UK: Private Action, Public Benefit

Last Updated: 31 January 2003

The Cabinet Office’s Strategy Unit report Private Action, Public Benefit was published on 25 September 2002 and contains wide ranging proposals for change to the legal and regulatory framework of charities and the wider not-for-profit sector.

The report was based on extensive debate within government and the voluntary sector and was open to public consultation until the end of 2002. The stated aims of the review’s proposals are to:

  • modernise charity law and status to provide greater clarity and a stronger emphasis on the delivery of public benefit;
  • improve the range of available legal forms enabling organisations to be more effective and entrepreneurial;
  • develop greater accountability and transparency to build public trust and confidence; and
  • ensure independent, fair and proportionate regulation.

This Briefing outlines the main issues tackled in the report and summarises its key recommendations.

A proposed new definition of charity

  • the prevention and relief of poverty
  • the advancement of education
  • the advancement of religion
  • the advancement of health
  • social and community advancement
  • the advancement of culture, arts and heritage
  • the advancement of amateur sport
  • the promotion of human rights, conflict resolution and reconciliation
  • the advancement of environmental protection and improvement
  • other purposes beneficial to the community

Modernising charity law

Charitable status

In reviewing the current law of charitable status, which started with the preamble to the Charitable Uses Act 1601, the report criticises it as outdated, unclear and inadequate to deal with the range of organisations which are, or should be, charitable today. It is recommended that the traditional 4 ‘heads of charity’ – relief of poverty, advancement of education and religion and other purposes beneficial to the community – should be scrapped in favour of a new definition comprising 10 purposes of charity, together with an overriding initial test of charitable status requiring all charities to demonstrate a public benefit to their activities. The expanded list of purposes is intended to make the overall framework much clearer both for charities and for the public and to reflect more accurately the range of charitable activities operating in modern society.

In many respects, the proposed new definition of charity is indicative of the manner in which society has developed since the original ‘4 heads of charity’ were established. However, this is not intended to be an exhaustive list; the last category should retain sufficient flexibility to allow new purposes to become charitable as society’s understanding of what is beneficial to the community develops.

It is anticipated that, with this enhanced emphasis on public benefit, charities which charge large fees for their services, thereby excluding a substantial part of the population, will need to demonstrate how their activities have a public character.

Trading by charities

With a view to encouraging a commercial approach and a reduction in administration and costs, the report recommends that charities be entitled to the same tax reliefs for trading in their own right (subject to a statutory duty of care along the lines of that imposed in the context of investment by the Trustee Act 2000), without the need to establish a separate trading subsidiary.

Whilst for some, usually smaller charities, this will be a welcome freedom, a separate limited liability vehicle for trading activities is

likely to continue to be used as, in the Charity Commission’s view in their response to the report "many charities will prefer to retain the safeguards and the transparency in financial relationships that come from operating through trading subsidiaries".

Campaigning

Rather than propose new legislation in this area, the report recommends that Charity Commission guidelines are revised to be less cautionary and that charity trustees are encouraged to carry on their advocacy and campaigning roles to the fullest extent within the remit of the current law.

Opportunities for change and cutting red tape

The report makes several recommendations intended to enable charities to be more flexible in reorganising their operations and give the regulator a greater ability to facilitate and support any developments or changes. These include the facilitation of mergers (possibly with a dedicated unit within the Charity Commission) and a revision of the criteria allowing trustees to spend endowment capital.

New legal forms

The need for new corporate legal forms, one of which should be designed specifically for charities has been recognised for some time and the report recommends:

  • The establishment of a Community Interest Company regulated by UK/EU company law, the objects of which are in the public and community interest but without the tax advantages of a charity. The new form is intended to improve access to finance, create a strong new brand, be legally protected from demutualisation and preserve assets and profits solely for social purposes
  • The overhaul of the structure of the Industrial & Provident Society into one of two distinct forms – societies for the benefit of the community and bona fide co-operatives
  • The creation of a legal form only available to charities – a Charitable Incorporated Organisation which ultimately, once its form has been finalised, will eliminate the need for dual regulation by the Charity Commission and Companies House.

Public trust and confidence

The report recognises that it is crucially important that public trust and confidence in charities and the not-for-profit sector be maintained by giving the public the tools to measure and compare their effectiveness and efficiency.

Various areas are identified as causing public concern and the following recommendations are made as to how these can be addressed:

  • Increase the level of transparency and provide more relevant and accessible information to meet the public’s needs.

It is recognised as too onerous to impose an additional reporting burden on all such organisations but the report recommends that the largest charities (with total annual income of over £1m) be required to submit to the Charity Commission a "Standard Information Form" detailing a range of qualitative and quantative information about the charity. This data would include reference to fundraising activities, campaigning, trading and investment strategy (including policy on ethical investment) and information on reserves. It would encourage benchmarking, social audit and other quality tools through sector-led initiatives with Government support.

  • Improve regulation of fundraising. Fundraising, as the public face of the sector, can strongly influence public attitudes and it is therefore recommended, in order to dispel the public’s generally negative view of certain current fundraising techniques, to introduce:
  • a simplified licensing system for public collections
  • an independent body to develop self-regulation and promote good practice
  • Provide Government support to the sector for work on performance improvement (defined as the extent to which an organisation meets its aims) and encouragement for organisations in the sector to benchmark their performance against their peers
  • Take action at grass roots level to address the difficulty of recruiting people with the necessary skills, knowledge and expertise to make good charity trustees given the risk, in some cases, of personal liability and limited prospect of remuneration. The report recommends the raising of awareness in the teaching of the National Curriculum. Although payment of trustees is not proposed across the board, it is recommended that:
  • a trustee body should have a statutory power to pay an individual trustee to provide a service to a charity (outside their duties as a trustee); and
  • charity trustees should be able to apply to the Charity Commission as well as the Court for relief from personal liability.

Regulation

Charity Commission – changes

Given the radical changes proposed in the report, it is not surprising that underpinning these will be modernisation of the sector’s regulator, the Charity Commission. It is recognised that there is concern within the sector over a lack of statutory clarity about the role of the Commission and the difficulties of accountability. In order to preserve the Commission’s independence as a regulator, consolidate recent improvements and ensure accountability, it is also recommended that:

  • Clear statutory objectives be established against which the Commission can regularly report
  • Board meetings and AGMs be opened to the public
  • The Commission be given a new status as a statutory corporation called the Charity Regulation Authority
  • The number of commissioners be increased from 5 to 9
  • A new independent tribunal be established to enable trustees to challenge its decisions at reasonable cost. At the moment, the only right to appeal against a decision of the Commissioners is to the High Court
  • Certain changes be made to the registration procedure. The report looks at the Commission’s ‘gateway’ procedure for the registration of new charities where viability issues are considered at the same time as approving the charitable status of the applicant. Whilst the report sets out the rationale for the Commission’s approach, it recommends that it ‘should seek to separate the process of judging whether or not an applicant is a charity from that of assessing viability’ and recommends legislation to clarify the circumstances in which an ‘activities test’ can be used as an aid to interpreting purpose

The rules on minimum registration requirements are also under review and it is proposed that the current threshold for registration be revised for smaller charities so that the threshold for compulsory registration is raised to £10,000 with Inland Revenue recognition of charitable status replacing Charity Commission registration. Exempt and excepted charity status will be amended in a move intended to ensure that all organisations with charitable status be subject to the same accountability requirements. In order to move away from the anomalous position in which charitable regulation might be avoided, it is proposed that excepted charities (eg scouts and guides and armed forces groups) be required to register and that exempt charities (including universities and housing associations) formerly exempt on the basis that they were ‘adequately supervised by another regulator’ should be regulated by amendments to the rules governing their existing regulators to cover basic charity requirements

  • The current system of annual monitoring be simplified with a recommendation that the audit threshold be raised from £250,000 to £1million and that independent examination be required for charities with an annual income between £10,000 and £1million. To tie in with the report’s aim to encourage public trust and confidence, it is recommended that increased protection be given to auditors under the provisions of "whistleblower" legislation
  • The Commission’s powers be consolidated to investigate and check abuse by means of the undertaking of a rolling programme of reviews of performance of charities.

The way forward

Although the report has generally been received favourably (notably with strong support "in principle" from the Charity Commission), it remains to be seen when, if ever, the recommendations will be given a space in the government’s legislative calendar.

Now that the formal consultation period has ended, the intention is that the Home Office’s Community Unit will put together a timetable for implementation whether by way of legislation or changes in administrative policy.

It is widely hoped, given the need for change identified in the report and the momentum that has built up since its publication, that legislation can be introduced during 2003-04 so that the opportunity to introduce the greatest shake-up in charity law for the last few hundred years is not missed.

To view the Strategy Unit’s Report Private Action, Public Benefit, and also the background paper, Charitable Status, log on to the Cabinet Office’s website at: www.cabinet-office.gov.uk

To view the Treasury’s review, The Role of the Voluntary Sector in Public Service Delivery, log on to: www.hm-treasury.go.uk

To view the Charity Commission’s response to the report, log on to:
www.charitycommission.co.uk

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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