it will be used for repairing, improving or extending buildings belonging to the charity. However we can authorise permanent endowment to be spent for other purposes, if we are satisfied that it is in the interests of the charity. We should work on the assumption that the trustees are in the best position to judge this and only question the expenditure if we have concerns, for example:
	it appears that the expenditure is not clearly related to the overall purposes of the charity;
	if it will reduce without suitable justification the ability of the charity to serve existing or future beneficiaries; or
	the charity has a poor record of financial management.
	There are many circumstances where it may be evident that a charity has a poor record of financial management. Examples include:
	the proposed expenditure is to cover losses caused by poor financial management;
	projects have failed in the past due to poor planning, for example, estimates of the funding needed have proved to be very inaccurate;
	repayment directions in previous recoupment Orders have been ignored.
	Accountancy and/or legal advice should be sought in these cases.

	3.6 How much do the trustees want to spend?
	This is a matter for the trustees to decide, and we should only question it if it appears that the amount to be spent seems unusually large for the proposed purpose of the expenditure. We need the information primarily for the Order granting authority.

	3.7 Why do the trustees need to use permanent endowment?
	Using permanent endowment should be almost a ‘last resort’ for trustees. Before any application is made to us the trustees should have explored any other options that may be open to them, such as using accumulated income, grant funding or interest free loans. It will usually be more expedient for us to authorise permanent endowment to be spent when the only other option is a loan from a bank, or other financial institution, which will charge interest at or near a commercial level. This is because the replacement we will authorise will be on a straightforward pound for pound basis.
	Any application should explain why the trustees need to use permanent endowment (as opposed to other sources of funding) and what other sources of funding the work are being used, or have been considered, such as accumulated income or grant funding. Form CSD 1347B asks for this information and applications that do not use the form should still include it. If it is not provided we should ask for it. We may reject the application if it appears that the trustees have not considered other forms of funding without any apparent reason.
	In some cases a grant funder may be prepared to provide matched funding, ie for every pound the trustees provide for the work the funder provides a further pound, in which case it is possible that the charity may need to use permanent endowment to maximise the money it can obtain for its work.

	3.8 Are the trustees are balancing the interests of the existing and future beneficiaries of the charity?
	The trustees must consider the needs of both the existing and future beneficiaries when deciding whether spending permanent endowment is in the best interests of the charity. This means they must have a balanced view of what they want to achieve both now and in the future and how best to do it. Again we should proceed on the basis that they are the best judge and only be concerned if the balance is not reasonably justified.

	3.9 How the trustees propose to replace the permanent endowment or why they think they should not have to replace it
	Pound for pound replacement
	Normally the permanent endowment will be replaced on a pound for pound basis by annual payments out of the income of the charity over an agreed number of years. The money is to be invested by the trustees. The wording of the Order will specify what the replacement period will be, but will allow us to authorise the trustees to change the terms by a simple letter if they think they can make larger payments.
	Other methods of replacement suggested by trustees can be considered and approved with advice from an Accountant. Such alternative methods may include replacing the permanent endowment by using a compound interest method, either by setting a capital sum aside to be invested and the income arising also being invested, or by regular payments that are invested along with the interest accruing to them.
	The replacement period should not be longer than the life expectancy of any work to be carried out (we expect the trustees to provide this information in the application form CSD 1347B) and should be shorter if the charity can afford higher payments. If the purpose of the expenditure is to provide a new building with a long life expectancy we can agree a longer replacement period than would be the case if the purpose was more short term, for example improving a building to meet health and safety requirements that are likely to need upgrading again in a few years. In approving any replacement terms, we should expect the trustees to provide evidence that the charity can afford them and not authorise the expenditure without such evidence.
	Waiving replacement in cases where the work has a long life expectancy
	In some cases it will be reasonable for us to waive the replacement altogether, if this is requested by the trustees. For example, if the proposal is to provide buildings with a long life expectancy, say 75 years, that will be used for the purposes of the charity, (such as providing extra classrooms at a school), we can consider whether it is appropriate to agree to waive the replacement because of the ‘permanency’ of the buildings.
	However if the building is more temporary, for example, with a life expectancy of, say 20 years, it is much less likely that we will be able agree to waive recoupment, because of the interests of future beneficiaries.
	Part of the information trustees must provide us when applying to spend permanent endowment is the proposed life expectancy of the work to be carried out and, if the trustees want us to waive replacement, they should state their reasons. Form CSD 1347B asks for this information. Our decision in these cases must be based on the information provided by the trustees, unless there is reason to doubt its accuracy, for example if the information provided makes the estimate of the life expectancy look inaccurate.
	Waiving the requirement to replace because the charity cannot afford to do so
	It is also possible for the charity’s finances to be in such a poor state that its only hope of a long-term future is to spend its permanent endowment but its income will not be sufficient to enable it to afford annual payments to replace it. For example:
		A village hall has sold some land and the proceeds of sale are functional permanent endowment and have been invested to produce an income to help fund its maintenance. Over the years, due to lack of support, the hall has become dilapidated and it is intended to spend this permanent endowment to bring it to a suitable state of repair to allow it to remain in use. However there is no realistic prospect of it generating enough income to replace the permanent endowment.
	The decision whether to waive replacement in these circumstances is likely to require Legal and/or Accountancy advice and a thorough examination of the charity’s finances and general situation.
	As always the decision must be based on the best interests of the charity and balancing the needs of present and future beneficiaries. In the situation described above, it is possible that the evidence presented to us may even indicate that it is a better option is to sell the property and use the charity’s income for other purposes generally beneficial to the community. In such circumstances we should not authorise the expenditure.

	3.10 Authorising the expenditure
	If we are satisfied that the trustees’ decision (that using the permanent endowment is in the best interest of the charity) is reasonable and properly taken, the Order authorising the expenditure and (if required) replacement can be endorsed on form CSD 1347B, if the trustees have used it. The form includes a warning that providing us with false or misleading information is an offence.
	If we do not authorise the expenditure we should write to the trustees to explain our decision, which will be capable of being referred to the Charity Tribunal (see OG 95).

4. Authorised staff
	Staff in Charity Services and Legal Division, who have been authorised to do so may make Orders under section 26(4) of the 1993 Act to authorise trustees to spend permanent endowment, subject to replacement, if required.

Glossary of Terms used in this Guidance
	1993 Act
	2006 Act
	governing document
	Order
	trustees

Index to further related information