Pothecary Witham Weld Solicitors

On the 8th of November 2006, the Charities Act 2006 (‘the Act’) received Royal Assent. The Act is divided into four parts, contains eighty sections and ten schedules. The First Commencement Order has now been issued (27th February 2007) and various sections of the Act have been put in place already.

It is envisaged that by early 2008, the commencement stage of the Act will have been completed but much will depend on consultation at the various stages of implementation and issues that might arise at the time. The Office of the Third Sector (responsible for the implementation of the Act) has issued a timetable for implementation, which can be obtained form www.cabinetoffice.gov.uk/third-sector.

To follow is a brief discussion of the main changes brought about by the Act.

The Act provides a statutory definition of ‘charity’. ‘Charity’ is now defined as any body or trust established for "charitable purposes only" (section 1(1). The Act introduces a further qualifier in that the ‘charity’ must also be for "the public benefit".

The Act lists thirteen charitable purposes:

• The prevention or relief of poverty 

• The advancement of education

• The advancement of religion

• The advancement of health

• The advancement of citizenship or community development

• The advancement of arts, culture, heritage or science

• The advancement of amateur sports

• 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 (this includes provision of accommodation or care)

• The advancement of animal welfare

• The promotion and efficacy of the armed forces of the Crown, or of the efficacy of the police, fire and rescue services or ambulance service

• Any other purpose (it is thought that this will allow for charitable purposes to be considered that have not been specifically detailed in the above list).

In the past there was a presumption that charities established for the relief of poverty, the advancement of education and the advancement of religion would be for the public benefit. This is no longer the case and all charities must demonstrate that they fulfil the public benefit requirement.

There is currently no statutory definition of public benefit and the new Act does not provide such a definition. It is thought that previous case law will be referred to in relation to this. The Act does, however, make provision for the Charity Commission to promote an understanding of public benefit. To this end the Charity Commission has issued its guidance on public benefit in draft form. This will be subjected to public consultation at the end of which the Commission will publish its findings.

This aspect of the Act has caused concern to some religious charities and those independent schools which have charitable status. While the issue is yet to be determined during the consultation process it is important to note that the Commission is likely to take into consideration the existing non statutory definition of public benefit and previous precedents. We will, of course, keep you informed as the issue is discussed further.

Previously, charities with an income of £1,000 or more, permanent endowment and/or use or occupation of land were required to register with the Commission. This has now changed and the income threshold has increased from £1,000 to £5,000. Also, just because a charity uses or has occupation of land or a permanent endowment, it will no longer be compelled to register.

Excepted charities: the exception from registration has been removed and these charities will have to register with the Commission. This requirement is not expected to come into force, across the board, until early 2008. However, during the transitional period, those charities with an income of more than £100,000 will have to register as soon as possible. Exempt charities: with a principal regulator will continue to be exempt from registration subject to their principal regulator ensuring that they comply with charity law. The principal regulator will be under a duty to ensure this.

Those exempt charities that do not have a principal regulator will be subject to regulation by the Charity Commission and must register with the Commission.

These provisions are expected to come into force in early 2008.

Those charities who wish to register voluntarily will still be able to do so. Those charities that do not meet the income threshold will not be removed from the register unless they choose to.

The role of the Charity Commission has been redefined with the introduction of the Act and the Commission now has clearly defined duties and responsibilities which set out its role as regulator of the sector. The Commission will have key objectives which it must fulfil and it must also produce an annual report updating users as to its progress. These provisions have been introduced in the First Commencement Order (27th February 2007). The details of the objectives are set out on the Charity Commission website but one of them includes the ‘Public Benefit Objective’ – discussed above.

The Act introduces a new tribunal which will hear appeals in relation to decisions made by the Commission. Schedule 4 of the Act outlines the decisions, directions or orders of the Commission which will be considered by the Tribunal and will include decisions regarding registration and removal. It will be possible to appeal the decisions of the Tribunal to the High Court and the Attorney General.

Customer complaints will be handled by the Commission’s current complaints procedure.

The Act has provided the Commission with expanded powers which mainly centre around inquires into a charity’s activities conducted by the Commission and include powers to remove individuals from acting, intervening in the charity (including in relation to the application of property) and seizing documents for inquiries. Some of these powers have been introduced in the First Commencement Order.

A number of amendments have been introduced by the Act which relate to the role of trustees or the office of trustee.

The Act includes provision for the payment of trustees (or persons connected to them) where they have provided goods or services. Payment can come in the form of cash and/or benefits in kind. However certain safeguards must be in place in order to prevent abuse. The safeguards include:

• Consultation with the Charity Commission

• Written agreements

• Reasonable (not excessive) remuneration

• If more than a minority of trustees (or persons connected to them) receive benefit - cannot proceed

• The trustees involved in receiving the benefit cannot take part in the decision making process

  It is expected that this part of the Act will come into force in early 2008.

If a trustee, auditor or independent examiner has made an honest and reasonable mistake in undertaking his or her duties, the Charity Commission has a new power to provide relief to such individuals from personal liability for breach of duty or trust. These provisions came into force under the First Commencement Order.

The Act includes provisions which allow the Charity Commission to provide a waiver for those trustees disqualified for more than five years from acting as a trustee because of misconduct or mismanagement. This will be the case unless there are special circumstances for not doing so. This part of the Act came into force under the First Commencement Order.

It is now possible for the trustees to purchase indemnity insurance using the charity’s funds even if the trust document makes no provision for the purchase of indemnity insurance. If the charity’s governing document expressly precludes such purchase it will not be possible to do so without the permission of the Charity Commission. This provision came into force under the First Commencement Order.

Previously, if a charity’s undertakings had changed substantially from its original objects, the trustees would have to apply, to the Commission for a scheme to amend the charity’s objects. The Act has provided greater flexibility in the provision of such schemes and gives the Charity Commission greater discretion in considering proposed schemes.

The requirement for advertising schemes has also been relaxed and this particular part of the Act came into force in the First Commencement Order.

Other provisions which are constitutional in nature include:

The Act has introduced provisions which make it easier for charitable companies to make amendments to their constitutions with obtaining the prior consent of the Charity Commission. Permission will still be required to make changes in certain cases, such as to the objects, clauses dealing with the disposal of property and in relation to directors and members obtaining benefit.

Smaller unincorporated charities will also be able to make certain amendments to their governing documents which they previously could not.

Smaller unincorporated charities will be able to spend permanent endowment (capital) without the consent of the Commission. However, if the gross income of the charity is greater than £1000 and the market value of the property is greater than £10,000 the charity will be required to consult with the Commission in relation to any disposals (the latter is likely to affect larger charities).

In the case of unincorporated and (it is thought) incorporated charities, trustees will be able to use the endowment property of separate/special charitable trusts for which the charity is responsible. This will be subject to similar safeguards described above.

The Act introduces a series of measures which will make it easier for charities undergoing a merger, including making it easier to transfer property on merger. It is also proposed that the Commission will keep and maintain a register of all new mergers. It is envisaged that this will assist in situations where a charity is left a legacy but cannot collect it as a consequence of a merger.

The CIO provides a new governing format in which a charity can present itself. The sole regulator will be the Charity Commission which will reduce the administrative burden associated with using a company format. The duty of care for officers of the CIO will be the same as that of trustees and the standard of care will be the same as under the Trustee Act 2000. However, it is not expected that the CIO will be made available in the immediate future.

The Act introduces a new legal requirement for parent charities to produce group accounts, where they have subsidiaries. It also introduces new protection for auditors and accountants who make reports to the Charity Commission (also known as ‘whistle blowing measures’).

The threshold for the audit and independent examination of accounts has changed and incorporated and unincorporated charities now have broadly similar thresholds.

Previously an unincorporated charity with a gross annual income and total expenditure of £10,000 or less would not be subject to external examination. It would have to be audited if the governing document required it or its annual income or total expenditure was greater than £250,000 in the year or in either of the two previous years. Independent examination would occur if the gross annual income or total expenditure was greater than £10,000 but not more than £250,000.

Under the Act an unincorporated charity will be audited if it is stipulated in its governing document or if it has a gross annual income of greater than £500,000 or an aggregate value of assets greater than £2.8 million and a gross annual income greater than £100,000.

If the charity’s income is below the audit threshold, but greater than £10,000 it will be independently examined. It should be noted that if the gross annual income is greater than £250,000 the independent examiner should have an accountancy qualification. If the annual income is below £10,000 or less there is no requirement for independent scrutiny.

In relation to charities incorporated as companies – an audit would be required if it was stated in the governing document; or the gross annual income was greater than £90,000 and gross assets exceeded £1.4 million; or if the gross income was greater than £250,000; or gross assets were £2.8 million.

An accountant’s report would be required if the gross annual income was greater than £90,000 but not more than £250,000 and the gross assets were below £1.4 million. If the gross annual income of the charity was £90,000 or less and the aggregate value of the assets was £2.8 million or less, the charity did not have to produce an audit or independent accountant’s report.

Under the Act, such charities will have to be audited if the gross annual income is greater than £500,000; or the aggregate value of assets is greater than £2.8 million; or it is required by the charity’s governing document. An accountant’s report will be required if the annual income is greater than £90,000 but not more than £500,000 and the aggregate value of assets is £2.8 million or less. External scrutiny will not be required if the gross annual income is less than £90,000 and the aggregate value of assets is £2.8 million or less.

The issue of fundraising has been debated for some time and the Act introduces a system of regulation for public charitable collections (this includes appeals for charitable, benevolent and philanthropic purposes which will affect non-charities undertaking such activities).

Under the proposals an organisation undertaking public collections will be required to hold a valid Public Collection Certificate (PCC) which will be issued by the Charity Commission.

If the collection is in a public place, the charity will also be required to obtain a permit from the local authority in whose area the collection is being undertaken.

There will be an exemption provided for short term collections and promoters will not require PCC’s or permits but they will have to notify the local authority of the details of the collection.

As there are a number of factors which need to be resolved in regard to the issuing of the PCC’s it is thought that it might be some time before this part of the Act is implemented.

The Act also tackles the statements made by fundraisers in relation to the amount of money they will receive and how much of the money will go towards the charitable cause.

The Act provides for reserve powers which will allow the government to intervene and bring in regulatory provisions in relation to fundraising in the event that self regulation fails.

The information provided in this handout is guidance only and is not in anyway meant to be the provision of an opinion or legal advice.