UK: Charities - A Briefing For Charitable Organisations, September 2008

Last Updated: 10 September 2008
Article by Stephen Drew

Under the Charities Act 2006, only organisations with aims 'charitable for public benefit' are accorded the charity label. In this edition of the newsletter, we discuss the definition of public benefit and how to meet the criteria.

THE PUBLIC BENEFIT TEST

Among the provisions detailed in the Charities Act 2006 is the requirement that the aims of all charities be for the public benefit.

On 1 April 2008, the Charities Act 2006 definition of a charity came into effect. The new definition introduces a wider range of purposes – 13 in all – which better reflect the diversity of charities that exist today and makes the public benefit test a legal requirement.

Prior to the introduction of the Charities Act 2006, there were only four charitable purposes.

  • The advancement of religion.

  • The advancement of education.

  • The relief of poverty.

  • Any other purposes beneficial to the community.

Those charities with aims falling under the first three purposes did not have to prove they existed for the public benefit. However, the Act has removed the presumption that the advancement of religion and education and the relief of poverty are automatically charitable. All charities, regardless of purpose, now need to prove that their aims are for the public benefit.

The 13 Charitable Purposes

  1. The prevention or relief of poverty.

  2. The advancement of education.

  3. The advancement of religion.

  4. The advancement of health or the saving of lives.

  5. The advancement of citizenship or community development.

  6. The advancement of the arts, culture, heritage or science.

  7. The advancement of amateur sport.

  8. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity.

  9. The advancement of environmental protection or improvement.

  10. The relief of those in need by reason of age, ill health, disability, financial hardship or other disadvantage.

  11. The advancement of animal welfare.

  12. The promotion of the efficiency of the armed forces of the Crown, the police, fire and rescue services or ambulance services.

  13. Other purposes currently recognised as charitable and any new charitable purposes similar to another charitable purpose.

Determining Public Benefit

There are two key principles to the public benefit test.

  1. There must be an identifiable benefit.

  2. The benefit must be to the public, or a section of the public.

Meeting The 'Benefit' Principle

There are three factors to consider when determining whether the 'benefit' principle has been met.

  1. It must be clear as to what the benefits are

    The benefits must be recognisable, but do not have to be measurable. For example, there are many charities that produce intangible benefits, such as the appreciation of a beautiful landscape or spiritual contemplation. But just because an organisation has a particular aim, it does not mean it provides the benefit usually associated with that charitable purpose. Benefit must be proven in every case. For example, medical research must be carried out in a controlled and scientifically rigorous way in order for a public benefit to arise.

  2. The benefits must be related to the aims

    All charities must act within their aims, and each aim must be shown to be for the public benefit. Some charities might carry out incidental activities that are for the public benefit but not related to their aims. For example, an amateur sport charity might hold a collection for disaster relief. This may be permitted as an incidental activity, but it would not count towards any public benefit assessment of the charity's aims.

  3. The benefits must be balanced against any harm or detriment

    'Benefit' means the overall net benefit to the public after any harmful effects of the charity's activities have been considered. For example, a charity using a minibus to transport disabled individuals might also harm the environment by producing carbon emissions. However, the positive benefits of transporting the disabled is generally seen to outweigh any possible negative impact on the environment.

Meeting The 'Public' Principle

There are four factors to consider when deciding whether an organisation's aims meet the 'public' principle of the public benefit test.

  1. The beneficiaries must be appropriate to the aims

    The question of who constitutes 'the public, or a section of the public' is based on an organisation's aims. For example, an organisation that provides a local village hall does so with the intention of benefiting the people living in that village.

  2. The opportunity to benefit must not be unreasonably restricted

    A narrow geographical restriction, for example, one street or a few houses, would be unreasonable. Sometimes, however, it is appropriate to restrict the benefit to a small class of people if those people have a particular charitable need, for example, a disability or disease. In such cases, it may be appropriate to restrict the benefit based on personal characteristics. Such restrictions – gender, race, religion – are acceptable only if they are appropriate to the charity's aims. In general, charities need to be outward looking and inclusive rather than inward looking and exclusive.

  3. People in poverty must not be excluded from the opportunity to benefit

    This is one of the factors that all fee-charging charities must consider carefully. It does not mean that people in poverty have to benefit, just that they must have the opportunity to benefit. Poverty is a relative term and will have different meanings depending on whether the charity carries out its work in the UK or in developing countries. There are ways in which fee-paying charities can allow people in poverty to benefit, for example, by awarding bursaries or allowing free or subsidised access to their facilities. This must represent a real opportunity for people in poverty and not just a token provision.

  4. Any private benefits must be incidental

    Private benefits are benefits received by a person or organisation who/that is not a legitimate beneficiary of the charity. For example, a charity might exist to regenerate a commercial area and businesses in that area would incidentally benefit from increased trade. Any private benefit must be incidental and must result from action intended to further the charity's aims.

Reporting Requirement

In addition to having to pass the public benefit test, charities will be required to report on the public benefit they provide from late March 2009 onwards. There is also a new statutory duty for trustees to "have regard to" the Charity Commission's guidance on public benefit.

The proposed changes are intended to build on the existing requirement for charities to explain their activities and achievements. Their annual report should clearly demonstrate that the charity's aims continue to be for the public benefit. The Charity Commission has not issued example guidance on this, but intends to publish examples of best practice in due course.

Passing The Test

What Do You Need To Do Now?

  1. Review your objectives. Does your charity have one objective or several?

  2. Work out what benefit(s) your charity provides in relation to each of your objectives.

  3. Establish who your beneficiaries are.

  4. Establish who your public is.

  5. Talk to your advisers about any concerns you may have. Maybe you need to revise your aims?

  6. Consider the reporting requirement at the beginning of the year in order to plan ahead.

  7. Ensure your annual report includes:

    • a review of significant activities undertaken, including how these are for the public benefit

    • details of your aims and objectives, and how these aims are for the public benefit

    • strategies adopted and activities undertaken in order to achieve these aims

    • details of your charity's achievements in the period.

MAKING A DIFFERENCE

A number of the rules introduced in the Charities Act 2006 have come into effect over the past year.

The Charities Act 2006 introduced a number of new laws, some of which enhance the role of the Charity Commission and others which protect trustees as individuals.

Payment Of Trustees

Since March 2008, with permission from the Charity Commission, charities have been allowed to pay trustees for providing goods and services as long as certain rules are followed.

  • Payment must be for services other than as a trustee.

  • Terms must be set out in a written agreement.

  • The arrangement must be in the best interests of the charity.

  • If more than one, the benefiting trustees must be a minority of the trustee board.

  • The benefiting trustee(s) must not be involved in decisions regarding the provision of these goods/services.

Trustee Liabilities

Since February 2007, trustees have not been required to ask the courts for liability assurance. The Charity Commission now has the power to relieve trustees from personal liability for breach of trust or duty, as long as they have acted honestly and reasonably. However, the commission will take any deliberate breaches of trust very seriously.

Trustee Indemnity Insurance

Charity Commission approval was previously required if a charity wished to purchase indemnity insurance for its trustees. Since February 2007, permission is no longer required but:

  • trustees must be satisfied that it is in the charity's best interests to purchase the insurance

  • the charity's governing documents must not prohibit the purchase of indemnity insurance.

Cy-près

Cy-près is the long-established legal principle applying to circumstances where donations cannot be used for the purpose that they were originally intended. Any change in use must be as close to the original purpose as possible. The Charities Act 2006 introduced a more flexible regime, which came into force in March this year.

The Charity Commission and the courts can now also consider current social and economic circumstances when deciding how to deal with donations that cannot be used as originally intended.

Changes To Thresholds

Audit and examination thresholds for unincorporated charities and charitable companies have been harmonised. For accounting periods beginning on or after 1 April 2008, unless otherwise specified in the charity's governing document, the following limits apply.

Fig 1: Audit And Examination Thresholds

Income Threshold

Requirement

Income between £10k and £500k

Independent examination

Income over £500,000

Audit

Gross assets over £2.8m and income over £100,000

Audit

CIOs

The new legal framework for Charitable Incorporated Organisations (CIO) is expected to come into force later this year. Setting up as a CIO has several advantages compared with the current corporate structure.

  • There is only one regulator – the Charity Commission.

  • Only one annual return needs to be filed.

  • There are no charges for registration or filing.

  • CIOs do not fall under company law.

  • There are less onerous reporting requirements. Reporting under the Companies Act 2006 is not required.

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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