UK: Charity Bites: The Scotland Bill

Last Updated: 31 May 2011
Article by Kirstie Penman

The Scotland Bill was published by Scottish Secretary Michael Moore MP on St Andrew's Day, with the general intent of taking forward the recommendations of the Commission on Scottish Devolution, led by Kenneth Calman ("the Calman Commission"). Overall, the Bill represents a major transfer of new powers to the Scottish Parliament across a variety of areas - including, for example, some aspects of taxation, drink-driving laws, national speed limits and the control of airguns.

The Calman Commission's report also included two recommendations on charity regulation. However, the UK Government has now announced that these recommendations will not be implemented; so what was the reasoning behind the recommendations in the first place, why are they not being put into practice, and what does the UK Government's decision mean for Scottish charities and voluntary organisations now?

The recommendations

The Calman Commission's recommendations on charity legislation were as follows:-
1 That there should be a single UK-wide definition of 'charity' and of 'charitable purposes', to be defined by the UK Parliament;

2 That a charity registered in one part of the UK ought to be able to operate in any other part of the UK without being subject to separate registration, reporting and accounting systems.

Rationale and backlash

These proposals represented an attempt to tackle the confusion caused by separate registration and reporting mechanisms in different parts of the UK, especially for UK-wide charities, and the resulting legal issues. For example, the interpretation which OSCR gave to a particular charitable purpose under Scottish charity legislation might not be adopted by HMRC for tax purposes - and vice versa.

As devolution expert Alan Trench stated in his blog on the subject:

"For charities, the key problem is the fact that the legal status and regulation of charities and their taxation are handled by separate bodies, and that HM Revenue & Customs has shown a limited grasp of Scottish law... - the problem isn't so much who makes charity law but how well HMRC understand that Scottish law is of equal status to that of England and Wales, and seek to ensure that tax law takes account of both legal systems' conceptions of 'charity'."

The Finance Act 2010 has in fact significantly strengthened the role of English charity law in relation to Scottish charities, and eliminated the principle of "equal status" which Alan Trench was arguing for - by stating unambiguously the position which HMRC Charities had adopted as a matter of practice prior to the Finance Act 2010 coming into force, i.e. that "charitable purpose" for tax purposes was to be interpreted in accordance with the English charity legislation.

At a practical level - and bearing in mind that many of the charitable purposes are phrased in quite broad terms - the views of HMRC Charities and the Charities Commission on where the boundaries lie in relation to particular charitable purposes are now much more important than those of OSCR. To take one example, if OSCR were to set the boundaries more widely than the Charity Commission in relation to eg the "promotion of community development", and a Scottish charity were to incur significant expenditure in delivering a project which made use of that additional flexibility, there would be a significant risk that HMRC Charities would impose a tax charge on the basis that the expenditure did not directly further a charitable purpose under the (English) Charities Act 2006. As a matter of practice, there have been few instances to date where OSCR and HMRC Charities have taken a different view in this kind of way - but nevertheless the potential for problems of this nature is evident.

The Scottish Council for Voluntary Organisations expressed concern at the Commission's proposals, describing them as 'a muddle to fix a muddle'. They went on to state that:

"The Charities and Trustee Investment (Scotland) Act 2005 is based on extensive consultation with the public and the voluntary sector, meaning that we have a system which reflects the Scottish public's understanding of charity. For example, the Act has a stronger definition of public benefit than the law in England and Wales. SCVO is concerned that if the Commission's recommendations were to be implemented in their current form, the Scottish charity brand would be significantly weakened."

The SCVO expressed their support for a full parliamentary review of Scotland's existing charity law to deal with the issues highlighted by the Calman Commission, and - going further - to examine in greater detail how well existing legislation is working in Scotland, and within the context of the UK as a whole. The UK Government appears to agree.

In the accompanying paper for the Bill, the Government expressed its intention to review the operation of the (English) Charities Act 2006 in the near future:

"This will be a review of the whole legislation, and we will be asking charities from across all parts of the UK to take part in this process to ensure that they can go about their vital business without unnecessary interference.

"The UK Government will also engage with the Scottish Government to ensure that the operation of charities legislation in England and Wales and in Scotland is consistent in its approach. In undertaking this review, the Government will ensure that the Commission's recommendations are taken into account.

"However, the Government does not believe that it is right to take a piecemeal approach to amending charities legislation, and so it will not be taking forward the specific recommendations the Commission made on the operation of charities at this time. It will instead take forward any change, with the consent of the Scottish Parliament where necessary, following the review."

What now?

The issues raised by the Calman Commission remain unresolved at the moment; however, many of those involved in Scottish charities and voluntary organisations will be breathing a sigh of relief that regulation will not be handed back to UK control, as proposed. As stated by the SCVO, such a move would risk "much of the robust and well-developed Scottish charity law". Having said that, the value of having a Scottish charity regulator in the form of OSCR to set the boundaries of charitable activity specifically by reference to the Scottish context will remain open to question for so long as HMRC Charities applies English charity law in determining what is or is not a "charitable purpose" for the purposes of tax legislation.

Reform is clearly still necessary to tackle the current problems, but the consensus is that this needs to done in partnership between the Scottish and UK parliaments, building on existing carefully tailored systems, and following a detailed review of current legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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