With effect from 6 April 2016, all companies, including charitable companies, are required to maintain a Register of 'People with Significant Control' (or 'PSCs'). This requirement is contained in the Companies Act 2006 and reflects the Government's drive for greater transparency which originally formed part of the agenda for the UK's G8 Presidency in 2013.
In essence, the aim of the PSC rules is to oblige UK companies to significantly increase the level of transparency about who exercises significant control over them.
As with much of the legislation that applies to UK companies generally, the PSC rules have not been drafted with charities specifically in mind and the rules, which are complicated, do not take into account or cater for the additional complexities that a company's charitable status creates in some circumstances.
The PSC rules will increase the regulatory burden for some charities although, if effective administrative procedures are put in place, it should be possible to ensure that the ongoing burden is limited in practice.
Not all charities will be affected by the PSC rules. Charitable companies (including companies limited by both shares and by guarantee) and community interest companies are within the rules. A subsidiary company owned by a charity is also affected, regardless of whether the parent charity is itself a company.
Unless they own a subsidiary company, Royal Charter bodies, charitable incorporated organisations (CIO), statutory corporations, registered societies and charity trustees which are incorporated under the Charities Act 2011 are not affected by the PSC rules. Charities established by trust or Charity Commission scheme or set up as unincorporated associations are also not affected, unless they own a subsidiary company.
Any charity within the scope of the PSC rules must take 'reasonable steps' to identify all of those people who exercise 'significant control' over it and must then record their details in a dedicated PSC register. A PSC register must be maintained even if the charity has no PSCs.
As from 30 June 2016, any charity which is obliged to maintain a PSC register must also deliver the information in the register annually to Companies House as part of its 'confirmation statement' (which is replacing the Annual Return made to Companies House from that date). Companies House will in turn make this information publicly available in a central register of PSCs.
The charity must also then update the information on its own PSC register when it changes, and update the information at Companies House when it makes its next confirmation statement.
The Companies Act 2006 places the obligation to comply with the PSC rules on the charity but any failure by the charity to comply with the rules may constitute a criminal offence by its trustees.
A PSC is any individual who exercises 'significant control' over a charity which is affected by the PSC rules. The rules do not therefore apply to other companies which exercise significant control over a charity (although there are specific rules which do catch a 'relevant legal entity' and which will apply to subsidiaries of charitable companies - please see below).
The PSC rules provide that an individual will have 'significant control' over a charity if he or she meets any one of the following five Conditions:
Whether or not a charity has any PSCs will depend upon an analysis of its specific governance arrangements in order to determine whether there are any individuals who meet any one of these five conditions.
It is important to bear in mind that the PSC rules are not generally intended to treat a charity's trustees as PSCs. While they are responsible for the way in which a charity is managed, trustees will already be clearly identified in a charitable company's register of directors and their details filed at Companies House. The PSC rules are aimed at obliging companies to identify those members and others who exercise significant control over the way in which a company operates whose identity would not otherwise be apparent.
For many charities, applying the PSC conditions is likely to be a straightforward process. By way of example:
However, if any of Conditions 1 to 3 are met, then a charity will have PSCs and must complete and maintain its PSC register accordingly. But even if they are not met, a charity will have PSCs if Conditions 4 or 5 (which relate to 'significant influence or control') are met.
Conditions 4 and 5 are likely to be more difficult to apply in practice because they are less certain in their scope. The Department for Business Innovation and Skills ('BIS') has issued draft statutory guidance on the way in which these Conditions apply.
The guidance is not intended to be an exhaustive statement of what constitutes 'significant influence' and 'control', but does provide some principles and examples which will help in applying Conditions 4 and 5.
In essence, 'control' means that an individual has the right to direct the policies and activities of the charity, whereas 'significant influence' allows a person to ensure that the charity adopts the policies and activities that he or she wishes.
Significant influence and control can go beyond the financial and operating polices of the charity and covers both a direct and indirect right to exercise actual control or influence (whether created by provisions in the charity's articles, a members' agreement or otherwise).
The guidance gives some examples of rights to exercise significant influence or control:
Absolute decision rights will include the ability to decide on:
The guidance also makes it clear that exercising significant control is not limited to situations where a person may be considered to be a 'shadow director' and will include a 'person, who is not a trustee, but regularly or consistently directs or influences a significant section of the board, or is regularly consulted on board decisions and whose views influence decisions made by the board'.
The guidance also makes it clear that the right to exercise significant influence or control over a charity may result in a person being a PSC in relation to the charity irrespective of whether the right is actually exercised.
The guidance begs the question whether a charity's Chief Executive may exercise significant influence and control where his or her views do actually influence the decisions made by the charity's trustees.
The PSC rules contain a number of exceptions from qualifying as a PSC, including anyone acting in the course of their employment. In general, a charity's Chief Executive is likely to fall within this exception, unless their role or relationship 'differs in material respects or contains significantly different features from how the role or relationship is generally understood'.
In many cases, the likelihood is that a charity's chief executive will fall within this exception, but the position will need to be assessed in the light of the specific circumstances which apply to the charity.
Other exceptions will apply to trustees and to people who advise a charity's trustees (e.g. lawyers and accountants) provided that they are not acting outside their usual role. This means that trustees will not usually be PSCs unless they are also members (and there are fewer than four members - please see above) or they are acting outside their usual role. Regulators will also generally fall within the exception, so that e.g. statutory advice given by the Charity Commission to a charity's trustees under the Charities Act 2011 on a specific issue will not mean that it is exercising significant influence or control over the charity.
A PSC is by definition an individual and not a legal entity. However, the PSC rules require any 'relevant legal entity' (or 'RLE') to be added to the PSC register where it meets any of the PSC conditions and is itself required to maintain a PSC register. The aim is to ensure that, from the point of view of transparency, it is clear which individuals ultimately exercise significant control.
The provisions in relation to RLEs are likely to be relevant where a charity is a subsidiary company (i.e. more than a 25% interest is owned by other charities, including a joint venture charity) or where a charity has a wholly-owned subsidiary company (where the parent charity will be the company's RLE). A subsidiary of a UK charitable company will therefore need to include details of its charitable parent company in its PSC Register.
Some charities will also be affected by provisions under the PSC Rules which provide for 'other registrable persons' to be treated as PSCs. These will primarily be relevant to charitable companies owned or controlled by central or local government (including e.g. a local authority) or a corporation sole (e.g. a Bishop).
Charities must now take the following steps in order to respond to the PSC rules:
The guidance in this briefing is general in nature and should not be relied upon in relation to any individual charity. We would be pleased to discuss your charity's position in more detail.