How will the new regulations affect your charity?

This year brings new requirements on UK companies to record and report those persons with significant control (“PSCs”) over them. This applies to the vast majority of UK companies, including charitable companies and charity-owned trading subsidiaries. Importantly, even if you are certain that your company has no PSCs it still cannot avoid the new regime altogether.

Where have the requirements come from?

  • These requirements were introduced by the Small Business, Enterprise and Employment Act 2015, by insertion of new provisions into the Companies Act 2006.
  • The stated policy objective is “to reduce crime and improve the business environment to facilitate economic growth through enhanced corporate transparency.” The background to this are commitments the UK made at the 2013 G8 summit.

What are the requirements?

  • From 6th April 2016 Companies will need to keep an up-to-date PSC Register. This must be available for public inspection.
  • The PSC Register must not be left blank. This applies whether or not a company has actually identified any PSCs – if there are none or identification is in progress this must be stated on the PSC Register.
  • Companies must take reasonable steps to identify any PSCs and confirm their information. Therefore it will not be sufficient for directors to presume the company has no PSCs.
  • From 30th June 2016 PSC information will be required to be filed in the “Confirmation Statement” (which replaces the Annual Return). This will then be publicly available through Companies House.
  • From 30th June 2016 PSC information will also be a required part of the incorporation documents for new companies. 

What exactly is significant control?

The regulations provide that a person (X) has significant control over a company (Y) if any of the following five conditions are met:

  1. Ownership of shares - X holds, directly or indirectly, more than 25% of the shares in company Y.
  2. Ownership of voting rights - X holds, directly or indirectly, more than 25% of the voting rights in company Y.
  3. Ownership of right to appoint or remove directors - X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of company Y.
  4. Significant influence or control - X has the right to exercise, or actually exercises, significant influence or control over company Y.
  5. Trusts, partnerships etc.
    (a)   the trustees of a trust or the members of a firm that, under the law by which it is governed, is not a legal person meet any of the other specified conditions (in their capacity as such) in relation to company Y, or would do so if they were individuals, and
    (b)   X has the right to exercise, or actually exercises, significant influence or control  over the activities of that trust or firm.  

How will this affect charities?

As above, most companies (including charitable companies and charity-owned trading subsidiaries) will be required to identify and confirm the details of any PSCs, keep an up-to-date PSC Register and report on PSCs annually.

Some companies will determine that they have no PSCs. However, the definition of “significant control” above is wide enough that many charities will find that they do have PSCs, and this does not have to mean there is anything sinister or secretive going on. Examples of how this might often occur for charities and their subsidiaries are:

  • In a charitable company limited by guarantee with directors who have equal voting rights: if the company has three directors each would have more than 25% voting rights and thus the directors would all be PSCs; whereas if the company had 4 directors none of the directors would be PSCs on the basis of their voting rights.
  • In a charity-owned trading subsidiary, where the controlling charity is a charitable company limited by guarantee: that company limited by guarantee will be a PSC and would be recorded on the PSC Register.
  • In a charity-owned trading subsidiary, where the controlling charity is a trust, CIO or charity governed by Royal Charter: the charity would not be entered on the PSC Register and instead the company would need to “look through” the charity and consider whether the charity trustees or other persons would be considered PSCs.
  • It may also be the case for charitable companies limited by guarantee and charity-owned trading subsidiaries that other persons will fall under the definition of PSCs by virtue of conditions 4 and 5, which are worded widely. In particular, if a person exercises significant control or influence in practice, though without specific legal rights, they may be caught. For instance, this could apply to major donors, influential advisors, or founders.

What happens if companies do not comply?

The regulations include criminal sanctions for officers of companies that do not comply, including fines and even the possibility of custodial sentences. Therefore all company directors would be wise to take an active interest in what steps are being put in place in their companies to ensure compliance.

If you would like further information on this subject or have any comments please contact Gerald Kidd or Nadeem Azhar or your usual contact at Pothecary Witham Weld.