Decision

Relief for Distressed Children and Young People

Published 29 March 2019

This decision was withdrawn on 18 January 2022

This Inquiry report has been archived as it is over 2 years old.

Applies to England and Wales

A statement of the results of an inquiry into Relief for Distressed Children and Young People (registered charity number 1103969).

Published on 29 March 2019.

The charity

Relief for Distressed Children and Young People (‘the Charity’) was entered onto the Register of Charities (‘the Register’) on 26 May 2004. It was governed by a declaration of trust dated 27 February 2004. The Charity ceased to exist following its dissolution on 28 February 2019; it was removed from the Register on 1 March 2019.

The Charity’s objects were ‘the relief of poverty, sickness and distress of persons under the age of 21, whether or not they are resident or temporarily located in Iraq, but in particular citizens of Iraq, who are in conditions of need, hardship or distress as a result of local, national or international disasters or by reason of their social or economic circumstance provided always that such relief is charitable and exclusively charitable according to the law of England and Wales.’ The Charity’s stated area of benefit on the Register was Iraq.

At the time the statutory inquiry (‘the Inquiry’) was opened, in August 2006, the Charity’s declared income for the Financial Year End (‘FYE’) 31 March 2006 was £2,653,165, 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 £60 million, these were subsequently sold in 2005 and 2006 generating profits from the sales of over £12 million. In addition to income derived from investments, the Charity also received donations from the trustees and their families.

Issue under investigation

In August 2006 the Commission received information from another government agency regarding the Charity and its trustees. This raised regulatory concerns regarding the management and administration of the Charity which warranted further investigation as part of a statutory inquiry.

On 31 August 2006, the Commission opened the Inquiry to examine the management and administration of the Charity under section 46 of the Charities Act 2011 (‘the Act’) ^{[footnote 1]}. At the time of opening the Inquiry the Commission exercised a number of regulatory powers under the Act to obtain information about the Charity and its bank accounts and to freeze funds held in three bank accounts in the name of the Charity – see Regulatory Action Taken for further information.

Shortly after the Inquiry was opened an anonymous complaint about the activities of the Charity in Iraq was received.

The Inquiry examined the following issues:-

• the financial management of the Charity, including application of charitable funds; and

• the conduct of the trustees in the management of the Charity

In May 2009 the Inquiry appointed Mr Charles Cox and Ian Mills of PKF^{[footnote 2]} as Interim Manager (‘the IM’) of the Charity - see Appointment of Interim Manager for further information.

The Inquiry closed on 29 March 2019 with the publication of this report.

Findings

The Inquiry found that the Charity was mismanaged by the Charity’s trustees and that there had been misconduct and/or mismanagement relating to both the application of the Charity’s funds and the conduct of its trustees. During the Inquiry the Commission corresponded primarily with the Charity’s (then) Chair of trustees, (‘the Chair’) and the Charity’s professional advisors.

The Inquiry queried the application of over $6.35m of charitable expenditure in 2005-2006 which the trustees stated was applied in Iraq including for the building of orphanages. In response to the Inquiry’s questions regarding the application of the Charity’s funds in Iraq the trustees provided supporting documents relating to the expenditure.

This supporting information included letters between the Charity and the purported recipients of funding from the Charity, as well as photographs and detailed plans of the building work. The trustees and the Charity’s accounts also provided descriptions on the measures put in place by the Charity to monitor the progress of the funded projects.

Following requests for additional information and questions relating to expenditure in Iraq, in July 2007, the trustees, through their representatives, informed the Inquiry that the evidence they had supplied to the Inquiry did not properly account for the use of the Charity’s funds and that approximately $5.5m^{[footnote 3]} had been passed to non-charitable organisations or friends and family of the trustees in Iraq as opposed to the orphanages and other charitable projects stated. At the same time funds, equivalent to those misapplied - with accrued interest at a rate more favourable to the Charity than if the funds were held in its bank accounts - were paid into the Charity’s bank accounts by the trustees, thereby restoring the Charity to the position it was in prior to the payments being made. The Inquiry found that the immediate repayment of the funds by the trustees was an admission that they were misapplied in the first instance. The trustees, through their advisors, confirmed that HMRC had been notified.

In addition to misapplying the Charity’s funds the Inquiry found that the trustees provided the Commission with false or misleading information relating to their application in Iraq. It is an offence by virtue of section 60 of the Act to knowingly or recklessly provide the Commission with false or misleading information.

The Inquiry sought to engage with the Charity’s other trustees who were not the main correspondent for the Charity but who were related to the Chair of trustees. Further to a direction from the Commission, these trustees claimed to have little or no knowledge of the financial controls and activities of the Charity. This was further evidence of mismanagement and/or misconduct in the management and administration of the Charity.

The Inquiry found that there were breaches of trust and duty by the trustees including the misapplication of the Charity’s funds and failure to manage conflicts of interest and act in accordance with the prohibition in the Charity’s Trust Deed on the trustees receiving any financial benefit, direct or indirect, from the Charity without the Commission’s prior consent.

In response to the information provided to the Inquiry in August 2007, the Inquiry suspended the Charity’s trustees pending consideration of their removal under the Act. The Chair of trustees was subsequently removed as trustee by Order under the Act in September 2007. In August 2008 the Commission accepted the applications from the Charity’s two remaining trustees to be discharged as trustees of the Charity. See Regulatory Action Taken for further information.

In August 2007 the Charity’s funds remained protected by Orders of the Commission on the bank accounts in which the funds were held. However, the Charity was in a position where it had no trustees who were able to act. As the trustees advised HMRC of their actions, the Inquiry was concerned that the Charity may have a potential tax liability.

Charities enjoy various tax reliefs and benefits by virtue of their status as charities; these reliefs and benefits are subject to certain conditions; if these are not satisfied the tax exemptions are wholly or partially restricted in law. The Charity’s potential tax liability arose because either (i) the sale of commercial properties in 2005-2006 (‘the Property Transactions’) constituted taxable trading by the Charity - for which relief does not apply, or (ii) 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.

The issue was whether any tax relief enjoyed by the Charity ought to be recovered and whether any penalties applied; if so, this would be an issue for HMRC. To address this issue and to take over the management and administration of the Charity, the Commission appointed the IM. HMRC indicated that the potential tax liability facing the Charity was up to c£3.5million - including interest and penalties.

Conclusions

The Charity was mismanaged and there was evidence of misconduct and/or mismanagement on the part of its trustees - particularly its Chair who was the primary correspondent with the Inquiry.

False and/or misleading information was provided to the Commission and a significant sum of charitable funds (c$5.1 million) were misapplied; although equivalent funds were repaid to the Charity (with interest), their misapplication with the personal involvement of the Chair of trustees presented a clear risk of further misapplication of the Charity’s funds.

The Interim Manager Appointment

On 29 May 2009 the IM was appointed under section 76(3)(g) of the Act. The Commission’s directions for the Interim Managers were to (in summary):

• manage and administer the Charity and its property - including taking control of the Charity’s bank accounts

• consider whether the Charity had a viable future and to take action accordingly - including the application of the Charity’s funds

• prepare accounts from the Financial Year End (‘FYE’) March 2006 and ensure that they are audited as appropriate

• to liaise with HMRC to settle any tax liability, associated penalties and charges at the lowest appropriate level; in the event of a dispute with HMRC as to the appropriate rate of tax to make further representations to the (Tax) Tribunal

• to consider the conduct of the former trustees with regards to their management and administration of the Charity and to make any recommendations to the Commission

At the time of the IM’s appointment, the most pressing issue was the Charity’s potential tax liability and any potential penalties that could be issued; the Inquiry was aware that the penalties could be up to 100% of the liability.

Shortly after their appointment, the IM purchased a certificate of tax deposit for £4million to cover the potential tax liability facing the Charity and any additional costs or interest that may have been levied or accrued.

In October 2009 a report was prepared by the IM, which was subsequently supported by an opinion from an appropriate specialist advisor, setting out the tax issues affecting the Charity and provided detailed background to the Property Transactions and why, in the IM’s opinion, they did not constitute trading activity. Between 2009-2013 the IM, with supporting opinion from the specialist advisor, advanced arguments that the Charity had no outstanding tax liability. Communications between the IM and 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 - if these assessments had been confirmed, significant amounts of interest and penalties would also have been due. The IM requested a review of these assessments. HMRC’s review concluded that the assessments were correct and should be upheld. The IM then submitted an appeal against the assessments to the Tribunal for determination. This was accepted by the Tribunal on 14 May 2014. Prior to HMRC submitting its statement of case to the Tribunal it withdrew from the appeal and subsequently confirmed to the IM that there were no outstanding tax liabilities for the Charity.

Between FYE 31 March 2011 – 31 March 2016 the IM awarded grants of over £13.3 million to UNICEF UK (1072612), Save the Children Fund (213890) and Christian Aid (1105851) working in Iraq in furtherance of the Charity’s purposes. Prior to the Charity’s dissolution a further grant of over £287,000 was awarded to support charitable activities in Iraq.

Having resolved the potential tax liability and receiving confirmation from HMRC that the Charity had no outstanding tax liabilities the IM made recommendations to the Commission in respect of the conduct of the former trustees of the Charity. Informed by specialist advice, the IM made a recommendation to the Commission that there was a case to make a claim against the former trustees of the Charity for costs incurred by the Charity as a result of their misconduct and/or mismanagement.

On 14 July 2017, the Commission varied its Order of appointment to include an additional provision relating to the conduct of the (former) trustees. This additional provision afforded the IM the authority to pursue any action considered appropriate and in the Charity’s best interests regarding the conduct of the Charity’s former trustees. In July 2017 the Commission, on request of the IM, gave formal advice under section 110 of the Act regarding the IM’s proposed action to make a claim against the former trustees of the Charity.

In October 2017, the IM issued a letter of claim seeking financial compensation for costs incurred by the Charity as a result of their conduct. In 2018 a financial settlement was reached and paid to the Charity.

The costs of the IM’s appointment (May 2009 - February 2019) were met out of the Charity’s funds and are itemised as follows:-

• Interim Manager fees (including VAT) - £390,758

• Disbursements - (expenses - eg, travel, accommodation etc) - £2,706

• Professional fees and charges (including VAT) - £143,011

The IM was discharged on 1 March 2019 following the Charity’s dissolution.

Regulatory Action Taken

In addition to the appointment of the IM, the Commission exercised a range of regulatory powers during the Inquiry.

Various orders and directions were issued to obtain information in the form of copy documents and answers to questions.

At the time of opening the Inquiry, orders to ‘freeze’ the Charity’s bank accounts were made to protect c£13.8 million held in them. These orders were discharged following the appointment of the IM and after they had taken control of the accounts.

The Commission suspended the Charity’s three trustees in August 2007. The Commission also, on the same day that it suspended the Charity’s trustees issued an Order restricting the transactions that they could enter into. Specifically, the Commission’s Order restricted the trustees from entering into any resolution or other agreement to appoint any individual as a trustee of the Charity under the provisions of the Charity’s Trust Deed.

On 18 September 2007 the Commission made an Order removing the Chair of trustees; the consequence of this is that they are permanently disqualified from acting as a trustee of any charity in England and Wales without a waiver from disqualification from the Commission or the Court. The Charity’s former Chair is listed on the Register of Disqualified Individuals maintained by the Commission^{[footnote 4]}.

On the 15 August 2008 the Commission accepted the applications from the Charity’s two remaining trustees to be discharged as trustees of the Charity.

Issues for the wider sector

The purpose of this section is to highlight the broader issues arising from the Commission’s assessment of the issues raised publicly that may have relevance for other charities. It is not intended as further comment on the charity in addition to the findings and conclusions set out in the earlier sections of this report, but is included because of their wider applicability and interest to the charity sector.

The courts have made clear that they expect trustees to cooperate with the Commission as regulator. Where it is in doubt, it is for trustees to show that they have complied with their duties, rather than for the Commission to prove that they have not. So, if trustees do not provide the information requested, or provide only limited, partial or inadequate responses, then the Commission is likely to have to conclude that the trustees have not discharged their legal duties and/or use it as evidence of collective failure of the trustees, incapacity or unwillingness to do so. It is an offence by virtue of section 60 of the Charities Act 2011 to knowingly or recklessly supply the Commission with false or misleading information.

Trustees have a legal duty to ensure that their charity’s funds are applied solely and reasonably in furtherance of its objects. Therefore, in order to show that they are complying with their legal duties, trustees must keep records and an adequate audit trail to show that the charity’s money has been properly spent on furthering the charity’s purposes for the public benefit. Records of both domestic and international transactions must be sufficiently detailed to demonstrate that funds have been spent properly and in a manner consistent with the purpose and objectives of the charity.

Conflicts of interest are more likely when there are only a small number of trustees on the board, when trustees are closely related, or when the charity has dealings with organisations in which the trustees have interests. It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees. The trustees should put in place policies and procedures to identify and manage such conflict.

Further guidance and advice on conflicts of interest can be found on GOV.UK.

Charities enjoy various tax reliefs and benefits by virtue of their status as charities - the Commission has published guidance on charities and tax which can found on GOV.UK. The reliefs and benefits that charities enjoy are subject to certain conditions and restrictions - failure to comply with these may mean that the tax exemptions are wholly or partially restricted. Trustees of charities who do not comply with relevant tax restrictions and conditions could find themselves subject to investigation by HMRC.

1. In March 2012 the Charities Act 1993 and Charities Act 2006 were consolidated into the Charities Act 2011. When the Inquiry was opened the Charities Act 1993 was in effect, however, for ease we have referred to the relevant provisions under the Charities Act 2011 in the report. ↩

2. On 19 April 2013 the merger between PKF (UK) LLP and BDO LLP was completed. ↩

3. The actual figure, confirmed at a later date was $5.451 million ↩

4. http://apps.charitycommission.gov.uk/trusteeregister/search.aspx?RegisteredCharityNumber=&CurrentLanguage=English&SubsidiaryNumber=&=DocType& ↩