UK: Draft Charities Bill - Charities Act 2005 in the Making

Last Updated: 1 September 2004
Article by Oenone Wright and Antony Brougham

Originally published June 2004

Following our recent Newsflash with details of the Joint Committee that has been set up to scrutinise the Bill the draft Charities Bill was finally published on 27th May.

In this article we give a brief overview of the Bill (which is not intended to be exhaustive) and more detail on the new Charitable Incorporated Organisations as it is not possible to comment on every provision within the scope of one article.

The new Act will apply only in England and Wales and it will not be a consolidating Act. Earlier Acts, such as the 1992 and 1993 Charities Acts (as amended) will remain in force. The draft Bill follows closely the Government’s response to the Strategy Unit’s "Private Action, Public Benefit" proposals.

Overview of the draft Bill

New statutory definition of Charity

  • "Charity" is now defined by reference to a list of "charitable purposes". To be charitable, a purpose must BOTH fall within one of the 12 listed purposes AND be for the public benefit. All current areas of charity fall within these purposes, some of which have been extended.
  • To retain flexibility the 12th purpose is the catchall "other purposes beneficial to the community" and there will be no statutory definition of "public benefit", which means that this test can evolve over time.
  • No presumption of public benefit - the big change is that there is no presumption of public benefit in the case of charities set up for the relief of poverty or the advancement of religion or education. Such charities will now have to demonstrate that they do provide a public benefit. The exact checks to establish this are the subject of further consideration by the Charity Commission.

Registration

  • The threshold for compulsory registration is raised from £1,000 to £5,000 but voluntary registration will still be available. Current "excepted" charities with an income of £100,000 or more will have to register and no new excepted charities will be created.
  • Some current "exempt" charities will lose their exempt status and will therefore have to register. The rationale for this is that there is no suitable alternative regulator. Initially the threshold for registration of formerly "exempt" charities will be £100,000 annual income.
  • Where a currently registered charity falls below the new threshold of £5,000 it will remain on the Register unless it asks to be removed.
  • There will no longer be any necessity for a charity that falls below the threshold but has permanent

Greater flexibility for charities

  • The cy-près principle, which allows a change of purposes where the original purposes are no longer practicable, is extended so that social and economic circumstances can be considered as well as the original spirit of the gift.
  • Money raised on appeal where the purposes fail in the future will now be able to be applied cy-près unless the donor opted out by making a declaration at the time of the gift.
  • There are relaxations in publicity requirements relating to Charity Commission Schemes which should save time and cost.
  • There is an extension of the power of the Charity Commission to give advice and guidance so that any officer, employee or agent can seek guidance, not just charity trustees.
  • Audit requirements are being relaxed so that the threshold for professional audit of accounts will only be reached where income in the relevant financial year is £500,000 or more or, where the income is below this threshold but above £100,000, if the asset value exceeds £2.8m. In assessing the threshold it will no longer be necessary to take expenditure into account or to look at income in the previous two financial years.
  • The need for Charity Commission consent for changes to charitable companies’ Memoranda and Articles of Association is reduced.
  • There are relaxations on provisions relating to the remuneration of trustees so that trustees who provide a service to a charity (other than purely trustee services) will be able to be paid subject to certain safeguards.
  • The power to spend permanent endowment is extended where it will achieve a more effective means of fulfilling the charity’s purposes and, subject to certain safeguards, this power will extend to larger charities, not just those whose gross annual income is £1,000 or less.

Mergers

In order to facilitate mergers a Public Register of Mergers is being set up. Registration will be voluntary and will have the following important effects:

  • A gift to the transferor charity will take effect on or after the registered termination date of that charity as a gift to the transferee.
  • A declaration by deed by the trustees of the transferor charity made in contemplation of a merger will have the effect that all of its property is vested in the transferee without the need for any further documentation.

Fundraising

The Home Secretary will have power to introduce statutory regulation of fundraising if self regulation fails (the Buse Report on Self Regulation was published in January this year and consultation on that report closed in April).

Licensing for Public Collections

A new licensing system is being introduced which should ensure greater consistency and which will be operated by local authorities who will issue "Certificates of Fitness" for a maximum of 5 years at a time. Where a collection is conducted in a public place (which will include any area within a station, airport or shopping precinct or other similar public area) it will also be necessary to have a permit from the appropriate local authority.

There are relaxations of these provisions for local, short term collections and door-to-door collections of goods but notification to the relevant local authority will still be required before such collections take place.

Charity Commission

The Charity Commission will become a Government Department in its own right and there will be an independent Charity Appeal Tribunal to which appeal may be made against certain decisions of the Charity Commission.

New Legal Form – The Charitable Incorporated Organisation (CIO)

  • The new CIO is designed as an alternative to incorporation under the Companies Acts where a charity is to have its own legal personality. This will avoid the need to register with both the Charity Commission and Companies House and to provide Accounts and Returns to both.
  • The CIO will be a body corporate with a Constitution and a principal office in England or Wales and with one or more members. Members do not have to be liable to contribute to the assets of the CIO on a winding-up, although they may be so liable (and, in the case of a company limited by guarantee converting to a CIO, members will have to remain liable to at least the same extent as they were previously).
  • Basic provisions that must be contained in the Constitution are the CIO’s name, its purposes, the address of its principal office and whether or not the members are liable to contribute to the assets on a winding-up and (if they are) up to what amount.
  • Other provisions must also be contained in the Constitution regarding eligibility for membership and the method of application, the appointment of trustees (who will be responsible for the CIO’s general control and management) and any conditions of eligibility for trusteeship, and directions about the application of property of the CIO on its dissolution. There is no requirement for trustees to be members or vice versa.
  • While the basic structure of the CIO is included in the draft Bill detailed provisions will be dealt with in secondary legislation and the Government will review the need for other forms of incorporation for charities once CIOs have been in existence for 5 years.
  • There are provisions for the conversion of charitable companies and registered friendly societies to CIO status. Conversion will take place by special resolution or unanimous written resolution. If the Charity Commission accepts the application for conversion it will notify the relevant registrar who will then cancel the registration of the company or registered friendly society.
  • Provision is made for the amalgamation of CIOs (also by special resolution or unanimous written resolution) and, on registration of a new CIO as successor to the amalgamated CIOs, all property, rights and liabilities of each of the old CIOs will automatically become the property, rights and liabilities of the new CIO and the old CIOs will be dissolved.
  • There is provision for the transfer of a CIO’s undertaking to another CIO by way of special resolution or unanimous written resolution and, in such circumstances, the Charity Commission can require the CIO to give public notice of the relevant Resolution, which will not take effect until confirmed by the Charity Commission.
  • Provision is made regarding the winding-up, insolvency or dissolution of a CIO, the detail of which will be set out in secondary legislation.
  • Provision is made for the transfer of the property of an unincorporated charity to one or more CIOs.
  • CIOs will be deemed to have power to do anything which is calculated to further their purposes or ABC is conducive or is incidental to so doing, subject to anything to the contrary in the relevant Constitution.
  • Third parties dealing with a CIO who give full consideration in money or money’s worth are protected against any lack of constitutional capacity or excess of the trustees’ constitutional powers provided that they were not aware of such lack or excess and had dealt with the CIO in good faith. This extends to a person who acquires an interest in property.
  • Unlike the members of a charitable company limited by guarantee, the members of a CIO have a duty to act in good faith in a way most likely to further the purposes of the CIO.
  • The charity trustees of a CIO must exercise such care and skill as is reasonable in the circumstances and any special knowledge or experience they have will be taken into account. In the case of a charity trustee acting in the course of a business or profession any special knowledge or experience that it is reasonable to expect him to have will also be taken into account.
  • Charity trustees must disclose any material interest in any arrangement or transaction with the CIO before it is entered into to avoid conflicts of interest.
  • CIOs may, subject to Regulations still to be issued, decide on their own internal procedures provided that there is, at least, a requirement to hold a general meeting of the members.
  • The Constitution of a CIO can be amended by special resolution or by unanimous written resolution, subject to the requirement for Charity Commission prior consent in certain specified circumstances (similar to those for which a charitable company limited by guarantee would require consent). Where a Resolution is passed amending the Constitution of a CIO this must be sent to the Charity Commission within 15 days and, except in the case of a change of address (which takes effect immediately) it will not take effect until it has been registered by the Charity Commission.

The Charitable Incorporated Organisation is not to be confused with the new Community Interest Company, which is a new type of company designed for social enterprises that wish to use their profits and assets for the public good. Draft regulations relating to CICs have been prepared by the DTI and are not referred to in the draft Charities Bill.

© RadcliffesLeBrasseur

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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