Pecuniary Benefit

October-December 2019

Pecuniary Benefit – What Does This Mean?

The Charities Act prohibits anyone from benefitting financially from the running of a Charity, and any organisation that is exempt from Income Tax has to comply with the same idea. But what does that actually mean?

Clearly, people are earning a living from managing a charity, so at what stage does this become illegal ‘pecuniary benefit’?

Problems can arise for people that are in control of a charity or tax-exempt not-for-profit. To be in control is not the same as having voting rights at a committee or board meeting – a person may still be in control due to the influence (or personal relationships) they have over those formally running it. If a person can effectively pay themselves from the income of a charity, even if the paying is formally done by someone else, or signed off by a second person, this may well be pecuniary gain. This means there must be a credible step between money coming into the charity, and it being paid to one or more key people or officers.

Pecuniary benefit is not necessarily cash. A charity may, for example, build up a ‘brand’, or other intellectual property, through their activities. If another person is able to use this goodwill or brand to make money with their own activities, this would also be illegal pecuniary gain.

Like businesses, charities are often successful because of the work of a single individual in setting it up, driving it, and giving it vision. Where this person is paid for their work, it is especially important that there is an effective committee with financial oversight that determines how, how much and for what this person is paid.

Occasionally we see a ‘sole trader’ pattern in a client’s accounts. The telltale signs of such a pattern are:

• the key person is paid irregularly (when there’s money in the bank) rather than being an employee.
• There is no breakdown, or hours, for what the person is paid for.
• there are cash advances to that person for future expenditure. These are often poorly accounted for.
• no accounting system (cashbook, spreadsheet or software) that would allow meaningful financial reports at meetings.

Avoiding Pecuniary Gain

Editorial/Opinion May 2023

by Harald Breiding-Buss

If you’re a registered charity, you will probably have heard the phrase ‘pecuniary gain’. It is illegal for someone involved in the running of a registered charity to derive a ‘pecuniary gain’ from this role, but the principle does not just apply to charities. Avoiding pecuniary gain is also the basis for any other tax exemption for not-for-profits from Inland Revenue.

Whether a particular transaction involves such illegal pecuniary gain is a frequent topic of discussion amongst ourselves here at CCA, and it is something we always consult with each other about when we see such a transaction, to make sure we get it right.

In essence, pecuniary gain is any benefit that someone gets for themselves by using their position as an officer of a not-for-profit. This can be payment for private expenses by the organisation, getting cheap or free rent, cheap or free loans for their business, additional business for their private company, drawing money out of the organisation or many other scenarios. It does not mean that an officer of a charity cannot be paid at all.

This is an extremely complicated subject, and it is easy for a charity to unintentionally cross that blurry boundary. Charities are well advised to make sure they can always show where any significant amount of money paid from their bank accounts went, and that a sound process has been followed for payments to anyone with a significant role in decision-making for the organisation, including wages or salaries. While the term ‘officer’ pops up in various places in the Charities Act and related documentation, it is not actually always clear who Charities Services would consider an ‘officer’ in a given situation. This is about ‘influence’ over the organisation, and having no role on a Board or Committee does not necessarily mean that you are off the hook when it comes to ‘pecuniary benefit’.

One case, which we considered illegal pecuniary benefit, concerned the manager and founder of a Charitable Trust, who was not a formal member of the Board of Trustees. The majority of payments made by this Trust went as contract payments to the manager’s company for professional work done, and invoices were often written by this company to match funding available for the Trust. The manager argued, probably truthfully, that the payments they received through the company were well below market value for the work they delivered, and that they had not unduly profited. However, through their role and authorities they effectively had the ability to make ‘drawings’ from the Trust’s account and determine their own payments – whether this was ‘fair pay’, or excessive, or excessively cheap, probably does not come into it, and would be hard to prove in any case.

In another case, a charity was generating sponsorship, sales and funding income under a name, the rights of which were held by the manager’s private company (which probably only existed to hold this trademark). Through the charity’s activities, the trademark’s market value would have increased, which was a private pecuniary benefit for that person.

It would help a lot if the Charities Act and perhaps other legislation would make it clearer who exactly is considered ‘in control’ of running a charity. The current definition more or less follows that of a director in a company, i.e. the position does not have to be formalised in order for the law to consider someone a director – but this is because companies are all about financial gain. Not-for-profits are generally trying hard to separate paid roles from those of the governance, and provided this separation is executed in practice, managers or coordinators in not-for-profits should not be subjected to pecuniary gain considerations. Unfortunately, the proposed amendments to the Charities Act go the other way: senior employees will be considered ‘officers’ regardless of their status as a governance member once this is in force, undermining the management and governance separation.