UK: Charity Bites: Introducing Scottish Charitable Incorporated Organisations

Last Updated: 25 May 2011
Article by Stephen Phillips

Background - what is an SCIO, and why is it needed?

Scottish charities can be formed using a variety of legal structures, but those which carry on operations themselves (rather than providing funding for other charities) generally fall into two categories - either unincorporated organisations, or companies limited by guarantee.  However, whilst each type of legal entity delivers its own distinct benefits, it is fair to say that each of them also has its own drawbacks.  

Unincorporated organisations tend to be simpler to set up and run, and have no formal registration requirements; however, for most legal purposes they are not recognised as legal entities in their own right and do not offer members of their management committees the benefit of limited liability.  This can raise issues in entering into property leases and major contracts - but the major problem arises in relation to the risk of personal liability for management committee members, and that can be  particularly problematic where they are faced with major pension deficits. Also, as unincorporated associations are seen as a more informal structure, this can be unattractive to potential funders, partners and commercial lenders.

Companies limited by guarantee offer the protection of limited liability and the advantage of a more formal, stable structure; but there are significant statutory obligations to comply with, with the need to meet the requirements of Companies House as well as the Office of the Scottish Charity Regulator (OSCR) - in relation to initial registration and then on an ongoing basis.  This can present quite a heavy burden, particularly for smaller organisations, in terms of set-up costs and ongoing administration.

The plans to develop an alternative legal entity to address these issues date back to ideas developed in England and Wales round what was referred to as a "Charitable Incorporated Organisation (CIO)".  The Scottish Charity Law Review Commission ("the McFadden Commission") took up these ideas, and recommended that a similar model should be made available to Scottish charities. The draft Charities and Trustee Investment (Scotland) Bill included provisions to create the Scottish Charitable Incorporated Organisation (SCIO).  In the course of the consultations on the draft Bill, it was evident that there was strong support for a tailor-made corporate body for charities in Scotland that was as clear and straightforward as possible. I served on an expert panel which fed in to the consultation process; and indeed I was commissioned by the Scottish Government to prepare template constitutions for the SCIO as a point of reference in relation to the consultation and also to help guide the detail of the new legislation.

In the case of both the CIO and the SCIO, these models represent entirely new legal forms, which will allow charities to form themselves into a corporate body (with the benefit of limited liability) without having to become companies.

It was always anticipated that the introduction of SCIOs would be held back until the main elements of the regulatory framework for Scottish charities under the 2005 Act had bedded down. In  2009, the Scottish Government set up a Working Group - a panel which included stakeholders from the charity sector, together with professional advisors with expertise in charity law, finance and governance (including myself) - to guide the Scottish Government on the best means to introduce the SCIO framework. A significant amount of work was carried out by the Working Group in exploring where the new entity would best sit, in terms of the extent of regulation - balancing the need to ensure that the model was sufficiently simple to work with so that it remained attractive even to relatively small charities, with the requirement to have a framework that was sufficiently robust to maintain confidence among commercial lenders and major grant funders.

Following a number of consultation exercises to test the proposals developed through the Working Group, the new regulations are now about to complete the parliamentary process. It is expected that this new legal form will be available for use (for new charities, or for existing charities converting from an unincorporated association model) from the beginning of April this year.  

We are confident that the SCIO will become the legal form of choice for the vast majority of new charities.  

Key advantages

  • The structure will provide an organisation with a clearly defined legal identity and offer limited liability for members - thereby addressing the primary concerns currently facing unincorporated associations in the charity sector.
  • The formation of a new charity as a corporate body will involve a "one-stop shop" process, handled by OSCR - as compared with the current process where procedures need to be followed both with OSCR and another regulator (Companies House for a company; Financial Services Agency for an industrial and provident society) to form a corporate body with charitable status.
  • The SCIO represents an entirely new form of legal incorporation, designed solely for charities and regulated only by OSCR, with no involvement from Companies House - thereby reducing the burden of administration.  
  • As SCIOs have been designed to be simpler and easier to use than currently available models, administration will significantly reduce; for instance, there will be no requirement to notify a regulator about appointments or resignations of board members.
  • The law relating to SCIOs is self-contained and very manageable - unlike company law, where the sheer volume of legislation and case law can represent a significant concern for charitable companies
  • SCIOs will be able to merge with one another via a very straightforward process, without the need for transfers of individual leases or contracts.

Further points to consider

  • SCIOs will only be available to organisations that are able to access charitable status;
  • Board members of a SCIO will have the usual statutory duties of charity trustees.
  • If an SCIO has its charitable status revoked, it stops being a SCIO - unlike a charitable company limited by guarantee, which would still exist as separate legal entity even if it lost its charitable status.  This has raised some technical concerns because it could potentially have implications for the SCIO's assets, but we consider that this is very unlikely to cause problems at a practical level.
  • Unlike a company limited by guarantee, a SCIO will be unable to grant a floating charge in support of debts and other obligations; while that could in theory make a lender less inclined to consider a loan to a SCIO as compared with a company limited by guarantee, there is nothing to prevent a SCIO granting a fixed security (e.g. a standard security over land/buildings) - and as a matter of practice it is unlikely that the inability to grant a floating charge will cause significant concern
  • While the SCIO is likely to be widely recognised within the third sector, it will be some years before banks, landlords and even public authorities gain an understanding of what an SCIO is, and the similarities and differences between an SCIO and a company limited by guarantee. To take one practical example, banks will need to prepare new forms suitable for SCIOs (e.g. for opening new bank accounts), and this may take some time to settle down.

Summary

We believe that the SCIO model will be a very attractive option for a high proportion of new Scottish charities - and, indeed, it is likely that over time a significant number of existing charities that are currently operating as companies limited by guarantee will want to convert to SCIOs. As such, we anticipate a high level of interest in the SCIO model from new and existing clients. I have been closely involved in the development of the model through the SCIO Working Party and am currently engaging directly with OSCR in relation to the details of the incorporation procedures.  Burness is accordingly ideally placed to take clients through the new process, and we can therefore look ahead to an exciting period as the new model gains wider recognition.

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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