The Beginner’s Guide to Charity Law

Sarah Payne and Tamsin Anderson

Thursday 15 May 2014

199999/0949

Essential Charity Law: What we will cover

• What is a charity?

• Public benefit requirements

• The Charity Commission and HMRC

• Different legal structures for charities

• Duties of Trustees

• Activities to watch out for

Why be a charity?

• No tax on primary purpose income

• Corporate and individual gift aid

• Rate relief

• Grant funding

• Public perception

On the other hand…

• Charity Commission registration/ regulation

• Fiduciary duties for trustees

• Restrictions on trustee benefits

• Other restrictions:

– Trading

– Political campaigning

Key features of a charity

• An organisation established for purposes which are regarded as exclusively charitable under the law of England and Wales

• Must deliver public benefit

Charitable Purposes (1)

• Prior to Charities Act 2006, set out in case law

• Charities Act 2006 introduced statutory list of charitable purposes

• Now consolidated into Charities Act 2011 – no change to the law

Charitable Purposes (2)

• 13 heads:

– *prevention or relief of poverty

– *education

– *religion

– health or the saving of lives

– citizenship or community development

– arts, culture, heritage or science

– amateur sport

Charitable Purposes (3)

– human rights, conflict resolution, reconciliation, religious/racial harmony, equality and diversity

– environmental protection and improvement

– relief of those in need from youth, age, ill-health, disability, financial hardship or other

– animal welfare

– armed forces; police, fire and rescue services or ambulance services

– *other purposes (catch-all)

Public Benefit

• “A purpose… must be for the public benefit if it is to be a charitable purpose”

• No change in law – charities have always had to be for the public benefit

• Meaning of “public benefit” not defined

• Particular issues around fee-charging

Public benefit – practical implications

• “Trustees must have regard to Commission guidance”. Trustees should be:

– Aware of the guidance

– In making a decision where it is relevant, take it into account

– And if they decide to depart from it, they should have good reasons

• Annual report to include statement of public benefit explaining activities undertaken to achieve public benefit.

The Two Aspects of Public Benefit

Aspect 1 – Benefit Aspect

• A purpose must be beneficial

– The benefits must be clearly identifiable

– The benefits must be capable of being proved if necessary

– Not based on personal opinion

– Any detriment or harm that results from the purpose must not outweigh the benefit

The Two Principles of Public Benefit

Aspect 2 Public Aspect

• Benefit must be to the public or section of the public:

– “A charitable purpose can benefit a section of the public, but the section must be appropriate (or sufficient) in relation to the specific purpose.”

– People in poverty must not be excluded, eg. independent schools working with state schools

– Any private benefit must be incidental

How to approach the public benefit test?

1. Read the Charity Commission guidance PB1, 2 and 3

2. Understand your charitable objects

3. Ensure all activities relate to charitable objects

4. Review all publicity material – esp. website (Charity Commission scrutiny)

5. Ensure Trustees’ decisions are appropriately authorised and minutes

6. Do you need to expand or amend your objects?

Role of the Charity Commission

• Registration: income threshold

• Main regulator – a friend and policeman

• Moving towards online forms

Registration with HMRC

• ChA1 form

• Fit and proper person test

Fit and proper persons (1)

• Applies to all “managers”

• Anyone having general control and management over running the charity/application of its assets

• HMRC says “managers, not just trustees”

Fit and proper persons (2)

• Nominate an authorised official and between 2 and 4 other officials

• Notify HMRC when changed

• Assumption that F&P

• What if cease to be fit and proper?

• Changes to HMRC details only for officials

• Use declaration

• Managers to read HMRC guidance

• Form ChA1 for new charities

Different legal forms

Incorporated forms:

• Companies (usually limited by guarantee)

• Charitable Incorporated Organisations (CIO)

• Industrial & Provident Societies (IPS)

Unincorporated forms:

• Trusts

• Unincorporated Associations

Charitable trusts

• Trustees

• Trust Deed

• Examples: small organisations, no membership, grant-making bodies, etc.

Unincorporated Associations

• Executive or Management Committee

• Unincorporated – no limited liability or legal personality of its own

• Constitution or Rules

• Examples: clubs, small organisations, local societies

Incorporation – why do it?

• Legal personality

• Limitation of risk – major contracts, employees, risky work (eg. with children)

• Clear ownership structure/governance

• Accountability/disclosure

• Can enter into contracts, own or lease property and employ staff in its own name

Companies

• Usually limited by guarantee

• Separate corporate legal entity

• Directors (Trustees) and members

• Regulated by Companies House

• Articles of Association

Charitable Incorporated Organisations (CIOs)

• New legal form for charities

• Existing charitable companies – no date yet

• CIOs give charities benefits of incorporation (limited liability and legal personality) with a single regulator – Charity Commission

• Downsides?

Is a charity a social enterprise?

• The Department of Trade and Industry:

“social enterprises are businesses with primarily social objectives whose surpluses are principally reinvested for that purposes in the business or in the community, rather than being driven by the need to maximise profit by shareholders and owners”

• CICs – not charities

Who is in charge of a charity?

Trustee

Board

Chief Executive

Employees / volunteers

Committees of Trustee Board

Trustees’ duties

Six Main Responsibilities

1. Ensure compliance

2. Accept responsibility

3. Act reasonably and prudently

4. Safeguard the charity’s assets

5. Act collectively

6. Act in the best interests of the charity and avoid conflicts of interest

http://www.bwbllp.com/knowledge/2013/08/12/duties-of-charity-trustees/

Compliance

• Assets must be used only for the objects/purposes of the charity

• Charity must be run in accordance with its constitution, charity law and all of the relevant laws and regulations

Prudence and Care

• Use charity assets wisely and in pursuit of charitable purposes

• Avoid undue risk

• Borrowing and investing – special care

• Overall duty to “exercise such skill and care as is reasonable in the circumstances”

N.B. Higher duty if special expertise or paid

Conflicts of Interest

• Conflicts arise where a trustee’s personal interests or those of someone connected to him or her conflict (or run a real risk of conflicting) with those of the charity.

• Is benefit authorised?

• Conflicts policy

Liability of Trustees

• Consequences of breach of trustees’ duties

• For charitable companies, directors’ duties under the Companies Act and charity law

• For CIOs, duties under the Charities Act 2011

Activities to be careful about

• Trading

• Fundraising

• Making grants overseas

• Employment

• Safeguarding

• Property

• Campaigning and political activity

• Payment of trustees

Trading

• Key question: Is the trade is exercised in the course of the actual carrying out of a primary purpose of the charity?

• Profits of primary purpose trading are exempt from tax if they are applied solely for the purposes of the charity

• The total turnover from all of the charity’s non-exempt trading activity (i.e. non primary purpose trading) must not exceed the annual turnover limit: – £5,000; or– If the annual turnover is more than £5,000, 25% of the charity’s

total incoming resources up to a maximum of £50,000.

Fundraising

• Corporate sponsorship

• Commercial participator relationships

• Engaging professional fundraisers

Making grants overseas

• Trustees must take such steps as HMRC considers reasonable to ensure that the payment will be applied for charitable purposes

• HMRC guidance

Campaigning and political activity

• An organisation is not charitable if one or more of its purposes are political

• Campaigning = to raise awareness, educate the public, mobilise support, change public attitudes

• Political activity = trying to obtain change in law, or policy or public body

• Objects based political activity (raising awareness issues) OK provided no attempt to persuade voters

Payment of Trustees

• General rule that Trustees cannot profit

• Some exceptions to this

• Conflicts of Interest

• CC11 guidance

Useful sources of information

Charity Commission:

www.charitycommission.gov.uk

0845 300 0218

NCVO

www.ncvo-vol.org.uk

020 7713 6161

Charity Law Association

www.charitylawassociation.org.uk

HMRC Charities

http://www.hmrc.gov.uk/charities/index.htm

0300 123 1073

Sarah Payne and Tamsin Anderson

Solicitors

Charity and Social Enterprise Department

Bates Wells & Braithwaite London LLP

2–6 Cannon Street

London EC4M 6YH

Tel: 020 7551 7777

E-mail: s.payne@bwbllp.com & t.anderson@bwbllp.com