I beg to move amendment 32, in clause 12, page 7, line 37, at end insert—

‘(b) or a charity merges with another charity,’.

This amendment seeks to clarify that merged charities will also be covered by Clause 12.

With this it will be convenient to discuss the following: Government new clause 4—Charity mergers: new charity taking over activities of one charity .

Government new clause 5—Charity mergers: new charity taking over activities of several charities.

Clause stand part.

The Minister has a lot to say about the new clauses, so I will keep my remarks on our amendment short. There is a lot of substance and the Minister will want to give more explanation to his new clauses than can be provided in 50 or so words in the explanatory notes. Some of the representations that were made to us about changing charities’ legal form, including those from the Law Society of Scotland, sought, through our amendments, to ensure that provisions are adequate for all the circumstances in which a charity might opt to change its legal form. In the evidence sessions, the Law Society of Scotland noted that, while it believes that it is sufficient in respect of incorporation of charities, specific reference needs to be made in the case of mergers. Our amendment is simply to ensure that there will be a debate on this; it is simple and straightforward and may have been overtaken, to some extent, by the Government new clauses.

It is worth noting why this is important. Several charities may seek to merge in the current climate. There are many circumstances in which charities already share backroom organisation or project work; they may now decide that a merger would be appropriate. It is important that we do not disadvantage charities that have done that. Many people will be aware of organisations such as Help the Aged and Age Concern, Poppyscotland and the Royal British Legion, as well as several small, local charities, which have come together to work in this way. There are many circumstances in which that makes sense and we do not want charities to feel that taking that step, in order to be more efficient and work together, would cause them problems under the Bill.

It is important to hear what the Minister has to say about the new clauses, so I will let him speak and perhaps come back with questions, rather than focus on our small amendment.

I thank the hon. Lady. I recognise that the purpose of the Opposition’s amendment is to allow charities that merge to continue to benefit from the scheme. Clause 12 allows charities that change legal form to inherit the gift aid record from their predecessor charity; for example, if a charitable trust incorporates or a charitable company becomes a charitable incorporated organisation, it can continue to claim under the scheme if it was able to do so before. However, the clause does not apply to charities that merge, an issue raised during the public reading stage and by the hon. Lady on  Second Reading. I have therefore considered the matter and tabled an amendment to take account of charity mergers, an intention set out in my letter to members of the Committee on 15 October. Let me set out the intention of our amendments, and why I believe the hon. Lady’s amendment does not quite achieve the effect that she intends.

We propose to remove clause 12 and replace it with two new clauses. New clause 4 would change how we treat a charity that changes legal form; for example, where a charity changes from being a charitable trust to a charitable company, it will be able to retain its gift aid history for eligibility purposes in the new scheme. The new clause differs from clause 12 in that it no longer requires the original charity to dissolve before the new charity can become eligible. We have been told by stakeholders that it can take some time to dissolve an old charity, even when the new charity is essentially the only one that is operating. We did not want to prevent new charities from claiming under the scheme while the legal details of the changes were being finalised, as that would unfairly disadvantage the new charities. Therefore, the new version of clause 12 sets out that, once the new charity has taken on the old charity’s activities, it can benefit from the old charity’s compliance history. To prevent abuse of that rule, we will require the new charity to have substantially the same purposes as the old charity. We will also require more than half of the charity’s managers to remain in place after the change of form.

The new charity must apply to HMRC before this provision can apply. Where the conditions are met, HMRC will certify that, in its opinion, the new charity was created with a view to taking over the old charity’s activities and that its purposes are substantially the same.

I thank the Minister for acknowledging that I raised the issue on Second Reading. I look forward to hearing further about the proposed changes. The Minister mentioned the 50% of managers criteria. Charities often merge or change when people move on to other posts. Perhaps there is an opportunity for streamlining in other ways. Has he given any thought to those circumstances?

I have given them some thought. That is why we have come up with the 50% figure, which we think strikes the right balance, and not 80% or 100%.

Returning to the certification requirement, where HMRC provides certification, the new charity can use the gift aid claims made by the old charity to establish its eligibility. That means that the new charity would not need to wait for three years after changing its legal form before it could claim for a top-up under the scheme. Some of the detail of how the rule will operate will be set out in regulations. HMRC will ensure that guidance is available to all charities before the commencement of the scheme.

The other major difference from clause 12 is that the provision for a change in legal form has been aligned with the new multi-charity merger provision in new clause 5. Charities will need to understand only one set of principles for changing form or merging, which leads me to the second proposed new provision, new clause 5.

New clause 5 sets out what happens when a charity merges with more than one other charity. It is a new provision and charities will welcome the extension of the scheme. The new clause will allow a new charity formed out of the merger of two or more separate charities to take on the compliance record of one of the old charities under the scheme. We need to prevent that rule from being abused by charities that have a poor or no gift aid record. Without any further restriction, such a charity could merge with an eligible charity to gain immediate access to the scheme. That is why I do not support amendment 32. We need to ensure that, to benefit from this provision, the newly-merged charity has a good compliance record. If each of the pre-merger charities is eligible to claim under the scheme, the new charity will also be eligible to claim immediately. HMRC will have had the opportunity to get to know each of the pre-merger charities already and assess their ability to claim gift aid correctly. HMRC can therefore be reasonably confident that the new charity will operate gift aid correctly, too.

There are special rules to determine which pre-merger charity’s gift aid history is adopted by the new charity. If any of the pre-merger charities is not already eligible to claim under the scheme, the new charity will take on the compliance history of that pre-merger charity. That pre-merger charity is the one that would have been the last to become eligible under the scheme if the merger had not gone ahead.

There is an extra rule if two or more charities that are not eligible on merger become eligible at the same time later. In that case, the new charity can choose which pre-merger charity’s history it wants to adopt. That rule avoids creating an incentive for charities with a poor compliance history choosing to merge as a way of gaining early access to the scheme.

As set out in earlier debates, these rules are important to ensure that the new scheme is protected from fraud. I do not intend to reopen the debate about fraud, but I remind the Committee that this scheme has a much lower level of paperwork, so there will be less of an audit trail between the donation and the claim under the scheme than there is with gift aid. HMRC will need time to get to know the charities and individuals to assess the risk of their claiming incorrectly under the scheme. If we did not have these safeguards, the scheme would be much more open to fraud and abuse. The Opposition amendment as drafted appears to allow only one charity to merge with another and so it would benefit fewer charity mergers than the Government new clause. Therefore, I ask the hon. Lady kindly to withdraw the amendment.

I am very happy to respond, although I have some other comments to make later. Given the Minister’s assurances, I will not push the amendment to a vote.

Following this debate, I hope that hon. Members now understand why these new clauses are necessary, and why they operate in this way. As I have explained, they allow charities to choose to benefit from their previous gift aid compliance history when they merge to form a new charity. They strike a fair balance  between bringing charities into the scheme as quickly as possible and providing HMRC with some assurance that only charities with a good compliance history benefit. Where one of the pre-merger charities would not have been eligible under the scheme, the new clauses allow what history that pre-merger charity has to qualify towards the entitlement of the new post-merger charity.

I fully understand what the Minister is trying to achieve, but could he explain why he has chosen the mechanism of HMRC having to certify following an application? Most of the tax rule changes in recent years have moved us to a situation where someone self-assesses and HMRC chooses whether to agree. We appear to be using a model whereby HMRC has to certify based on an application, with some discretion on its part. Is that what he intends, or does he expect the charity applying to set out what it thinks the right answer is and HMRC can effectively sign that off? Alternatively, will the charity have to set out a load of options and HMRC can choose which it thinks is most appropriate?

Let us take the case of two charities that decide they want to merge, or perhaps to close one structure of a charity but create a new structure for essentially the same charitable purposes. Before taking that action, we would like them to check with HMRC to confirm that what they intend to do would work as far as this scheme is concerned. HMRC will be able to go through the facts with them; it is intended to be a process where, if charities ask for advice or are not clear on some of the regulations, HMRC can advise them. The intention is to ensure that such a merger does not go ahead without HMRC being made aware of it first, in case the merger unintentionally does not quite meet the rules set out by HMRC. For example, one of the key rules is that the new or merged charity must have substantially the same charitable purposes as the original two charities. It is important that the charities make sure that they are fulfilling all the provisions in advance of going ahead; otherwise, it might turn out to be a little too late to reverse something that they have done.

I am grateful for that explanation. It sounds much like a clearance application that businesses and individuals can make for various transactions. I am just a little intrigued by the drafting here: we are not proposing law that applies and people can then either interpret it themselves or seek guidance or clearance; we are actually proposing law which only applies if HMRC has issued that certificate. That is a slightly unusual way of making legislation in the modern world; it takes us back about 20-something years or something. I just wonder whether this an ideal way, whether we should just have the rules apply and have a clearance process rather than have an actual advance requirement.

My hon. Friend will appreciate that throughout our discussion of these scheme, one of the things that we have been most concerned about—rightly, because of the impact on public spending—is the potential for fraud. That is one of the reasons why it is important for charities to have to go through the process that I  have outlined today to benefit from the merger procedures. The Government are adding flexibility. A number of charities have rightly raised the issue, and it is only right that we recognise that; but at the same time, we want to balance that in such a way that we minimise the opportunity for fraud. As we have discussed, there is a tiny number of people out there who have no charitable intention at heart and whose purpose will be to try to take advantage of generous tax breaks and this top-up scheme. We have to strike a balance to protect against that eventuality.

The Minister is being generous with his time, and that is important because, once again, it is extremely important to get the provisions right. In his deliberations, has the Minister looked at the history of any particular charity mergers and learned any lessons from them? For example, can he set out some circumstances in which HMRC might decide, by whatever form, that the objects of the new charity were substantially different and did not meet the criteria? During his research before tabling the clauses, did he find any examples where charities would have fallen foul of that provision?

In researching the clause and the amendments and deciding how to frame them, I had a number of discussions with officials. They assured me that there such examples do exist, particularly when they administered new gift aid and other charitable schemes through HMRC. I cannot give her a particular example, but the information they provided assures me that they do exist. When HMRC has looked at charity mergers in the past, it has worked closely with the Charity Commission, staying in regular contact and swapping information to ensure that it has all the information it needs to make determinations on questions such as charitable purpose.

Does the Minister none the less accept that we should take seriously the concerns of the hon. Member for Amber Valley? Would he like to use this opportunity to point the hon. Gentleman in the direction of Opposition new clause 2, which would insert a formal review mechanism? If the hon. Gentleman still has serious concerns and he can convince the Minister and the rest of the Committee of their seriousness, the formal review new clause 2 would establish would provide an early opportunity to address those concerns.

I am sure that my hon. Friend has heard and duly noted the hon. Gentleman’s comments.

We seem to be proceeding on the assumption that people will go to extreme lengths to create elaborate scams, but the notion that charities will decide to merge so that they can claim the top-up payment does not reflect the charity world to which I am accustomed, and if we do proceed on that basis, we end up having to create elaborate structures around the Bill. Unless there is clear evidence that people would go to such lengths to claim the payment, perhaps we should have started from a simpler perspective.

The hon. Lady touches on the need for the a structure in the Bill to protect the taxpayer against fraud. She is right to say that we as Members of Parliament have no reason to have come into contact  with those who intend to commit fraud, using the Bill or the related gift aid legislation, but it does happen and the Committee has discussed it before. HMRC estimates that at least £10 million a year of fraud is committed against the taxpayer under the gift aid scheme. It is incumbent on us to ensure that that is kept to a minimum, but we must also avoid putting too many hoops in front of the vast majority of charities, which are entirely legitimate and intend only to do good work. I hope that the hon. Lady respects that we must strike that balance.

As I have said before, because the legislation is entirely new in form—it is a top-up payment system rather than a tax relief system such as gift aid—we do not pretend that every aspect will work exactly as we intended right at the start. As with all new legislation, we will learn as we go along, which is why I have committed the Government to reviewing the Bill in three years. There will be lessons to learn, and if improving the scheme means adjusting the protections against fraud, we will look at that.

I commend new clauses 4 and 5 to the Committee and I ask the hon. Member for Kilmarnock and Loudoun to withdraw amendment 32.

It is a pleasure to be here again under your chairmanship, Mr Turner. Amendment 32 and new clauses 4 and 5 address what happens when charities merge; therefore, they all pick up on a genuine and legitimate question in the Bill. The extensive provisions of new clauses 4 and 5, including the rather clumsy introduction of HMRC advanced certification that has been addressed already, show that when we as legislators have to deal with a Bill and anticipate all the different questions, and indeed some of the possible temptations, that might arise, we risk getting into a predictive predicament, and that is exactly what the Minister is finding with new clauses 4 and 5.

The Minister has indicated that the provisions try to ensure that HMRC will have credible reference points when assessing what the real intent and purpose is behind any particular merger, but that means it has to look to what in other cases might be regarded as arbitrary reference points—for instance, the question of 50% of managers. If we are talking about large charities, how many people are we classifying in the bracket of managers? Are we talking about a single controlling personality or managers who have general control of the administration of the charity, which could include many people?

In Northern Ireland, we have legislation that uses particular thresholds of proportionality such as 50%, and that can often give rise to odd situations in which, to meet a numbers game, people are designated in a particular way for a particular time. They stay in a position for a short period, so that a 50% threshold at a given time is matched. Everybody knows that that is a purely temporary phenomenon, and at a future stage people move down or redesignate themselves in some other way. We want to ensure that the Minister is satisfied that the provisions in the clause do not give rise to a legitimate artifice that might be used for people to meet the terms of the certification. How long do managers have to remain in place post-merger to meet the 50% threshold? Does it have to be absolutely clear that it was intended all along that they would remain in place, and  that if they moved subsequently, that was not going to lead to a question of overpayment, a review, an investigation or whatever?

Will the Minister clarify why new clauses 4 and 5 emphasise managers controlling the charity, whereas in clause 5, on connected charities, control centres on trustees or those who have the power to appoint or remove trustees? Clause 5 is about control on its own, whereas in the new clauses we are talking about the person having general control and management of the differentiation of a charity. Clause 5 deals with connected charities and the meaning of such charities. Its emphasis is on control in relation to trustees, but the other clauses have a quite different standard of control.

Did the Minister consider whether new clauses 4 and 5 should have included not only the question of managers, but should have allowed HMRC to refer to the position of the trustees as well when assessing who is in overall control of the merged charities and what the balance of interest and continuing influences is going to be? Mergers may happen when trustees and boards try to introduce more strength and rationalisation in their charity field, but that may or may not involve retention of so many managers from different charities.

Mergers take place across jurisdictions, and I bring the Minister back to the point that a charity in Scotland and one in Northern Ireland could merge together or with a charity in England. I would appreciate it if the Minister clarified that he is satisfied that new clauses 4 and 5 anticipate some of the issues that may arise. The new clauses make no reference whatever to the Charity Commission for England and Wales, and that for Northern Ireland, or the Office of the Charity Regulator in Scotland. The Bill has a “now you see it, now you don’t” syndrome.

My hon. Friend is making a powerful case. I am sure he is aware that organisations such as the Rehab Group, which works not only in different parts of Scotland and England, but in Ireland, have a cross-border component. It is a merger of different charitable organisations, including one in Scotland.

I thank my hon. Friend for making that point, which is a useful reminder that some issues will transcend different jurisdictions not just in the United Kingdom, but in these islands. The Minister will probably do what he has done previously, and go to the Batbelt, saying that everything will be done through guidance and review. I just hope he can assure us that the new clauses have been drafted, or will be revised or reconsidered, with an eye to accommodating several different issues that could arise. In particular, I return to the point about the Charity Commission for England and Wales, and that for Northern Ireland, and the Office of the Charity Regulator in Scotland.

Sometimes the Bill and HMRC seem to take their lead from the Charity Commission’s standards, but at other times HMRC seems to do its own thing with its own view of the charity world. To my mind, that can give rise to difficulties and concern for charities. For their own good reasons, charities may want to consider mergers, rationalisation and re-profiling, and if that is what they want, we do not want to create a feeling that they are under suspicion and must clear their motives, plans and intentions with HMRC.

Perhaps the Minister will tell us whether he is satisfied that the new clauses as drafted properly anticipate issues that may arise for charities with similar purposes and causes, but with different organisational profiles. Some charities may rely on a network of community buildings, and others may not. The Bill includes specific provisions differentiating various qualifying issues, and the new clauses should not cut across, contradict or cause unnecessary tensions with other provisions in the Bill.

Some important points have been made about the new clauses. As I indicated to the Minister, I do not intend to press the amendment to a vote. We tabled it because we believed that clause 12 creates some difficult situations relating to charity mergers. That issue, as the Minister accepted, was raised both on Second Reading and at the Bill’s public reading stage. I mentioned the Law Society of Scotland’s representations, but we also had a powerful representation from the Hospital Broadcasting Association that states:

“HBA welcomes the inclusion of this clause, which addresses a potential problem caused by a change in legal form of a charity (e.g. from an unincorporated association to a corporate form) as it develops. However, HBA is concerned that the change of status is restricted to a change in legal form. HBA would like to see the facility extended to allow HMRC to certify that a new form of the charity is substantially the same as an old charity, even if the legal form remains the same.”

The submission continues to discuss mergers, where

“two charities might become a single new entity, legally distinct from either of the original charities, but possibly of the same legal form.”

The HBA made the point that it would be

“unfortunate if the new charity were ineligible to make claims under the Small Donations Scheme for three years after the merger, and might result in the merger not taking place because of the loss over three years of up to £3,750.”

The HBA says that that might be a small figure in some contexts, but it would be “very significant” to a small charity. I am pleased to hear that the Minister has taken those representations into account, and I will therefore not press the amendment.

However, the problem with removing one clause and replacing it with two fairly complex new clauses is that we always have to ensure that we are not creating more difficulties or unintended consequences. Much of our discussion has revolved around, as my hon. Friend the Member for Edinburgh East said, the risk of potential fraud, which was discussed—perhaps disproportionately —to the extent that anybody looking in from the outside would wonder what the Bill’s purpose was; or the unintended consequences of the Bill’s wording that could erect unnecessary barriers to charities taking advantage of the scheme.

In that context, I have a couple of questions relating to the point about 50% of managers, as outlined clearly by my hon. Friend the Member for Foyle. His description of the predictive predicament was powerful. In primary legislation, we cannot deal with absolutely every potential set of circumstances that may arise, but, in order to get the legislation and the rules and regulations right, we have to look at what is going on in the real world. That was why I asked the Minister whether examples of  real-life charity mergers had been examined and whether any lessons had been learned. I asked whether there were any scenarios where well-respected charities had come together and whether any issues had emerged from their being examined, such as areas where people would have fallen foul of the new rules.

As I said, my hon. Friend the Member for Foyle made a powerful point about the definition of a manager. Are we talking about chief executives or the senior level of charitable organisations, or about operational managers out in the field, running the day-to-day activities? For many years, I was the manager or director of a charitable organisation in Scotland. I took that charity through the process of changing from an unincorporated organisation to a corporate body, did much work around charitable status and worked with a number of other organisations and local government. To all intents and purposes, I was the only person in the staff team who would have been described as a manager; the rest were operational staff working directly with young people in the care system.

At that stage, should we have chosen to merge with another organisation with a similar structure—one manager—and both managers had decided that there was the opportunity for a new broom to come in and take the new organisation forward, would the 50% rule have been fallen foul of? I had been seconded from a local authority for a number of years, so it would have been perfectly reasonable for me not to go forward as a manager.

I am well aware of my hon. Friend’s experience in the voluntary sector in Scotland and how that has informed her contribution. As a merger can often be an opportunity to reduce management costs, might it therefore be difficult for some newly merged charities to meet the 50% threshold?

My hon. Friend makes an important point. That is one reason why I asked the Minister why he had settled on 50%, and he explained that he had not settled on 80% because he did not want the rule to be restrictive. In fairly large organisations, 50% would perhaps allow for some flexibility, but I worry about the scenario in which only a small number of people are deemed to be managers.

My hon. Friend the Member for Foyle asked whether people are expected to stay in post for a certain time or whether the rule is applied at the moment of certification by HMRC, when the merger is deemed to take place. We must be careful that unintended consequences do not get in the way of the Minister’s intentions. In this instance they were, I think, good intentions—to ensure that charities have the opportunity to merge and not suffer penalties.

In my hon. Friend’s example of two charities that are deemed to have one manager each, the only way to meet the “more than half” rule would be to retain both managers. Is that really what the Minister intends?

That illustrates perfectly the potential dilemma, and links with the point that my hon. Friend the Member for East Lothian made. Charitable organisations sometimes feel that they have to merge  because of financial circumstances, and sometimes because they want to move up to a different level and do new things. In such circumstances, surely it would be an unintended consequence if the new organisation was unable to have a structure that allowed it to do those things.

There is still uncertainty and it would be helpful if the Minister clarified who will meet the definition of “manager”. Are we talking about the chief executive—the director of the organisation—or about front-line operational managers? Regarding who is in operational control of the day-to-day work of a charity and who is in overall control of the ethos, direction and accountability of the board or the trustees, there is a slight lack of fit between what was discussed under the connected charities provision and what we are discussing now under the merged charities provision. A number of Members who perhaps did not have the opportunity to do so before, are now giving some thought to the issue. I appreciate that the Minister has introduced the new clauses in an attempt to be helpful, and I welcome that, but we have to consider some points in slightly more detail.

The hon. Member for Amber Valley also made an important point about the language used. HMRC “certifying” is perhaps not language that we are familiar with. The Minister responded by saying that HMRC would be available to give advice, work with charities and do all of those things. I am not entirely persuaded, given the responses to earlier debates in this Committee, that HMRC will necessarily have the expertise, opportunity or time to do that to any great extent over the process.

There is a difference between HMRC certifying a proposal from the charities by rubber-stamping it and saying, “Yes, that’s okay,” and its actively working with two or more charitable organisations on a merger process and whether it is advantageous and meets the requirements of the various schemes. Although I welcome what the Minister is trying to do, there are issues that need to be probed further.

Does the hon. Lady also agree that when we consider the new clauses, we must be careful about how they interact with the definitions of connected charities? If a new charity inherits more than 50% of the managers of an old charity, we fear that the new one will be connected to the old one because they had the same managers at some point in the tax year. If three charities merge into one, they may end up in the unfortunate situation of being entitled to only one third of the top-up payments claimed, due to an accidental mistake. I suspect that we do not intend to do that, but it probably means that the only way a merger can work is if it is done on 6 April.

The hon. Gentleman makes an interesting point. Again, that is why I was trying to probe the Minister on the extent to which the actual practice of charities merging had been considered. What happens in the real world, what scenarios are thrown up by those circumstances, and would any of those mergers have fallen foul of the regulations or rules that will be put in place? Again, do we really want HMRC’s time to be taken up with ensuring, as the hon. Gentleman suggests, that charities merge only on 6 April, or do we want it to do other things? I do not want to reopen that whole debate, but we must ensure that we do not end up  with the unintended consequences of more and more bureaucracy and red tape and less opportunity for charities to get on with doing their charitable works within local communities or at the national level.

The issue is not just one for the larger charities. Increasingly, groups and organisations at community level are having to come together to ensure that they get the most from the pot of money available to them, whether from regular donations, top-up payments or anything else. Charities have increasingly come under the spotlight to ensure that their administrative costs are not excessive and do not appear unfair given what they do and the contributions they receive.

Can the Minister give some reassurance on those points, particularly about managers, definitions and who will decide? Will he also clarify the role of HMRC? That would allow us to move on.

I thank the hon. Lady for her general support for the intentions behind the Government’s proposed changes. I also thank the hon. Member for Foyle for his questions. He made some good points, as did the hon. Lady. I will try to answer some of them now.

On the issue of managers, the hon. Member for Foyle asked what “managers” means. It is defined in the new clause as

“the persons having the general control and management of the administration of a charity”.

It is important to point out—hopefully this will give him some comfort—that the term is already well understood by many charities after the introduction of the fit and proper persons test. The concept of a manager of a charity and the differences between managers and trustees, which he also mentioned, are generally well understood. There are already examples in other HMRC legislation on gift aid, and other things that explain some of those differences. Of course, examples will be given in the guidance for this measure, but it might be useful if I give an example from my own experience. As I mentioned earlier, until recently I was the trustee of a charity that was called the Westminster Children’s Society but is now referred to as the London Early Years Foundation. Trustees are mentioned in clause 5, and they are the people who set the general direction of the charity and who have certain legal responsibilities. The hon. Member for Kilmarnock and Loudoun asked whether the manager would be the CEO, the CFO or someone who is responsible for the day-to-day management of the charity in discharging its activities. That is what HMRC sees as the manager. Again, it is important to point out that that term is well understood by many charities.

I realise the Bill, when it becomes an Act, will apply only to charities that have been in existence for three years, but perhaps the term is not well understood, especially among smaller charities. I refer again to my example of the East Lothian food bank, which has no employed staff, but trustees and volunteers generally share responsibility for day-to-day operations. So perhaps the Minister needs to provide more clarity on that. There may not be the understanding out there that he thinks there is.

The hon. Lady makes a fair point. Many small charities may not have anyone who is paid in any way—they are all volunteers—and the unpaid people who are managing and discharging the charity’s activities are also the trustees. Every charity will have trustees and, especially with small charities, they and the management are quite often one and the same. In such cases, a trustee can also be a manager, so it turns out to be the same individual. I do not think anything here says that that is not possible. Many larger and better established charities will have professional management, whether or not they are paid—and often they are paid—with unpaid volunteer trustees who have different responsibilities.

The Minister rightly makes the point that clause 5 refers to trustees, but it refers to trustees as those who control the charity. Taking the example that has just been given of small charities that do not have professional managers and that rely on trustees merging, if part of the will for that merger is to create a more permanent management structure for the first time, it might be that none of the trustees of the merging charities see themselves as eligible or in any position to be a manager. So, the merged charities might have a manager for the first time. In the Minister’s example of small charities that do not have professional management, how could those charities qualify under the certification system if they do not have previous managers to be the managers? That is why he needs to address trustees.

I think the hon. Gentleman would accept that every charity has someone carrying out a management function. Otherwise, how would that charity discharge its charitable activities? If he is suggesting that the charity’s trustees—every charity will have trustees—are also acting as the managers, that may be the case. As I have said, in many small charities that probably is the case, but it is not the same as saying that the charity does not have managers. In such cases, where two small charities come together, they will have managers, albeit the managers may also be the trustees for both. It would be wrong to suggest that it is somehow possible to have a charity without a manager, because the next question would be how that charity actually discharges its charitable activities.

Is the Minister saying that, in interpreting the provision and deciding about issuing a certificate, HMRC will look not only at who the management staff are or are planned to be, but at trustees? It might be that at least 50% of trustees might count.

To be clear, when the managers are trustees and there is no distinction between them—for example, if there are two charities, in both of which the trustees are the managers and there are no managers other than the trustees—HMRC will look indirectly at the trustees, because they are also the managers. It will not look at them as trustees, but because, to meet the requirements of the clause, they are also the managers of the charity.

The Minister is being good humoured and good natured in dealing with all our questions, but my point is about the real world in which charities exist. The fact is that, should two charities be merging with a  view to appointing and paying a manager, their trustees, if they had previously acted as managers, are not—as trustees—allowed to receive any financial income from those charities. It is therefore unlikely that an existing trustee who has acted as a manager will become the new manager. Did the Minister follow that?

No. Will the hon. Lady explain the end of her question?

My point was that, should two small charities merge with a view to appointing a paid manager, trustees who, in the eyes of HMRC, have been managers until that point would have a conflict of interest and would not be able to take on a paid management role. Certainly in Scotland, that is set out in the regulations and rules for charities.

I thank the hon. Lady for her clarification. In her example of two charities having merged and having decided that they want a new professional, paid manager, that new manager could not be counted as part of the 50% of the old management team. Clearly, however, that is okay because, as I have said, it is not a 100% requirement, so there is some flexibility.

The principle still stands, however, that a post-merger charity must have 50% of the previous management team. I will make that clear with an example. I am just picking a number, but I appreciate that each case will be different. If two charities each have 10 managers, after the merger 11—sorry, 10—of them must be from those two teams, with at least five from each charity, who together represent at least 50% of the management teams of the old charities.

The clause says more than that.

Sorry. It is 11, then. The hon. Gentleman has corrected me. In that example, the figure would be 11: if there are 10 in each charity, post-merger it must be 11 of the old teams to meet the condition in the clause.

Does the Minister accept that, although large charities may have 10 managers, many small charities looking to merge may have only one manager? How can two charities coming together, each with one manager, meet the 50% rule in any sensible way?

I accept that point. As I said, I used the example of 10 managers only for the purposes of illustration. I accept that circumstances will be different for each charity, particularly for small ones. To take the hon. Lady’s example, if each charity has one manager, post-merger the figure would have to be two—the figure must be more than half, so it would have to be two. Please keep in mind that, in that example, if there were only one, it would be more of a takeover than a merger. It is fair to say that the concept of a merger is two charities coming together rather than one taking over another.

With respect—the Minister is trying to explain a complex scenario—in the real world, when two charities come together but one manager decides to move on while the other remains in post, that would not  necessarily mean that it was a takeover of one charity by another. That is a particular issue for small charities, in the sense that their expectation is that the two same people would be there at the point of the merger.

The hon. Lady has made a fair point. She will understand that, in framing the rule and rules in general to meet the eligibility criteria under the Bill, some bits can lead to an anomaly or something that is not intended. There is no perfect way in which to catch every possible eventuality of mergers.

The hon. Member for Foyle asked what would happen if some managers left post-merger, so the more than 50% requirement was no longer met. HMRC thought about that; we could have added new clauses and tried to capture such a possibility and say, “You can’t change for 12 months” or that the merger must stay in place for a certain period. However, we ruled out such a provision because guidance will be published on the matter. Given that the Bill is at least as long as the gift aid legislation, we do not want to overcomplicate it. We want to strike the right balance.

The hon. Gentleman used a good example of when some charities could change their management structure post-merger, but we must strike the right balance and find something that will work and deal with the worries that have been expressed. Hopefully, he will accept that we must draw the line somewhere; we think that the right balance has been struck.

The hon. Gentleman also referred to cross-border mergers of charities, as did the hon. Member for Kilmarnock and Loudoun. I assure them that nothing under the clause prevents the mergers of cross-border charities from happening, whether in England, Scotland or Northern Ireland, which the hon. Member for Foyle might have had in mind. He also asked whether the clauses would work for charities that are taking advantage of the community buildings rules. Yes, we were deliberately careful to draft the provisions to take that into account. If one charity benefited from the community buildings rules and was part of the merger, post-merger the new charity could still continue to take advantage of the rules.

My hon. Friend the Member for Amber Valley asked about mergers and connected charities rules. We dealt with connected charities previously and explained why the rules were in place. He also referred to tax years. Under the Bill, they can claim as merger charities after the merger or they can claim as individual charities before the merger. In either case, they would not be treated as connected. That is taken into account, and I hope that I have reassured my hon. Friend.

The reason for my concern is complicated. The connected charities rules deem that if the arrangement applies at any point in the tax year, it applies for the whole of the tax year. It would be hard for a collection of three charities merging into a new one if, at the instant before the merger, there was not to be a connection between the new charities and at least one of the ones that merge in, because the same individuals will be managing the bodies. While we intend that such a merger will be fine, there might be an accidental impact just before the merger, when the charity in question has become connected and therefore tripped itself out of all  the claims for that year. I accept that after the merger, things may well be fine, but I am not sure what happens before that.

Perhaps I did not make myself clear; if so, I apologise. When two charities come together, they will be able to choose how they wish to be treated. They can either claim as a merged charity after the merger, or they can claim as individual charities before the merger, which may be relevant to my hon. Friend’s example. That is designed to ensure that there is no conflict with the connected charities rules. We have considered this provision carefully and think that it works.

As I understand it, the hon. Member for Kilmarnock and Loudoun is prepared to withdraw her amendment. However, just to be clear, I will be voting against clause stand part, and urge the Committee to join me in supporting new clauses 4 and 5 when we vote on them.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 disagreed to.