The Charities Act: Charity law finally enters the modern age

The four long-standing 'heads of charity' have been put aside in favour of modern definitions of charitable purpose

The Charities Act
The Charities Act

It took three years, three Queen's Speeches and 80 hours of debate to get the Charities Bill through Parliament. Is humanism a religion?

Is darts a sport? Is defence of the realm a charitable purpose? Discussion ranged widely, especially in the House of Lords.

But the crux of the matter came in October last year, when the Upper House voted by 139 votes to 60 against a crucial amendment on public benefit by Lord Phillips of Sudbury, the Liberal Democrat peer.

An experienced charity lawyer, Phillips argued that case law on public benefit was such that the charging of fees was irrelevant to the question of whether a charity provided public benefit.

The Charity Commission had also said as much in a submission to the parliamentary committee that scrutinised the Bill. Fee-charging charities might, it seemed, be spared the Bill's main purpose - to require real evidence of public benefit in return for charitable status.

Phillips had introduced an amendment designed to address this by saying that the Charity Commission should "consider the effect on public benefit of the charging policy of any charity" when consulting about its guidance on public benefit.

The amendment was supported by the National Council for Voluntary Organisations and, discreetly, by the commission itself. Without it, Phillips asserted: "The central issue in this Bill is not seaworthy."

But the Government refused to budge, and called in its troops - including many Labour peers who had taken no part in the debate - to vote the amendment down. A similar amendment in the Commons a year later never even reached a vote.

We will probably have to wait for the memoirs of Tony Blair or his ministers for confirmation of the common belief that this all stemmed from a Prime Ministerial veto on anything that could be considered an attack on public schools.

It also remains to be seen whether the failure of the amendment really will mean that fee-paying schools and hospitals that drag their heels over providing benefit to the wider community will be protected by the courts from losing their charitable status.

CLAUSE BY CLAUSE

Charity lawyers Alice Faure Walker and Stephen Lloyd summarise the Act.

PART ONE - MEANING OF 'CHARITY' AND 'CHARITABLE PURPOSE'

The new Act contains a statutory list of the purposes the law regards as charitable. The existing four 'heads', or categories, of charitable purpose, developed by the courts over the years - the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community - will be expanded.

There will be 13 charitable purposes.

They are:

- The prevention or relief of poverty

- The advancement of education

- The advancement of religion

- The advancement of health or the saving of lives

- The advancement of citizenship or community development

- The advancement of the arts, culture, heritage or science

- The advancement of amateur sport

- The advancement of human rights, conflict resolution or reconciliation, or the promotion of religious or racial harmony or equality and diversity

- The advancement of environmental protection or improvement

- The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage

- The advancement of animal welfare

- The promotion of the efficiency of the armed forces, or of the efficiency of the police, fire and rescue services or ambulance services

- Any other purposes accepted as charitable on the day that this part of the Act comes into force, and any purpose that is analogous to or within the spirit of any existing charitable purposes, any of the purposes listed in the Act or any purposes accepted as charitable after the new law comes into force.

The final purpose allows flexibility for the law to evolve over time in response to changes in society.

Under the Act, all charities must demonstrate that their purposes are for public benefit, marking a change in the law for religious, educational and poverty relief charities, where public benefit has been presumed unless there was evidence to the contrary. There is no statutory definition of public benefit, so the Charity Commission will be expected to apply the existing law in this area, which has been described in Parliament as confused and sparse. The commission's understanding of the law is set out in a paper, Public Benefit - the Charity Commission's Approach, published in January 2005. The commission is required to issue guidance promoting awareness and understanding of public benefit. The change in the law means that all charities will have to demonstrate their public benefit when registering.

For existing charities, trustees must take account of the commission's public benefit guidance. The commission will be undertaking rolling reviews of existing charities to ensure that public benefit is being provided.

Religious charities and fee-charging charities, such as private hospitals and schools, have expressed most concern about how the new rules will affect them. Whether these reviews will be the equivalent of Thomas Cromwell's visitation of the monasteries remains to be seen.

PART TWO: REGULATION OF CHARITIES

The Charity Commission

The commission will have up to nine members, rather than the existing five commissioners, with one place earmarked for a Welsh representative.

In a bid to ensure that the diversity of the sector is reflected, the commission must include members with experience of charity law, finance and accounting and of charities of different sizes and descriptions.

The commission's role is clarified by the inclusion of a new set of statutory objectives, functions and duties, on which it must report to Parliament annually. The commission must also hold an annual public meeting to discuss its report.

The Charity Tribunal

An important development is the establishment of a Charity Tribunal.

Its job is to hear appeals against decisions by the commission to exercise, or not to exercise, its statutory powers. Most, but not all, of the commission's powers can be the subject of an appeal to the tribunal by the charity concerned. The Attorney General, acting as the protector of charity, can also bring a case, and can become involved in existing cases before the tribunal. Both the Attorney General and the commission itself can refer questions of charity law to the tribunal. The tribunal will deal only with formal legal matters, not with complaints about delay or poor service.

The aim is that charities should have a realistic chance of challenging the commission's decisions. This has not been the case in the past, because the only avenue available to charities has been to bring expensive proceedings in the High Court. But there are some concerns about how accessible the tribunal will be in practice. The Government has consistently refused to allow for the establishment of a formal 'suitors' fund' to help finance tribunal cases. A charity wishing to bring a case will need to bear its costs up front, although the tribunal can order the commission to pay the charity's costs if it decides that the commission's original action was unreasonable. The tribunal can also order either party to pay the other side's costs if they have acted "vexatiously, frivolously or unreasonably".

The detailed tribunal procedures, which have yet to be decided by the Lord Chancellor, will affect the costs of bringing a case. The tribunal has no powers to award compensation over and above the costs of making a claim before it.

Registration of charities

The annual income threshold for registration with the commission is raised from £1,000 to £5,000. Charities with income below that level will be able to register voluntarily. Charities previously 'excepted' from the requirement to register with the commission, for largely historical reasons, will now need to register if their incomes are more than £100,000, a threshold that is likely to decrease over time. Charities previously 'exempt' from registration will be brought within the commission's net. Some will now need to register and others will be subject to a greater degree of commission scrutiny than before.

Cy-pres

The rules about when a charity's purposes can be changed are modernised, which will help charities with out-of-date objects. The Act also assists with failed appeals. The commission will have wider discretion about how to publicise charity schemes, which should cut down on the paperwork, costs and delay associated with the current system.

Powers of the Charity Commission

The commission is given new powers, including:

- Power to determine who the members of a charity are. This could help charities that have not kept accurate records of their members to get back on track

- Power, even without instituting a formal inquiry, to order that anyone in possession or control of charity property should apply it in a certain way

- Power, after starting a formal inquiry, to seek a warrant to search premises (which could include a trustee's home) and seize documents

- Power, in the course of a formal inquiry, to direct the trustees, the charity or its employees to do anything at all that the commission considers expedient in the interests of the charity.

The rules about mortgaging charity land in order to secure grant obligations are modernised.

Accounts

Some charities will no longer need to have their accounts audited. Broadly, the income threshold for a full audit is raised to £500,000. Unincorporated charities with subsidiaries will, in most cases, now have to prepare group accounts. The trustees' annual report must now include a report on the activities of subsidiaries. Auditors will be under an amended 'whistle-blowing' obligation to report to the commission in certain circumstances.

Charitable incorporated organisations

The Act introduces a new legal form for charities, the Charitable Incorporated Organisation. CIOs will be regulated by the Charity Commission alone, avoiding the dual regulation of charitable companies, which report to both Companies House and the commission.

Much of the detail about how CIOs will work will be contained in regulations, but the Act specifies some of the key features.

CIOs will have limited liability. Each one's principal office must be in England or Wales. Like companies, they will have a two-tier system of governance, with both members and trustees. The trustees may but need not be members, and vice versa. There will be statutory duties for members to act in good faith and for trustees to exercise reasonable care and skill. A 75 per cent majority will be needed to alter a CIO's constitution.

The name of the CIO must be stated on certain documents.

Registration of a CIO will be by application to the commission with a draft constitution. Existing charitable companies and industrial and provident societies will be able to convert to CIO status, with the approval of the members. The Act also contains a mechanism for CIOs to merge. An existing unincorporated charity cannot convert to a CIO, but must go through the process of establishing a CIO and transferring assets and liabilities to it, a process that is currently used by charities wishing to 'incorporate'.

Charity trustees

The Act introduces an important statutory power for charities to pay their trustees for services provided to them, even if the constitution contains no express power to do so. The power will not allow payment for actually acting as a trustee, nor will it allow trustees to be paid employees of the charity. But it will cover, for example, legal or fundraising services provided to the charity by a trustee who also happens to be a lawyer or a fundraiser. The power is subject to strict safeguards set out in the Act.

There will also be a new statutory power for charities to pay for trustee indemnity insurance, subject to certain safeguards, even if the constitution does not allow for this. Most charities should, therefore, no longer need to amend their constitutions if they want to purchase trustee indemnity insurance.

The commission will have a new power, previously given to the court alone, to relieve trustees from breach of trust or duty if they have acted honestly and reasonably and ought fairly to be excused. Similar powers apply to auditors and others reporting on a charity's accounts.

Constitutional changes

Under new, more flexible procedures, unincorporated charities with annual incomes of £10,000 or less will be able to transfer property to other charities. They will also be able to change their charitable purposes to new, similar purposes simply by notifying the commission, provided, in either case, that the commission does not object. All unincorporated charities, regardless of size, will have a statutory power to change the administrative powers and procedures in their constitutions without involving the commission in advance. This brings the position of unincorporated charities into line with that of charitable companies and will benefit unincorporated charities with out-of-date constitutions. The rules about when a charitable company must seek prior commission consent to amendments to its constitution are now spelt out more clearly.

Powers to spend capital

The rules about spending permanent endowment property are significantly relaxed. Trustees of permanent endowment will be able to resolve to spend the capital, provided they go through the appropriate process and, in the case of most larger endowments, obtain the commission's consent.

Mergers

The Act introduces provisions designed to facilitate charity mergers.

Provided the merger satisfies certain conditions, the transferring charity will be able to make a declaration to the effect that legal title to a wide range of property should automatically transfer to the recipient charity without the requirement for any additional documentation. This leaves open the question of what happens to liabilities. These do not automatically transfer, which is a serious defect in the arrangement.The commission will keep a register of relevant charity mergers, which will be open to public inspection. Where a merger is recorded in the register, most subsequent gifts to the transferring charity will automatically take effect as gifts to the receiving charity.

PART THREE: FUNDRAISING

Public charitable collections

The Act introduces a new regime for public charitable collections, which are currently regulated by local authorities under a patchwork of legislation.

The new rules will apply to collections in a public place or door-to-door. Subject to some exceptions, a public place will include any place where members of the public have access, including a station or shopping precinct. There was doubt about whether the old rules applied to soliciting direct debits, as in face-to-face fundraising, but this is covered by the new regime.

For the most part, public charitable collections may be carried out only by holders of Public Collections Certificates. PCCs will be issued by the Charity Commission and can last for up to five years. This could mean big log jams. The commission can refuse to issue a certificate on several grounds, including concerns about the proportion of the appeal proceeds that will actually reach the charity. For collections in public places, a permit must also be obtained from the local authority, lasting up to 12 months. Permits can be refused only on the grounds of inconvenience, perhaps because of the proposed timing or location of the collection. No permit is needed for door-to-door collections, but the local authority must be notified in advance.

The National Exemption Certificate system is abolished. Local short-term collections are exempt from the PCC regime but, again, the local authority must be notified in advance and may object.

Fundraising

The Act tightens up the rules about statements that must be made by professional fundraisers and commercial participators. Professional fundraisers must give details of the actual or estimated amount of their remuneration. Paid public collectors and charity employees will need to make similar statements in some cases. Commercial participators must specify the actual or estimated amount that will be paid to charity as a result of the promotion.

The Minister for the Cabinet Office is given power to impose a system of fundraising regulation on the sector. The Home Office plans to review the performance of the new self-regulatory body, the Fundraising Standards Board, in five years to see if this power needs to be invoked.

Financial assistance

The Secretary of State or Minister for the Cabinet Office and the Welsh Assembly will have power to give financial assistance to charities.

PART FOUR - FINAL PROVISIONS

There must be a review of the operation of the 2006 Act five years after it is passed, which will be laid before Parliament. Public benefit will be reviewed after three years. Issues such as the effectiveness of the commission in the light of its new responsibilities, the accessibility of the tribunal as a matter of practice and the new public collections regime are expected to be scrutinised closely.

Conclusion

The Act consists of 182 pages, 80 sections and 10 schedules. It's a long drive to a small house, so let's make it work. And remember, it applies only to England and Wales. Most of it will come into force in stages over the next two years.

This article is based upon the book Charities - The New Law: A Practical Guide to the Charities Act 2006 by Stephen Lloyd and a team of specialist contributors from Bates Wells & Braithwaite. It will be published by Jordans in February 2007. For more information, go to www.bateswells.co.uk/charitypublications.

THE AUTHORS

Stephen Lloyd is senior partner and head of the charity and social enterprise department at Bates Wells & Braithwaite. He is the author of numerous books and publications on charity law, former chairman of the Charity Law Association and a trustee of five charities.

Alice Faure Walker is a consultant and former partner in the charity and social enterprise department of Bates Wells & Braithwaite. Before joining BWB, she worked for a human rights charity. She is now a trustee of two charities.

IN ON THE ACT

ETON COLLEGE - The question 'Is Eton a charity?' was a symbol of the debate that dominated discussion of the Bill right from the start. It is, in fact, one of the country's oldest charities - its status has been protected by the presumption established in Elizabethan times that education is charitable and provides public benefit. Because the Bill proposed removing the presumption and requiring all charities to demonstrate public benefit, the issue became how they do that, and by what criteria. The Government declined to set that out in the Act and has handed the task to the Charity Commission. Some parliamentarians wanted to remove charitable status from fee-paying schools.

- Fiona Mactaggart MP was the Home Office minister for the voluntary and community sector, in charge of the Bill's progress until it fell by the wayside because of the 2005 General Election. She had worked in the sector and was seen as a strong advocate of voluntary organisations.

- Alan Milburn MP chaired the joint parliamentary committee that scrutinised the draft Bill in 2004. His two most notable moves were a set-to with Geraldine Peacock, then chair of the Charity Commission, and telling Fiona Mactaggart that the Bill was "a dog's breakfast".

- Stuart Etherington, as chief executive of the National Council for Voluntary Organisations, was the leading light in the Coalition for the Charities Bill, which lobbied the Government and kept up the pressure for progress.

Working with then NCVO policy director Campbell Robb and parliamentary officer Pete Moorey, Etherington succeeded in holding the Government to its commitment to the Charities Bill through periods when most parliamentary time was devoted to greater political priorities, such as terrorism and education.

Etherington pressed for the strengthening of the public benefit clause, but settled for other measures when the Government finally dug in its heels

- Lord Phillips of Sudbury, an experienced charity lawyer, was the most persistent advocate in the Lords of strengthening the public benefit clause to make sure fee-charging charities could not escape demonstrating public benefit. They might be able to do so under existing case law, he argued.

- John Grogan, MP for Selby, pursued a similar line in the House of Commons, putting down an amendment saying that the Charity Commission should take account of any restrictions when considering whether or not a charity provides public benefit. The amendment failed.

- Geraldine Peacock had just been appointed chair of the Charity Commission when the draft Bill was introduced. She said that the biggest frustration of her two years in the job was the slow passage of the Bill.

- Richard Corden was the civil servant in charge of preparing the Bill and helping ministers take it through Parliament. He was also a member of the Strategy Unit team that laid the foundations for the legislation.

- Ed Miliband, MP for Doncaster North, was appointed to the newly created post of Minister for the Third Sector when most responsibilities for charities and the voluntary sector were transferred from the Home Office to the Cabinet Office in the Government reshuffle of May this year. It was his job to pilot the Bill through its second reading, committee stage and report stage in the House of Commons.

Like his predecessors, he refused to give ground on the public benefit question, arguing that the Grogan amendment could have the effect of denying charitable status to organisations that provided public benefit but were unable to prove it. Some politicians believed there was a Downing Street ban on anything that could be interpreted as an attack on private education.

- JULY 1996: Voluntary Action into the 21st Century, by Professor Nicholas Deakin, calls for changes in the law on charities

- SEPTEMBER 2002: Private Action, Public Benefit, a report by the Prime Minister's Strategy Unit, outlines what the key changes should be

- NOVEMBER 2003: The Queen's Speech announces a draft Charities Bill, to be put through a process of 'pre-legislative scrutiny'

- JUNE 2004: Draft Bill published; discussion starts in a committee of MPs and peers chaired by former Cabinet minister Alan Milburn

- NOVEMBER 2004: Bill announced in the Queen's Speech after publication of the report of the scrutiny committee the previous month

- JANUARY 2005: Bill introduced in the House of Lords. Lord Bassam steers it through the Grand Committee on behalf of the Government

- APRIL 2005: The Bill falls by the wayside along with 10 others as Prime Minister Tony Blair calls a General Election

- MAY 2005: The Charities Bill is included in the Queen's Speech for the third time and introduced again in the House of Lords the following day

- DECEMBER 2005: The Bill is introduced in the Commons by Paul Goggins, the new minister for the voluntary and community sector

- JUNE 2006: Second reading: Cabinet Office minister Hilary Armstrong resists proposals to strengthen the public benefit clause

- NOVEMBER 2006: Bill gets Royal Assent after the Government makes minor concessions, but sticks to its guns on public benefit.

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