OPINION: The Charities Bill - The law on trial

Patrick McCurry

Company and charity law

More and more charities are choosing to become companies because it reduces the individual liability of trustees, says Jean Dollimore, and the CIO structure will make incorporation a less cumbersome process. The Government intends to allow charities with income of less than £5,000 a year to have the option of not registering with the Charity Commission. But lawyers believe that many smaller charities will still choose to register.

"I think many small charities will still want to be registered so that they have credibility among donors," says James Carleton.

When it comes to proposals to relax campaigning rules, Chris Priestley points out that there have already been moves, in the form of Charity Commission guidance, to allow charities more freedom in campaigning. But he stresses that, even if there is a further relaxation outlined in the Bill or its associated guidance, the prohibition on charities engaging in overtly political campaigning will continue.

Of more significance, says Dollimore, is the proposal to create an independent appeals process for charities that are unhappy with Charity Commission rulings. "It's important for the sector and the commission that the system should be seen to be fair and, in recent years, there have been several cases in which trustees have complained that the Charity Commission is both judge and jury," she says.

She adds that the Bill will provide new information on the form and structure of a future appeals process.

Michael Scott of Charles Russell agrees that an independent appeals system is a welcome development: "At the moment, the suspicion is that the people who judge an appeal at the Charity Commission may be the same people who took the original decision, and if a charity is unhappy with this, their only option is to go to court."

Whether the legislative changes result in more, or fewer, registered charities remains to be seen, but most lawyers do not expect any dramatic changes in the number of charities.

"The trend has been for the number of charities to increase, and I think that will continue," says Chris Priestley.

CHARITIES BILL: THE KEY POINTS

The Government laid out its broad plans for the Charities Bill in its response, published in July, to the Strategy Unit review of the sector.

Among the key areas dealt with in the Government's response were:

- Legal definition of charity: The Government accepted the Strategy Unit's recommendation for a new definition of charity, based on the principle of public benefit.

- List of charitable purposes: The Government accepted the proposal that a new list of charitable purposes be drawn up to reflect changes in society. In addition to the Strategy Unit's list of 10 charitable purposes, it added the promotion of animal welfare and the provision of social housing.

- Trading by charities: The Government rejected the recommendation that charities should be able to trade without setting up a trading company. The Government argued that such a reform would create unfair competition with the private sector.

- Charitable incorporated organisations: The Government accepted the recommendation that a new legal form for charities, the CIO, be introduced. This would prevent charitable companies having to comply with both charity and company law.

- Standard information return: The Government accepted the Strategy Unit's proposal that larger charities be required to provide a standard information return highlighting key information about the charity, how it sets its objectives and measures outcomes.

- Registration of small charities: The Government accepted the Strategy Unit's argument that smaller charities should not have to register with the Charity Commission. But it stated that the threshold for registration should be raised from charities with income of £1,000 to those with £5,000 income, rather than the Strategy Unit's recommendation of a threshold of £10,000.

The long-awaited Charities Bill was unveiled last month. Patrick McCurry assesses the key points, investigates what could be changed in the draft and if it will be passed in time.

The long-awaited reform of charity law edged closer to reality last month with the announcement of a Charities Bill in the Queen's Speech.

But, given the probability of a General Election in the first half of 2005, there remains some uncertainty about the Bill's chances of becoming law in time.

And, while lawyers know in broad terms what the legislation will cover, there are still doubts about exactly what the details contain and in what form. This will become clearer with the draft bill. The Home Office has not said when this will happen, but in order to get the bill through Parliament by the election, it would probably have to be by the middle of 2004.

"The unofficial line I've heard is that a draft bill will be published next spring," says charity lawyer Jean Dollimore, a partner at law firm Hempsons.

This will be followed by 'pre-legislative scrutiny', a mechanism sometimes used for non-controversial legislation, in which a bill is considered by a Parliamentary select committee before going through the traditional readings in both houses.

During the pre-legislative scrutiny, interested parties will be invited to present their views. Lawyers welcome this consultative approach by the Government, although they acknowledge that there has already been significant consultation on the key elements of the legislation by the Government's Strategy Unit, whose September 2002 report will form the backbone of the bill.

"I'm sure many groups, including the Charity Law Association, will want to give their views on the draft bill when it comes out," says Jonathan Burchfield, head of the charity group at Nabarro Nathanson and deputy chair of the association.

But it is unlikely that the Government will accept significant changes.

For example, in its response to the Strategy Unit report, the Government chose not to accept the recommendation that charities should be able to trade without setting up cumbersome subsidiaries.

"Although we were disappointed the Government didn't accept this, it's probably unrealistic to expect them to change their mind," says Jonathan Burchfield.

Despite having to go through this pre-legislative process, Chris Priestley, a partner at law firm Withers, believes the Bill will become law before the next election: "It's an area where the Government can please its natural supporters, and the bill is relatively uncontroversial." Dollimore agrees, arguing that the charity sector has become more important to the Government in its delivery of public services. "The Charities Act 1992 went through in the last hours of that Parliament, and I think this one will get through too."

But others are more cautious. Michael Scott, head of the charities group at Charles Russell, says: "The danger is that a bottleneck of legislation builds up towards the election and the Charities Bill, because it's relatively uncontroversial, is, therefore, seen by the Government as somehow less significant."

Rebel Labour MPs who oppose charitable status for private schools could also slow down the process if they were to mount a campaign. "If it ended up becoming a controversial bill, like foxhunting, the whole process would be threatened," says Withers' Priestley.

Legislative framework

The form the Bill will take is also unclear. Priestley believes the draft bill will probably provide a general legislative framework, but that the details of the legislation will be contained in associated guidance and regulations.

In historical terms, the most important element will be the redefining of charitable purposes, the first time they have been reviewed since 1601.

A new list of 10 charitable purposes will replace the antiquated definition, and, at the heart of the new approach, will be that charities must provide "public benefit".

How that public benefit will be assessed is an area of uncertainty, however.

"It will be interesting to see in what terms any public benefit test is framed or if indeed it is included in the legislation," says James Carleton, a partner at Farrer & Co. At the time of the Strategy Unit report, many observers felt that the proposed public benefit test could see some private schools and hospitals losing charitable status.

Since then, the Government has inferred that very few, if any, charities are likely to be deregistered. "But the new system will put a different emphasis on what is required from charities in terms of demonstrating public benefit," says Michael Scott of Charles Russell.

Dollimore believes that a crucial element to the public benefit changes will be how they are implemented: "Presumably the Charity Commission will require some kind of return from charities so that it can assess whether the charity is complying with the public benefit criteria. But what would happen if one year the commission judged that a charity was complying, but the next year that it wasn't?"

Lawyers argue that it could be very difficult in practice to remove charitable status from organisations, such as private schools, that have enjoyed such status for decades or even centuries.

"Technically it could be problematic to remove charitable status because if the charity's property and assets have been held for charitable status, what happens to those assets if status is removed?" asks Scott. He believes that the public benefit test will be implemented in such a way that, at least initially, "the bar is set pretty low". In other words, private schools would only have to show some benefits to the wider public, such as making a few facilities available to the local community, in order to retain their status.

"With charities deemed to be failing to comply with the public benefit criteria, I imagine the Charity Commission will contact trustees and give them time to make changes, rather than taking any quick action against the charity," adds Scott.

Face-to-face controversy

Unsurprisingly, it is not the arcane area of public benefit tests that has excited most media attention so far, but rather the controversial issue of face-to-face fundraising. Proposals emerging from the recent Home Office consultation on the licensing of street collecting, including face-to-face fundraising, will feature in the legislation, says Nabarro Nathanson's Jonathan Burchfield.

"There's been a lot of coverage of face-to-face fundraisers - so-called chuggers - in the press and it's good that the licensing issue will be in the Bill," he says.

More general fundraising regulation, however, will not feature highly given that the Government has agreed to allow self-regulation in the sector.

But the Bill will contain powers to be made available to the Home Secretary if he feels that self-regulation is failing.

Carleton says: "It will be interesting to see the extent of powers granted to the Home Secretary, but it's not entirely clear yet who would carry out his wishes should he choose to actually exercise those powers. Perhaps it will fall to the Charity Commission."

Whether these reserve powers will ever be put into action is doubtful, argues Carleton, pointing to the regular debates on press regulation.

"We're always being told that the Press Complaints Commission is in the 'last chance saloon', but the Government always shies away from direct intervention."

An agency will also be given responsibility for fundraising regulation, but, again, it is unclear whether this will be a new body or an existing body, such as the Institute of Fundraising, suggests Priestley.

"The Government has not yet said who will pay for this regulation, and there are concerns among charities that they will have to pay," he says.

Fundraising will also feature in the Bill in regard to accountability and transparency. A key element to this will be the proposed 'standard information return' for larger charities, which is designed to give the public an overview of what the charity does, what it is achieving and key statistics in areas such as fundraising costs and income. The format of the return is still to be developed, and the Bill may give the Charity Commission powers on its implementation. The SIR is aimed at making charities more efficient and so is another area that could feature in the Bill - mergers. The Government has said that measures to encourage mergers could be included in the legislation, such as making it easier for charities that have slightly different charitable objectives to merge.

"The Bill may allow charities with slightly incompatible objectives to go through a more simple process to get permission to merge," says Priestley.

Another Strategy Unit proposal was that a merger unit be created at the Charity Commission, but this measure would not require legislation.

An important reform in the Bill is a new legal form for charities, the 'charitable incorporated organisation', which will remove the requirement for incorporated charities to comply with both charity and company law.

This move is welcomed by charity lawyers.

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