Charity Commission probe sees £13m handed over to good causes
2 Apr 2019
A Charity Commission inquiry into a poverty charity has resulted in over £13m distributed to good causes, and the disqualification of the charity’s former chair following findings of breaches of trust, misapplication of charity funds and failure to manage conflicts of interest
2 Apr 2019
The inquiry into the charity Relief for Distressed Children and Young People began after concerns were raised about its management and administration.
At the time its declared income for the financial year 31 March 2006 was £2,653,165, and the trustees’ annual report made reference to the charity deriving the majority of its income from property investments and rental income.
In 2004 the charity purchased, through loans, three commercial properties for over £60m which were subsequently sold in 2005 and 2006 generating profits from the sales of over £12m. In addition to income derived from investments, the charity also received donations from the trustees and their families.
The inquiry questioned the trustees about $6.35m (£4.8m) which they claimed had been spent on building orphanages in Iraq. Investigators examined letters, photographs and detailed plans of building work. It later materialised that over $5m had been passed to non-charitable organisations or friends and family of the trustees in Iraq.
Funds equivalent to those misapplied, plus interest, were quickly repaid into the charity’s bank accounts by the trustees. The inquiry considered this an admission by the trustees that funds had been misapplied.
In 2007, the Commission suspended the trustees pending consideration of their removal. The chair was removed in September 2007, and disqualified, following his removal, from serving as a charity trustee or holding any senior management function of any charity in England and Wales. The remaining trustees were discharged from their roles in 2008.
As a result of the trustees’ conduct a potential tax liability of up to £3.5m was identified. With no trustees remaining, the inquiry appointed an interim manager from PKF to take over the administration of the charity, settle any tax liability and make a determination on the charity’s future.
The charity’s potential tax liability arose because either the sale of commercial properties in 2005-2006 constituted taxable trading by the charity, for which relief does not apply, or alternatively the profits (or gains) from the property transactions were subject to tax as a result of the trustees’ misapplication of the charity’s funds in Iraq for non-charitable purposes.
HMRC indicated that the potential tax liability facing the charity was up to £3.5m, including interest and penalties.
PKF, as interim manager, sought to argue the property transactions did not constitute trading activity, but communications with HMRC over a number of years (2009-2013) did not resolve the issue.
In August 2013 HMRC raised assessments totalling £771,508 for the tax years ending 5 April 2006 and 5 April 2007 which, if confirmed, meant significant amounts of interest and penalties would also have been due. The case went to tribunal, with HMRC withdrawing before the hearing and agreeing there were no outstanding tax liabilities.
Between 2011 and 2016 the interim manager awarded grants of over £13.3 million to UNICEF UK, Save the Children Fund and Christian Aid working in Iraq in furtherance of the charity’s purposes. Prior to its dissolution a further grant of over £287,000 was awarded to support charitable activities in Iraq.
By this point the inquiry had found clear misconduct and/or mismanagement by the former trustees, including their failure to act in accordance with the prohibition in the charity’s trust deed on the trustees receiving financial benefit, as well as the provision of false and/or misleading information to the Commission.
The trustees were also judged to have misapplied the charity’s assets, to have little or no knowledge of the financial controls and activities of the charity; and to have failed to manage conflicts of interest.
The charity was removed from the register of charities on 1 March 2019.
Michelle Russell, director of investigations, monitoring and enforcement at the Charity Commission, said: ‘A series of actions by the former trustees allowed charitable funds to be misapplied and put at risk. Our protective action ensured they put right their mistakes and have been held to account for their actions.
‘As regulator, we want to see charity thrive. This case highlights the lengths we will go to address misconduct and/or mismanagement in charities and protect charity property and assets so that the sector can inspire trust.’
Report by Pat Sweet