Decision

Charity Inquiry: Rhema Church London

Published 30 March 2023

Applies to England and Wales

The charity

The charity was registered with the Charity Commission (‘the Commission’) on 14 April 1999. It was governed by a Declaration of Trust dated 14 January 1998 as amended by resolutions dated 1 October 2001 and 7 August 2003.

The charity operated an Evangelical Church in Croydon. At the time the inquiry was opened the objects of the charity were;

“For the advancement of the Christian religion and for such other purposes as are charitable in law including without prejudice to the foregoing generality the advancement of education and relief of the aged, infirm and poor people.”

The charity was removed from the register of charities during the course of the inquiry on 7 June 2022 and is recorded as a removed charity on the register.

Background and issues under investigation

Prior to the opening of the inquiry, the Commission had a history of regulatory engagement with the charity. This included a regulatory compliance case opened on 7 September 2010 following receipt of a whistle-blower report raising concerns about how the trustees were applying charitable funds, as well as concerns about the charity’s persistent late filing of its annual accounts and annual returns. This compliance case was closed on 12 October 2012 when the Commission issued regulatory advice and guidance to the trustees:

• that the trustee body should meet more frequently and consider the appointment of additional locally based trustees to enable this to happen
• the trustees should take steps to ensure that their decision making is formally recorded
• that the trustees should consider taking independent professional advice when appropriate, especially for those decisions which could potentially place the Charity and its assets at risk

On 4 December 2014, the Commission received a further whistleblowing report relating to the charity’s accounts for the financial year ending 30 September 2013, which highlighted wide-ranging issues in the charity’s governance and administration, including:

• the trustees had failed to follow regulatory guidance previously provided by the Commission as part of its regulatory compliance case
• it was identified that a significant amount of charitable funds (approximately £95,000) had been expended on overseas trips with no evidence of trustees approving the level of spending
• the charity had net liabilities of £170,199 in relation to mortgages on charity properties and insufficient funds in reserve to meet repayments
• it was identified that there was a lack of segregation of duties regarding collections, and a lack of security arrangements
• it was identified that there was a lack of expenditure authorisation, including in the use of credit cards and petty cash and no evidence that expenditure was properly authorised

A further regulatory compliance case was opened to examine these issues and it was identified that the trustees were unable to demonstrate how they had followed the regulatory advice issued by the Commission in October 2012. In their responses dated 19 February and 2 April 2015 the charity was unable to demonstrate that they had followed our guidance in full. Evidently, the Commission’s regulatory advice had not been followed, particularly regarding decision making and large financial commitments. The auditor’s report or the year ending 30 September 2013 highlighted insufficient evidence of proper decision making on expenditure and gave a qualified opinion on the accounts as there was insufficient evidence to evaluate how much of the charity’s £203,707 in credit card spending and, £76,161 in petty cash expenditure, had been for charitable purposes. The auditors further stated they were unable to assess whether there were associated tax liabilities. Specific concerns were raised about approximately £90,000 spent in the year on overseas development workshops and how much of this expenditure was directly for charitable purposes.

The Inquiry

Following a period of engagement with the charity, in which the Commission received limited co-operation from the trustees in seeking further information to allow a full assessment of the trustees’ oversight and control of the charity, and their failure to comply with an order issued under section 52 of the Charities Act 2011 (the “Act”), the Commission opened a Statutory Inquiry into the Charity under section 46 of the Act (“the inquiry”), on 3 August 2015. The reasons for opening the inquiry were:

• significant risk to the charity’s funds or other property
• the charity had previously been the subject of an inquiry or received regulatory advice and guidance on the same, or similar issues
• the trustees are unwilling or unable to take the necessary action to protect the charity
• there were reasonable grounds to believe that there may be a need to use the Commission’s regulatory powers of remedy and protection which are only available if an inquiry had been opened

Scope of the Statutory Inquiry

The inquiry examined:

• the administration, governance and management of the charity
• whether the trustees discharged their legal duties and responsibilities in the best interest of the charity
• whether or not and to what extent there had been mismanagement and/or misconduct on the part of those acting in the administration and management of the charity
• whether the trustees were able to take necessary action to rectify the problems within the charity
• the possible misappropriation or misapplication of the charity’s funds
• the charity’s financial controls and risk management policies
• the failure to comply with legal obligations in relation to the filing of the charity’s Accounts and Annual Returns

The scope of the inquiry was later expanded to include the examination of:

• the circumstances that contributed to the charity having potential tax liabilities, particularly with regards to the conduct of the trustees
• the charity’s ongoing engagement with HMRC

Findings

The inquiry’s findings are based on the reports of the Interim Managers (“IMs/IM”) appointed by the Commission to review the charity’s governance and operation, the Commission’s own engagement with the trustees and on information provided by the trustees and other sources during the course of the inquiry.

The administration, governance and management of the charity

Based on the information held by the Commission, Pastor Martin Phelps (“Mr Phelps”), an employee at the charity at the time the inquiry was opened, held the principal controlling role in the administration of the charity. He was supported in this role by the charity’s bookkeeper. The trustees should have exercised proper oversight of the activities of both these individuals but failed to do so.

The inquiry found that the trustees only met once a year. This is despite the charity’s governing document stipulating that the trustees shall hold at least two ordinary meetings a year. The trustees’ apparent failure to meet twice a year indicates a failure to discharge their duties to comply with the governing document. The inquiry found that other than on cash collections, the charity had no written financial control policies.

The inquiry found that the trustees did not exercise sufficient oversight and control over the management and administration of the charity, nor did they manage tax liabilities or exercise sufficient supervision of its employees, which allowed for improper decision making, particularly regarding financial matters. The inquiry found that Mr Phelps made unauthorised use of the charity’s credit cards, went on unauthorised overseas trips and misused charity funds.

This failure by the trustees to both implement financial policies and procedures and ensure charity employees comply with them, ultimately contributed towards a significant tax liability to HMRC of over £540,000, which had to be paid out of the charity’s assets. The trustees are ultimately responsible for managing the charity’s resources responsibly, undertaking proper oversight of the charity’s expenditure and ensuring that the charity met its tax liabilities. The inquiry found that the trustees did not fulfil their duties in this regard and considers this to be misconduct and/or mismanagement.

The inquiry found that the trustees failed to take reasonable steps to implement recommendations made by the charity’s auditor, who qualified the charity’s accounts for the financial year ending 30 September 2013. For example, the auditor had raised concerns about the use of credit cards for personal use and recommended that separate credit cards should be used for personal and charitable expenditure. The trustees’ failure to implement changes recommended by their auditor, whose concerns were so great that a qualified opinion was produced, is considered by the inquiry to be mismanagement and/or misconduct in the administration of the Charity, as the trustees failed to discharge their duties to manage the Charity’s resources responsibly.

The misappropriation or misapplication of the charity’s funds (including its financial controls and risk management)

The inquiry undertook a books and records inspection at the charity’s premises on 20 and 21 October 2015 and reviewed the charity’s written internal financial control policy relating to cash collections. No further written financial control policies were found during the inspection. In addition, it was found that the charity had no expense policy in place, which was inappropriate given the volume, amounts and nature of expenses that were being incurred and processed. These included day to day living expenses such as food, domestic purchases, medical bills, vets’ bills, and gym memberships, all of which appeared to be of a personal nature. The absence of a written expenses policy raised concern that there was no framework in place to determine what expenses could be legitimately incurred and reimbursed by the charity. It was found that the charity’s assets were at risk of not being properly applied. The 2013 auditor’s report made the trustees aware of these concerns but there was no evidence that the trustees had sought to address them in a meaningful way.

Due to its concerns about the application of the charity’s funds, the inquiry took steps to protect the charity’s assets by freezing its bank accounts in November 2015.

The inquiry identified four cheques, totalling £300,000 which had been paid to Mr Phelps during the period from 6 October 2014 to 26 March 2015. The inquiry was informed that the pastor’s dwelling (which was held on trust by the Senior Pastors (being Mr Phelps) on behalf of the charity) was subject to an offset mortgage which is in the name of Mr and Mrs Phelps. The inquiry was also informed that £225,000 of the £300,000 was transferred into the Senior Pastor’s personal bank account to reduce the monthly mortgage interest payments and £225,000 was later transferred back to the charity. After interviewing a trustee, the inquiry found that the £225,000 were charitable funds and as a result of being transferred out of the charity’s bank account, the funds had been placed at risk. It was confirmed to the inquiry by a trustee of the charity that no security for the £225,000 had not been sought or obtained.

The charity organised several overseas trips led by Mr Phelps, to Italy, Austria, France, and Greece in the years prior to the opening of the inquiry. The Inquiry found little evidence as to the charitable purpose of these trips, itinerary, or budget. There was no evidence that Mr Phelps sought or received appropriate authorisation from trustees to spend charitable funds on these trips. There was a lack of documentation in connection with these trips showing how they were charitable in nature. There was no evidence to show that authorisation had been obtained to spend charitable funds on these trips.

Upon their appointment, the IM put in place policies and procedures aimed at addressing concerns the inquiry had about the charity. These included policies relating to expenses, gifts and petty cash policies. These came into effect on or around May 2016. The IM also arranged for formal contracts of employment for all employees of the charity be put in place.

The inquiry found that policies implemented by the IM were not followed by the charity’s staff. The IM concluded that Mr Phelps and the bookkeeper ignored specific instructions regarding the use of credit cards, such as obtaining prior authorisation from the IM for their use. The IM provided the inquiry with evidence showing that Mr Phelps had continued to spend charitable funds using the credit cards without authorisation.

Mr Phelps was a key employee and an important figure within the charity. The inquiry found that he failed to adequately co-operate with the IM and he was suspended as an employee on 12 July 2017. One of the terms of his suspension was that he did not communicate with employees, trustees, the congregation or any other stakeholder of the charity. However, one week after his suspension, Mr Phelps invited members of the church to a meeting held on 19 July 2017, at which he attended and spoke about the charity. He did not obtain authorisation from the IM for this meeting, which was a clear breach of the terms of his suspension from employment at the charity. Mr Phelps was subsequently dismissed from his employment with the Charity, he appealed this decision, but it was upheld. Mr Phelps issued a claim for unfair dismissal at the Employment Tribunal but this was dismissed by the Employment Tribunal on 12 September 2018. Mr Phelps did not appeal this.

This failure by the trustees to discharge their duty to protect the Charity’s assets and oversee and manage the expenditure incurred by employees is misconduct and/or mismanagement in the administration of the charity by the trustees.

The charity’s tax position

The inquiry found that most of the charity’s spending was incorrectly categorised and there was insufficient information to demonstrate that all transactions were for charitable purposes. This resulted in a significant tax liability being incurred.

HMRC undertook investigations into three areas in which it believed the charity had underpaid tax, which included investments, charitable and overseas donations and PAYE and National Insurance payments, some of which related directly to the issues detailed above. HMRC stated it was clear that significant amounts had not been reported correctly which resulted in a significant tax liability of £543,285.82 being owed. The IM oversaw the settlement of this from the charity’s funds.

The failure to comply with legal obligations in relation to the filing of the charity’s Accounts and Annual Returns

The inquiry found that the trustees had a history of late filing of accounts. They failed to submit accounts on time for the financial years ending 30 September 2009, 2010, 2011, and 2013. At the point the IMs were appointed in November 2015, the accounts for financial year ending 2014 were 123 days overdue. The trustees had a statutory duty to submit an annual report and accounts to the Commission within ten months of their financial year end. Their consistent failure to do so and failure to discharge their duties to ensure the charity was accountable is misconduct and/or mismanagement in the administration of the charity.

Following their appointment, the IM was responsible for bringing the charity’s accounts and annual audits up to date. The IM was responsible for completing the accounts for the financial years ending 30 September 2014, 2015, 2016, 2017, 2018, 2019 and 2020.

Whether the trustees were able to take necessary action to rectify the problems within the charity

The inquiry found that the trustees were unable and unwilling to take steps to address the issues and weaknesses in the charity’s administration and governance. This was evidenced prior to the opening of the inquiry by their failure to comply with regulatory advice and guidance provided by the Commission in October 2012. The inquiry also found that the trustees had failed to take reasonable steps to address wide ranging issues identified by the charity’s auditors following the audit of the accounts for financial year ending 2013. This behaviour by the trustees was persistent and repeated over a number of years so the inquiry had no confidence in the trustees’ ability to address the issues. For these reasons the Commission decided it was necessary and proportionate to appointed independent IMs.

Whether the trustees discharged their legal duties and responsibilities and the extent of misconduct and/or mismanagement identified in the charity

As referenced above, the inquiry found numerous examples of misconduct and/or mismanagement by the trustees and failures to discharge their legal duties and responsibilities.

Conclusions

The Commission found significant failures in the charity’s governance and financial management. The charity had failed to address such issues following previous regulatory engagement by the Commission as well as advice from the charity’s auditor. The Commission concluded that there had been serious misconduct and/or mismanagement in the administration of the charity by the trustees.

The trustees failed to fulfill their duties and obligations and demonstrate effective oversight of senior staff. The charity had little to no policies and procedures to safeguard its funds and operation which put funds at unnecessary risk. Following the introduction of such policies by the IM, senior staff, including Mr. Phelps and the bookkeeper failed to adhere to such policies and frustrated the efforts of the IM to address these issues.

The Commission concluded there was a lack of clarity and record keeping surrounding the use of the charity’s credit cards for Mr Phelps’ personal expenditure. Mr Phelps and the bookkeeper ignored IM instructions regarding unauthorised usage of charity funds. Therefore, the Commission concludes that charitable funds were put at risk and senior staff failed to act responsibly and reasonably when managing the charity’s resources. Trustees must ensure that assets are only used to support or carry out its purposes, and the inquiry concluded that they failed in this regard. The conduct of Mr Phelps resulted in the Commission disqualifying him from acting as a trustee or in a senior management function in a charity for 10 years.

Following the introduction of significant changes to the charity’s policies and personnel, the IM explored whether the charity had a viable future and attended a meeting with the charity’s members in November 2017. Against the backdrop of the significant tax liability that had crystallised for the charity and difficulties faced in taking forwards a professional trustee recruitment exercise, the IM concluded that the most appropriate course of action was to wind down the charity, satisfy the charity’s creditors and to pass on any surplus funds to a charity with similar objects. Another consideration in the decision to wind down the charity was the fact that it had not operated or received income since July 2017. It is acknowledged that the steps to wind down the charity took considerably longer than anticipated which has resulted in the inquiry remaining open for an extended period of time. The IM proceeded to close the charity and distributed £136,760.70 to three charities operating in a similar location with similar purposes.

Regulatory action taken

Requests for information

During the course of the inquiry, the Commission exercised its information gathering powers numerous times under sections 47 and 52 of the Act to obtain information and evidence relevant to the regulatory concerns identified.

Freezing of the charity’s accounts

On 30 November 2015 the inquiry made an order not to part with charitable property, under section 76(3)(d) of the Act, the impact of which was to freeze four of the charity’s bank accounts and another account linked to a mortgage.

The Orders were discharged on 28 April 2017.

Appointment of Interim Managers and distribution of the charity’s assets

On 30 November 2015 the inquiry used its protective powers under section 76(3)(g) to appoint Helen Briant and Keith Mills (then of DWF LLP) as IMs of the charity to the exclusion of the trustees. The appointment order was varied on three occasions, the latest of which, on 27 September 2018, appointed Helen Briant (now of Trowers & Hamlins LLP) as the sole IM.

The IMs were appointed to address specific issues which included securing its assets and reviewing the day-to-day governance affairs and activities of the charity.

The IM addressed many of the steps required to wind down the charity, including overseeing the sale of three properties owned by the charity and liaising with HMRC to pay the charity’s extensive liabilities.

Following the settling of all of the charity’s liabilities, the inquiry issued an order under section 85 of the Act to the IM on 2 February 2022, to direct the IM to apply the remaining charity funds to three charity’s operating in the same geographic location with similar objects as the charity. The remaining funds amounted to £136,760.70, spilt in three equal parts to the identified registered charities.

The charity was dissolved on 23 May 2022, and it was subsequently removed from the Register on 7 June 2022. It is noted that the IM appointment took considerable time to complete, due in part by the lack of cooperation from the trustees and members of the charity. There were added delays by the protracted eviction of Mr Phelps from the charity’s property and when selling the charity’s properties.

In total, the costs of the IM were £473,000 plus legal fees and disbursements to deal with the tax investigation, accounting matters, employment claims and property matters.

The IM appointment was discharged on 12 July 2022.

Vesting the charity’s property in the Official Custodian

On 1 December 2017, the inquiry made an Order under section 76(3)(c)(i) of the Act to vest three properties owned by the Charity in the Official Custodian.

The sale of these properties was authorised by the Commission on 29 August 2018 under section 91(4) of the Act, as it was concluded that this was in the best interests of the Charity. The proceeds of these sales were added to the charity’s assets and later used to meet the charity’s liabilities and contributed to the amounts distributed to other charities with similar objects.

The disqualification of Pastor Martin Phelps

On 11 July 2018, the inquiry made an order under section 181A of the Act which disqualified Mr Phelps from being a trustee and/or holding any office or employment with senior management functions for all charities generally.

Mr Phelps challenged the decision and submitted representations. A Decision Review reduced the disqualification period from 12 years to 10 years. Mr Phelps subsequently appealed the disqualification to the First Tier Tribunal (Charity), but in a decision dated 7 October 2019, the appeal was dismissed, and the disqualification was upheld. Mr Phelps is disqualified for 10 years.

Issues for the wider sector

Trustees are under a legal duty to ensure funds are used only in furtherance of their charity’s purposes and are legally responsible and accountable for their proper use. Trustees must be able to demonstrate that funds have been used for the purpose for which they were intended. This means that they need to take reasonable and proper steps to ensure that any money or resources have reached their intended beneficiaries. Trustees must take steps to monitor the specific use of their charity’s funds, this will always include verifying their proper end use. Due diligence is the range of practical steps that need to be taken by charities in order to be assured of the provenance of charitable funds and be confident that they know the people and organisations the charity works with and are able to identify and manage associated risks. When choosing partners to work with there must be proper due diligence checks relevant to their charity and the risks to ensure that they are appropriate partners for them to work with.

Every charity needs an effective trustee body which has control over the administration of the charity. Trustees must ensure that their charity has adequate financial and administrative controls in place, and that the funds of their charity are applied for the benefit of the public for which it has been set up.

Proper financial controls are a necessary feature of any well-run organisation. Because of the special characteristics of the charitable sector, they play an essential part in helping to show potential donors and beneficiaries that a charity’s property is safeguarded, and that its management is efficient. Trustees are equally responsible for the overall management and administration of the charity. They should ensure that adequate financial controls are put in place and that sufficient information is reported back at trustee meetings to satisfy them that the controls are being properly implemented. If, due to the nature of the charity, its work, location and /or set up, the trustees delegate supervision of financial arrangements to one or a small number of trustees or employees, they need to ensure that there are arrangements in place for proper reporting back to the whole trustee body. In this way, system failures or issues can be identified at an early stage.

Trustees have a legal duty to act in their charity’s best interests when making decisions as a trustee. If there’s a decision to be made where a trustee has a personal or other interest, this is a conflict of interest, and a trustee won’t be able to comply with their duty unless following certain steps. Conflicts of interest are common in charities – having a conflict of interest doesn’t mean trustees have done something wrong. But trustees need to act to prevent them from interfering with the ability to make a decision only in the best interests of their charity.

A ‘personal benefit’ means a benefit that someone receives from a charity. That ‘someone’ might be an individual or an organisation. Financial benefits might be in the form of cash, grants or other payments. Non-financial benefits or payments in kind might be benefits in the form of goods or services rather than in cash, for example the provision of free accommodation, meals or transport. The law states that trustees cannot receive any benefit from their charity including in return for any service they provide to it unless they have legal authority to do so.

It is legitimate for trustees to delegate the day to day management of a charity to staff and others. However, charity trustees always retain the ultimate responsibility for running the charity and should ensure that robust reporting procedures are in place to enable them to make reasonable decisions. Responsibility for ensuring they have sufficient information and are adequately informed in order to make decisions rests with the charity trustees.

Trustees of charities are under a legal duty as charity trustees to submit annual updates, returns, annual reports and accounting documents to the Commission as the regulator of charities depending upon the level of the charity’s income. Failure to do so is a criminal offence.

Trustees are representatives of the charity they govern or the charitable funds they are responsible for, in the charity sector. Trustees must be aware of and act in accordance with their legal duties. The conduct of trustees can be a key driver of public trust and confidence in the charity sector. When the conduct of trustees falls below the standards expected there can be damage to the reputation of individual trustees, the charity and possibly the wider charity sector. Trustees are jointly and severally liable for the decision they make. Trustees must act collectively. Trustees who simply defer to the opinions and decisions of others aren’t fulfilling their duties.

• trustees must act in accordance with the Charity’s governing document. Trustees should be familiar with their governing document
• all charities should have appropriately tailored internal policy documents which address the specific risks associated with the kind of activities that are undertaken