Keep it legal: The Scottish charity test

The key to charitable status in Scotland used to be recognition by the Inland Revenue (now HM Revenue & Customs). Accordingly, most constitutional documents set out charitable purposes by reference to tax law.

But in April 2006, practice for new Scottish charities changed with the inception of the Office of the Scottish Charity Regulator. Reference to the purposes contained in the Charities and Trustee Investment (Scotland) Act 2005 became the litmus test of whether a body has a right to call itself a Scottish charity. Tax became a separate, but still important, issue. This distinction between charity and tax law was under most charities' radars, but the pilot of the OSCR's rolling review made the issue of referring to tax law in a constitution a very live one.

The OSCR decided that reference to tax and English law's definition of charitable purposes is slightly wider than that permitted under the 2005 act. The result was that a charity whose constitution contained that formulation of charitable status could be granted tax relief, but would not satisfy the Scottish charity test.

Recently, the OSCR and HMRC issued joint guidance to clarify these issues. This states that 'charitable' should be defined by reference to both the 'taxes acts' and the 2005 act if the benefits of both charity and tax law are to be obtained by a charity. Unfortunately, this reference to the undefined term 'taxes acts' means trustees need to consider other taxes such as inheritance and capital gains tax as well as income tax.

The reason for the two-pronged definition of charitable is that the OSCR does not want charities operating in Scotland to apply for funds to carry out purposes that are not defined in the 2005 act as charitable. English charities that are required to register twice will also have to ensure that a reference to the 2005 act is included.

Scottish charities established before the 2005 act became effective will also have to take action to amend their constitutions if they refer to tax law only. This may not be straightforward. If they fail to amend as required by the OSCR, they will not be registered Scottish charities.

- Alan Eccles is a solicitor at Maclay Murray & Spens LLP 

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