An introduction to Charity Law 1 December 2016

An introduction to Charity Law 1 December 2016 Pippa Garland Molly Carew-Jones

An introduction to Charity Law What is a charity? Activities charities need to be particularly careful about Public benefit Duties of trustees Comparison of different legal forms for charities The role of the Charity Commission

Charitable status What is an English/Welsh charity? • An organisation established for purposes which are regarded as exclusively charitable under the law of England Wales. • Public benefit • Not for profit

Charity regulators England Wales Charity Commission for England Wales Scotland Office of the Scottish Charity Regulator “OSCR” Northern Ireland Charity Commission for Northern Ireland “CCNI”

Charitable status: Features Registration with the Charity Commission Regulation by by the Regulation Charity Commission Restrictions on on Restrictions trustee benefits trustee Tax advantages Restrictions on on trading, Restrictions campaigning etc. campaigning What are the main features of charitable status? Activities must fall within objects Activities (includes recipients of of funding) (includes Fiduciary duties for the duties trustees

Charitable status: Advantages • No tax on primary purpose income • Corporate and individual gift aid • Rate relief, SDLT relief, relief from VAT on office space • Grant funding • Public perception

Charitable status: Disadvantages • Charity Commission registration/regulation • Fiduciary duties for trustees • Restrictions on trustee benefits • Other restrictions: – Trading – Fundraising – Making grants overseas – Campaigning and political activity

Charitable purposes: Section 3(1) Charities Act 2011 1. Prevention or relief of poverty 2. Education 3. Religion, now includes: – A religion which involves belief in more than one god – A religion which does not involve belief in a god 4. Health or the saving of lives 5. Citizenship or community development 6. Arts, culture, heritage or science

Charitable purposes: Section 3(1) Charities Act 2011 7. Amateur sport 8. Human rights, conflict resolution or reconciliation, the promotion of religious or racial harmony or equality and diversity 9. Environmental protection or improvement 10. Relief of need: youth, age, ill-health, disability, financial hardship, other disadvantage 11. Animal welfare 12. The promotion of the efficiency of the armed forces of the Crown or the efficiency of the police, fire and rescue services or ambulance services 13. Other beneficial purposes

Public benefit • “A purpose… must be for the public benefit if it is to be a charitable purpose” • Meaning of “public benefit” not defined

Public benefit implications 1. Trustees’ duty to apply guidance – “trustees must have regard to the CC guidance”. Trustees should be: • Aware of the guidance • In making a decision where it is relevant, take it into account • And if they decide to depart from it, they should have good reasons 2. Annual report to include statement of public benefit, explaining significant activities undertaken to achieve public benefit

The two aspects of public benefit Aspect 1 – Benefit Aspect • A purpose must be beneficial – The benefits must be clearly identifiable – The benefits must be capable of being proved if necessary – Not based on personal opinion – Any detriment or harm that results from the purpose must not outweigh the benefit

The two aspects of public benefit Aspect 2 Public Aspect • Benefit must be to the public or section of the public: – “A charitable purpose can benefit a section of the public, but the section must be appropriate (or sufficient) in relation to the specific purpose. ” – People in poverty must not be excluded, eg. independent schools working with state schools – Any private benefit must be incidental Private benefit – Benefit to an individual or an organisation that is not a beneficiary – Permitted but must be necessary, incidental and reasonable in amount

How to approach the public benefit test 1. Read the Charity Commission guidance PB 1, 2 and 3 2. Understand the charitable objects 3. Ensure all activities relate to charitable objects 4. Review all publicity material – esp. website (Charity Commission scrutiny) 5. Ensure trustees’ decisions are appropriately authorised and minutes

Charity Commission as regulator • Wide range of statutory powers • Power to launch inquiries • Power to appoint and remove trustees • Power to appoint an interim manager • Power to freeze assets of the charity Contacting the Charity Commission Telephone (9 am to midday, Monday to Friday, except national holidays) 0300 066 9197 Email fcemailteam@charitycommission. gsi. gov. uk

Charities (Protection and Social Investment) Act 2016 • Received Royal Assent on 16 March 2016. • Various provisions came into force in July, October and November of 2016 • Power to give official warnings • New disqualification criteria, including unspent convictions for various offences, including terrorism offences, money laundering misconduct in public office • Power to give disqualification orders • Discretionary power for the Charity Commission to disqualify people from trusteeship “any other conduct of that person that appears to the Commission to be damaging or likely to be damaging to public trust and confidence in charities generally or particular charities or classes of charity” • Power to direct winding up

Charity Commission guidance • “Essential Trustee” – Key piece of guidance – Recently revamped – Charity Commission encourages all trustees to read it • “Must” and “should” – “Must” identifies legal requirements and regulatory requirements – “Should” identifies good practice • Change to Commission approach – “Should” is not an optional extra – Commission wants to know if good practice has not been followed, why not … – Trustees must be able to explain and justify • Operational guidance http: //ogs. charitycommission. gov. uk/

Setting up a new charity Charitable Company Limited by Guarantee (CCLG) Charitable Incorporated Organisation (CIO) Constitution Company incorporation (IN 01 at Companies House) Application to the Charity Commission (over £ 5000 income) Application to HMRC Unincorporated association Application to HMRC Charity registration https: //apps. charitycommission. gov. uk/outreach/Registration. Landing. ofml Charity Register https: //www. gov. uk/find-charity-information Companies House register https: //beta. companieshouse. gov. uk/ Model governing documents https: //www. gov. uk/government/publications/setting-up-a-charitymodel-governing-documentsc

Registration with HMRC • Ch. A 1 form • Fit and proper person test • Applies to all “managers” • Anyone having general control and management over running the charity/application of its assets • HMRC says “managers, not just trustees”

HMRC: Fit and proper persons • Nominate an authorised official and between 2 and 4 other officials • Notify HMRC when changed • Assumption that F&P • Use declaration • What if cease to be fit and proper? • Managers to read HMRC guidance • Form Ch. A 1 for new charities

Different legal forms Unincorporated forms: • Trusts • Unincorporated Associations Incorporated forms: • Companies Limited by Guarantee (CLG) • Charitable Incorporated Organisations (CIO) • Community Benefit Societies (CBS)

Charitable trusts and unincorporated associations Trusts • Trustees • Trust Deed • Unincorporated – no limited liability or legal personality of its own • Examples: small organisations, no membership, grant-making bodies, etc. Unincorporated associations • Executive or Management Committee • Unincorporated – no limited liability or legal personality of its own • Constitution or Rules • Examples: clubs, small organisations, local societies

Companies Limited by Guarantee • Separate corporate legal entity • Directors (Trustees) and members • Regulated by Companies House • Articles of Association

Charitable Incorporated Organisations (CIOs) • Legal form only for charities • CIOs give charities benefits of incorporation (limited liability and legal personality) with a single regulator – Charity Commission • Downsides? • Ability to convert from charitable company to CIO – no date yet

Incorporation – why do it? • Legal personality • Limitation of risk – major contracts, employees, risky work (eg. with children) • Clear ownership structure/governance • Accountability/disclosure • Can enter into contracts, own or lease property and employ staff in its own name

How to incorporate an unincorporated charity Choose incorporated form Incorporate/ prepare governing document Apply to the Charity Commission Transfer assets and liabilities

Who is in charge of a charity? Trustees Committees Chief Executive Employees / volunteers

Trustees’ duties Six main responsibilities 1. Ensure compliance 2. Accept responsibility 3. Act reasonably and prudently 4. Safeguard the charity’s assets 5. Act collectively 6. Act in the best interests of the charity and avoid conflicts of interest http: //www. bwbllp. com/knowledge/2013/08/12/duties-of -charity-trustees/

Compliance • Assets must be used only for the objects/purposes of the charity • Charity must be run in accordance with its Articles of Association, charity law and all of the relevant laws and regulations

Prudence and Care • • Use charity assets wisely and in pursuit of charitable purposes Avoid undue risk Borrowing and investing – special care Overall duty to “exercise such skill and care as is reasonable in the circumstances” – Higher duty if special expertise or paid

Acting collectively • The majority binds the responsibility • Trustees may have skills in certain areas but all responsible • The Chair is “the first among equals” – Very few circumstances in which the Chair will have power to act alone, unless authorised to do so by the rest of the board • The Charity Commission has demonstrated that it will investigate allegations that one person is dominant in a charity

Conflict of interest management Identify conflicts of interest / conflicts of loyalty Consider a register of conflicts of interest At board meetings • Declarations • Follow process set out in governing document • Record in minutes how conflicts dealt with

Trustees’ liability • Breach of trust or breach of duty e. g. spending charity funds “outside” the objects/purposes – Very rare for trustee to be held guilty of breach of trust where acted in good faith – Can take out Trustee Indemnity Insurance • Criminal sanctions e. g. under Health & Safety, Money Laundering • Generally no liability to third parties • (Rarely) personal liability under company law for trading while insolvent

Trustees’ liability: Scargill case “It would be wrong to require unrealistically high standards of legal skill, financial analysis, or detailed factual knowledge, from charitable trustees. The court should, in principle, not be anxious to find fault with charitable trustees who, while doing their best, make honest, even stupid, mistakes. ” Must be considered in light of recent media and political scrutiny of trustees’ behaviour

Activities to watch out for Trading Fundraising (including using supporters’ data) Granting funds overseas Granting funds to non-charities Campaigning and political activity

Trading Is this primary purpose trading? Does the charity have power to carry out the trade? Is this taxable trading? Should the charity be using a trading subsidiary?

Primary purpose trading • The trade is exercised in the course of the actual carrying out of a primary purpose of the charity – e. g. a charity with an object “to advance education” selling educational material • If trading activity is carried out mainly by beneficiaries of the charity and profits are used for charity’s primary purpose

Non-primary purpose trading • Common examples – Fundraising events – The sale of Christmas cards – The sale of other items not linked to the charity’s primary purposes e. g. t-shirts – Corporate fundraising (trade in the charity’s name and logo or providing advertising services) • Do the charity’s Articles allow the activity?

Small scale trading exemption • The total turnover from all of the charity’s non-exempt trading activity must not exceed the annual turnover limit • The annual turnover limit is – £ 5, 000 or – If the annual turnover is more than £ 5, 000, 25% of the charity’s total incoming resources up to a maximum of £ 50, 000 • Exceeding these limits – Corporation tax liability – Breach of trustees’ duties

Trading subsidiary • Company limited by shares all of which are owned by the charity • The charity funds the trading subsidiary by loan, share purchase or grant • The trading subsidiary carries out the trading activity • The profits are paid to the parent charity under gift aid • The trading subsidiary has no profits to tax

Trading subsidiary Charity Control Profit Trading Subsidiary

Trading subsidiary Charity Non-primary purpose and/or high risk Trading Subsidiary Primary purpose

Charities and Fundraising Commercial participators Professional fundraisers New Fundraising Regulator

What is a Commercial Participator? Any person who: a) carries on for a gain a business other than a fund-raising business, but b) in the course of that business, engages in any promotional venture in the course of which it is represented that charitable contributions are to be given to or applied for the benefit of a charitable institution. Exception: charity’s trading subsidiary

Commercial participator implications What are the consequences of being a • commercial Need a writtenparticipator? agreement with the charity • Commercial participator must make a statement each time it makes a solicitation • Charities (Protection and Social Investment) Bill – Agreement must include provision for protection of people in vulnerable circumstances

Commercial participator statement examples “ 25% of the purchase price will be donated to TNC UK Foundation. ” “For each item sold, £ 100 will be donated to TNC UK Foundation. ” “Company A will donate 25% of profits from this promotional venture to TNC UK Foundation. This is expected to be at least £. ”

Relationships with corporate sponsors: Tax • Provision of charity’s name and logo for a fee is both: – Non-primary purpose trading; and – A VAT taxable supply • Provision of advertising services is both: – Non-primary purpose trading; and – A VAT taxable supply

Professional fundraisers Any person who is: (a) any person (apart from a charitable institution) who carries on a fundraising business; or (b) any other person…who for reward solicits money or other property for the benefit of a charitable institution, if he does so otherwise than in the course of any fundraising venture undertaken by a person falling within paragraph (a) above. ”

Professional fundraiser implications What are the consequences of being a • commercial Need a writtenparticipator? agreement with the charity • Professional fundraiser must make a statement each time it makes a solicitation – different statement from commercial participator – agreement must include provision for protection of people in vulnerable circumstances

Granting funds overseas • Charity Commission and HMRC guidance • HMRC acting as a “quasi regulator” – Trustees must take such steps as HMRC considers reasonable to ensure that the payment will be applied for charitable purposes – The consequence of HMRC deciding that a charity’s trustees have not taken reasonable steps to ensure that a payment will be applied for charitable purposes could be that the payment will be taxable as non-charitable • Grant policy • Grant terms and conditions

Granting funds to non-charities • Due diligence in to grant recipient particularly important • Must ensure that funds are used in a way that furthers grantor’s purposes • Robust terms and conditions • New draft Charity Commission guidance published in February 2016

Grants of funds overseas • “To meet their legal duty as trustees”, trustees must: – carry out appropriate research in relation to the overseas body; – follow up with monitoring and evaluation; and – avoid or minimise risk to the charity’s finances. • Trustees must also be able to: – describe the steps they take; – explain how those steps ensure charitable application of funds; – demonstrate that those steps were reasonable; and – produce evidence that the steps were, in fact, taken.

How much campaigning can a charity do? Type 1 Non-Political Campaigning Awareness Raising = 100% of resources. Type 2 Political Campaigning Changing Law or Policy = CC 9 guidance (March 2008): political campaigning cannot be the sole and continuing activity. Type 3 Party Political And Electoral Campaigning Party Political/ Electoral 199999/0119 = Including supporting a party, a candidate or groups of candidates = prohibited.

Pippa Garland Associate Charity & Social Enterprise team p. garland@bwbllp. com / 020 7551 7779 Molly Carew-Jones Solicitor Charity & Social Enterprise team m. carew-jones@bwbllp. com / 020 7551 7677