Introduction
The Charities Bill received Royal Assent on 8 November 2006. This means that, after much debate in the House of Lords, the Bill has now become law and will be known as the Charities Act 2006 (“the Act”).
Although the Act has now received royal assent many of its provisions are yet to come into force. To date the main provisions that have been commenced are:
Increases to the financial thresholds above which charities must have a professional audit;
Measures to address concerns around the potential personal liability of charity trustees; and
Changes to the Charity Commission’s governance arrangements.
These were among the first series of provisions that came into force on 27 February 2007, having been implemented by the First Commencement Order of the Charities Act 2006.
Further detail of the provisions now implemented and a provisional outline timetable for implementation of the remainder of the Act can be found at the Office of The Third Sector/Charity Law on the Cabinet Office Website: http://www.cabinetoffice.gov.uk
The Cabinet Office believes that the Act will do the following:
Enable charities to administer themselves more efficiently and be more effective;
Improve the regulation of charity fundraising and reduce regulation in the sector – especially for smaller charities;
Provide a clear definition of what is meant by ‘charity’ with an emphasis on public benefit;
- Modernise the Charity Commission’s functions and powers as regulator, increase its accountability, and preserve its independence from Ministers
Summary of the key changes
One of the key changes is a new legal meaning of ‘charity’. There is no fundamental change in the purposes now accepted as charitable. However, the presumption that all charities exist for the public benefit no longer exists.
Public Benefit
The thinking behind this new provision is that a demonstration of providing public benefit will safeguard public confidence and enable people to better understand why charities deserve tax and additional benefits.
The Act does not contain a definition of public benefit, or indeed suggest how charities should demonstrate it. Instead the Government will be working closely with the Charity Commission to implement a public benefit test. The Charity Commission has already published guidance on what its approach to public benefit will be. The latest guidance was produced in October 2006, and can be found on their website. The Commission say their decisions will be based upon underlying case law and that they will follow the court’s approach and develop decisions on public benefit in the context of changing economic and social conditions, including public attitudes.
Further Charity Commission guidance on public benefit is expected soon. Until this further guidance is known it is difficult to know the precise impact that the test will have on particular charities.
Other proposed changes include:
The Charity Commission itself is to be reformed with new regulatory objectives encompassing public confidence, public benefit, compliance, charitable resources and accountability. Its structure and functions will also change. And an independent Charity Tribunal will be set up to hear appeals against decisions of the Charity Commission.
The registration of charities. Charities do not have to register if their gross income does not exceed £5,000 pa although they can choose to do so if they fall below this new threshold.
New rules with regard to changing the purposes for which charitable property is held, by the Charity Commission or the courts, within specified constraints.
Raising the threshold for auditing unincorporated charities accounts from £250,000 to £500,000 pa gross income (£100,000 pa gross income if the aggregate value of the charity’s assets exceeds £2.8m). Charities with gross annual income between £10,000 and £500,000 will be subject to the requirement to have their accounts independently examined and there are new requirements with regard to the qualifications of the independent examiner where the charity’s gross income exceeds £250,000.
Charitable companies with gross incomes of £90,000 but not more than £500,000 and with assets of not more than £2.8 million would have to have a reporting accountant’s report as opposed to an audit.
Amending the rules in relation to amending the Memorandum and Articles for charities, setting out a clearer list of alterations which require Charity Commission consent.
Relaxing the provisions for the payment of charity trustees over and above those provided to the charity in their capacity as trustees.
A relaxation of the rules in relation to the expenditure of capital.
New provisions in relation to mergers.
Enabling the Charity Commission as well as the courts to grant relief to a trustee.
A new unified system for the licensing of public charitable collections.
Setting up of a specific legal structure for charities: the ‘Charitable Incorporated Organisation’ along with provisions for conversion. There is more on this below.
The impact of the Companies Act 2006
Like the Charities Act the Companies Act received Royal Assent on 8 November 2006 which will introduce a number of changes to the existing company legislation including the revision to the memorandum of association. Specifically the act abolishes the objects clause in the memorandum. A company’s objects will now be unrestricted unless any restrictions are specifically set out in articles of association.
Existing companies will not have to change their objects as the act will treat the existing objects clause in the memorandum as provisions in the articles. However, for any new company there will no longer be a requirement for objects to be stated in the memorandum.
Charities will be affected because many are currently set up as companies limited by guarantee. The advantages of being set up like this are that the charity has its own legal entity and is able to enter into contracts in its own right. Also the liability to trustees is not as great because any claims would be made against the company and, finally, third parties often prefer dealing with companies.
Again much like the Charities Act the provisions of the Companies Act will not be implemented immediately. It is envisaged that that the government will consult on detailed implementation plans in February 2007 with all parts of the act commenced by October 2008.
Charitable Incorporated Organisations (CIOs)
A charity set up as a company will fall under the requirements of both charity and company law. Although it can be advantageous for a charity to be set up as a company, as company law was designed primarily for commercial organisations, it may not always be suitable for charities.
The Charities Act will introduce a new specific legal structure for charities: the Charitable Incorporated Organisation (CIO). This is designed specifically for charities. It will be available to both new and existing charities. The new structure will allow charities and their trustees to gain the benefits of limited liability and separate legal identity outside the normal regulated company law framework. There will no longer be the burden of dual regulation to Companies House and the Charity Commission, as regulation will be by the Charity Commission alone.
We understand that the provisions relating to Charitable Incorporated Organisations are unlikely to be implemented until 2008 as there are a number of issues that need addressing. Specifically new regulations will need to be drafted and consulted upon before implementation and we have not yet had sight of these.
Please note this article states the position as at 28 February 2007. For more information, please email Mark Lewis or telephone him on 01926 880700.
