The Charities Act 2022 (the Act) received Royal Assent on 24 February. The Act implements the majority of recommendations made by the Law Commission in its 2017 report ‘Technical issues in charity law’ and aims to reduce the administrative burden on charities, saving both time and money. The provisions of the Act will be implemented on a staggered basis to allow time for trustees to understand the changes being brought in by the Act and for the Charity Commission (the Commission) to reflect the changes by updating existing guidance and creating new guidance. The Commission is currently working with the Department for Digital, Culture, Media and Sport on the implementation plan – it will need to produce at least 12 pieces of new or updated guidance, in addition to over 20 pieces of new or updated internal guidance. The Act makes amendments to the Charities Act 2011 (2011 Act).
This briefing note considers some of the key provisions of the Act.
The words contained in the Law Commission’s 2017 report on technical issues had a prophetic quality, “with the passage of time, new needs will arise and unforeseen eventualities will occur, requiring charities to amend their governing documents to ensure their continuing effectiveness”. For many charities, particularly unincorporated charities, these changes will be welcome, allowing charities to have greater flexibility and clarity around the assorted rules for amending governing documents, providing greater flexibility to respond to: changes in demand; different financial conditions; and governance strains brought into sharp relief by the pandemic.
Different rules apply to charities wishing to make changes to their purposes and governing documents, depending on their legal form. The provisions in the Act include:
- Charitable companies: amending the 2011 Act so that an alteration to the statement of a charitable company’s purposes which does not alter the substance of its charitable purposes will no longer be a “regulated alteration” that requires prior approval of the Commission. This will align more closely the rules governing changes to constitutions of charitable incorporated organisations (CIOs) and articles of association of charitable companies.
- Consent to change of purposes – factors to be considered: requiring the Commission to have regard to the same factors when considering whether or not to consent to a change of purposes of charitable companies, CIOs and unincorporated charities. Currently, the tests are different for each type of charity. The standardisation is welcome but could make it more difficult for incorporated charities to amend their purposes in future since the Commission will now consider as a relevant factor “the purposes of the charity when it was established”, as opposed to merely relying on a rational argument for the change.
- CIO resolutions: new subsections providing for amendments to a CIO’s constitution to take effect on the date that the resolution containing the amendment is passed, or on a later date specified in the resolution. There is an exception for an alteration of the CIO’s purposes, which takes effect only when registered by the Commission, or on a later date specified in the resolution. CIOs are required to send to the Charity Commission a copy of a resolution amending their constitution, as well as a copy of the constitution as amended and any other documents that the Commission requires. This makes the process consistent with the provisions of the Companies Act 2006 in relation to the amendment of articles of association for charitable companies.
- Unincorporated charities – power to amend governing document: the introduction of a new power for all unincorporated charities to amend any provision in their governing document by resolution of the trustees, subject to the consent of the Commission for certain types of amendments (including changes to purposes, trustee benefit provisions and dissolution clauses). Currently, larger unincorporated charities without an express power of amendment (or with a limited power) need to rely on the Commission exercising its powers if they wish to make changes other than to the charity’s powers and procedures.
- Public notice: giving power to the Commission to give public notice, or require charity trustees to give public notice, of any amendments to a charity’s governing document where the Commission’s consent is required.
- Royal Charter charities: the introduction of a new power for Royal Charter charities to amend their governing document with the consent of the Privy Council. Currently, Royal Charter charities that do not have an express power in their Charter need to petition the Queen for a Supplemental Charter each time they want to change their governing document. The Explanatory Note which accompanies the Act suggests that charities contact the Privy Council Office at an early stage in the process to obtain approval in principle to proposed changes before it is put to a vote.
The provisions in the Act give charities more flexibility around initial and subsequent failed appeals, replacing the existing requirements which are cumbersome and pre-date the age of internet and emails.
The provisions in the Act include:
- New rules: replacing the current regime with more flexible rules allowing donations given in response to a charitable appeal that cannot be carried out (known as ‘initial failure’) to be applied cy-près (i.e. transferred to another charitable purpose which is as close as possible to the purpose for which it was donated), rather than having to be returned to donors in certain circumstances. There are four circumstances in which this can happen: when it would be unreasonable to incur expense to return the donation, or unreasonable for donors to expect the donation to be returned; the donation is £120 or less; donors cannot be identified or found; or the donor is unidentifiable.
- Removal of six-month rule: removing the current rules where, if charities decide to apply the proceeds of a failed appeal cy-près, the donor continues to be able to make a claim for the return of their donation for up to six months.
- Cy-près schemes: enabling trustees to resolve that proceeds from a failed funding appeal are applied to different charitable purposes without the requirement to obtain a cy-près scheme. The power will be available where proceeds of a fundraising appeal are applicable cy-près in relation to an initial failure of an appeal (where the four circumstances above apply), or there has been a subsequent failure of an appeal (i.e. where there is surplus money after the charity has achieved the purpose of the appeal, where the circumstances in section 62(1)(a) or (b) of the 2011 Act apply). The trustees will need to have regard to the desirability of securing that the purposes are, as so far as is reasonably practicable, similar to the specific charitable purposes for which the money or property was given; and the need for the purposes to be suitable and effective in light of current social and economic circumstances.
Our advice remains that charities should always make it clear in fundraising literature that any funds raised which cannot be applied to the appeal’s aims will be applied to the charity’s general purposes – this makes it much more straightforward to deal with any unused funds.
The Act makes many welcome amendments to the 2011 Act in relation to regulation of permanent endowments, which is often considered to be a complicated and complex area. Permanent endowment refers to funds of a charity where there is a restriction as to how the capital may be expended (for example, a fund which must be invested to produce income). The Act goes some way to clarify the provisions in the 2011 Act as well as widening powers to spend from permanent endowment and introducing a new power to borrow from permanent endowment without Commission consent.
The 2011 Act provides trustees of unincorporated charities with powers to spend permanent endowment capital if they are satisfied this would enable the trusts to be carried out more effectively. However, the power to spend funds “entirely given” by an individual or individuals for a particular purpose, which are above certain relatively low income and capital thresholds, is subject to Commission consent. There have been doubts expressed in the past as to whether these sections apply to endowments held by corporate charities. The Act helpfully makes clear that this is the case.
Other provisions of the Act include:
- New test for whether consent is required: replacing the current provisions for when Commission consent will be required, with a single condition: The Commission’s consent will be required in all cases where the market value of the endowment fund exceeds £25,000. In practice, this will provide charity trustees with the opportunity to spend many permanent endowments where they would previously have required the Commission’s consent but it should be noted that it will no longer be possible for larger funds to rely on their income being below the current income threshold of £1,000 to use the statutory powers, which may be a drawback for some larger funds.
- Calculating value of endowment: when calculating the value of the endowment, any outstanding borrowing from the fund (e.g. under the new power to borrow from permanent endowment referred to below) will be included when determining whether the fund is over or less than the £25,000 threshold and, accordingly, whether Commission consent needs to be obtained to spend permanent endowment capital. Provided the charity trustees are satisfied it would enable the purposes to be carried out more effectively, the obligation to repay outstanding borrowing will be released as part and parcel of the resolution to release the fund from permanent endowment restrictions.
- Resolutions: amending how and when resolutions to release permanent endowment restrictions take effect and when it is necessary to seek the Commission’s consent or “concurrence”.
- Borrowing from endowment: a very welcome and pragmatic new statutory power enabling a charity to borrow up to 25% of the value of its permanent endowment fund subject to recoupment within 20 years, without having to obtain an order from the Commission. This power could be a helpful alternative to the removal of permanent endowment restrictions altogether. At the Report Stage of the Act's passage in the House of Lords, an amendment was agreed to provide for regulations made to vary the proportion of permanent endowment which may be borrowed and the period over which such borrowing must be repaid to be subject to the affirmative resolution procedure in Parliament. The negative resolution procedure applies to regulations adjusting other financial thresholds in the Act. The affirmative procedure means that delegated legislation is laid before Parliament in draft form. Approval of that draft by Parliament is needed before it comes into force. The negative procedure means that the delegated legislation is signed by the Minister and then laid before Parliament. In this instance, the Government was persuaded that an additional level of parliamentary scrutiny was appropriate.
- Social investments: finally, there is another welcome new power enabling trustees (of charities who already opt in to invest on a total return basis) to make social investments that they could otherwise not make (because it is expected that, although the social investment would further the charity’s purposes, the return would be negative or uncertain). The Commission is to make new regulations governing the exercise of this new power.
Under existing requirements, charities have to obtain authority from the Commission, the Court or the Attorney General if they wish to make a payment out of their charity’s funds which they feel morally obliged to make but for which there is no legal basis (known as an ‘ex-gratia payment’). Particularly relevant for charities with significant legacy income, the provisions of the Act include:
- Small ex-gratia payments: a new statutory power allowing small ex-gratia payments to be made without requiring Commission consent. ‘Small’ is understood in relation to the charity’s gross income in its last financial year: payments without authorisation can be made up to £1,000, in the case of a charity with a gross income of £25,000; £2,500 for a charity with a gross income of more than £25,000 and £20,000 for a charity with a gross income of over £1million (thresholds subject to review). Charities will still need to report all ex-gratia payments in detail in their annual accounts, in line with the Charities Statement of Recommended Practice. This new statutory power applies to charity trustees of all types of charity including Act of Parliament and Royal Charter charities that have a general prohibition in their governing document on using the charity’s assets otherwise than for the charity’s purposes. A charity’s governing document can expressly exclude or restrict the power.
- Statutory test: the test for making an ex-gratia payment is reformulated to be ‘when charity trustees could reasonably be regarded as being under a moral obligation to make it’. This means that the decision as to whether or not to grant an ex-gratia payment can now be delegated to the teams which manage the process day to day, rather than sitting with the trustees. This should serve to reduce both time delays and the associated costs. Such delegation can be made by the trustees regardless of the payment value, so legacy teams with delegated authority will be able to make applications for Commission consent where the payment is above the threshold. In its response to the Law Commission’s report, the Government was keen to stress, however, that trustees will of course retain ultimate accountability where such decisions are delegated.
- Statutory charities: the Government confirmed that the Attorney General, the Court and the Commission would all have the power to authorise statutory charities to make ex-gratia payments above the threshold limit.
The Act seeks to protect charity land in its support for charitable objects and to help trustees “do the right thing” in pursuit of that. This involves both requiring and enabling trustees to deal with charity land in a way which is proportionate and appropriate.
The provisions of the Bill include:
- Restrictions on dispositions: a new section which confirms that the restrictions on dispositions of land only apply to land where the whole of the land which is being disposed of is held beneficially by a charity solely for its own benefit (if it is a corporate charity), or in trust solely for that charity (if it is an unincorporated charity). There is further description of different scenarios where the restrictions will, or will not, apply in the Explanatory Note that accompanies the Act.
- Exceptions to general restrictions: amendments to the exceptions to the general restrictions on disposing of or mortgaging charity land e.g. disposition by a liquidator or an administrator.
- Charity to charity disposals: clarification of the exception for disposals to another charity, confirming that it only applies to disposals to another charity that are solely intended to further the transferor charity’s purposes. This means that the exception will not apply to a commercial transaction (a transaction intended to achieve the best price that can reasonably be obtained for the disposing charity); or a social investment.
- Advertisement and surveyor’s report: removal of the requirement for trustees to advertise a proposed disposition in the manner advised in the surveyor’s report and replacement of the requirement for a surveyor’s report to “contain such information” as may be prescribed by regulations made by the Secretary of State with a general requirement that such reports “deal with such matters” as may be prescribed by regulations.
- Advice on disposals: the category of those who can give advice to trustees on disposals of their charity’s land is expanded in line with the Law Commission’s recommendations. The Act replaces the wording “qualified surveyor” with “designated adviser”, which reflects an expanded category of advisers who may not be members of the Royal Institution of Chartered Surveyors that will be brought in by regulations. The draft regulations produced by the Law Commission would allow fellows from the National Association of Estate Agents and fellows of the Central Association of Agricultural Valuers to provide advice.
- Advice from trustees, officers and employees: a new section enables trustees, employees and officers who are qualified to provide a report or advice, including where they do so in the course of their employment.
- Connected persons: the definition of “connected person” is amended to exclude employees of a charity where the disposal is the grant of a short, fixed-term or periodic tenancy (of one year or less) to use as their home. This means that while trustees will still need to obtain advice on the grant of these tenancies, the consent of the Commission will no longer be required.
- Contract statement: a new provision amending existing sections requiring charities to include a statement that they have complied with requirements of Part 7 of the 2011 Act in the contract for a disposition or mortgage of charity land. This is an additional requirement on top of the requirement that exists already to make a statement in the instrument effecting the disposition or mortgage of land. The provisions protecting purchasers and mortgagees are amended meaning a charity can no longer rely on its own failure to comply with Part 7 of the 2011 Act to avoid completing a contract for the disposal of an interest in its land.
- Universities and colleges: there are provisions repealing the detailed provisions of the University and Colleges Estates Act 1925 and new provisions giving universities and colleges to which that Act applies all the powers over land of an absolute owner. Exercising this power will be subject to any restrictions imposed by statute, common law, equity or the university or college’s governing document. A disposal of land will be subject to Part 7 restrictions.
The Act gives the Commission the power to direct exempt and unregistered charities (in addition to registered charities) to change their names, and extends that power to include a charity’s working name (as well as its legal name). The Commission will also have the power to delay registration of a charity or a change of name where not to do so would result in one charity’s name being the same as or too similar to the name of another.
The provisions of the Act include:
- Working names: a power for the Commission to direct that a charity stops using a working name, extending its existing power to require a charity to change its formal name. There is also a power to direct a charity to change either its formal name or working name where it is the same as or too similar to the formal or working name of another charity – this is irrespective of whether the charity being told to change its name is a registered charity, or not. The Commission will no longer need to give a direction to a registered charity within 12 months of registration.
- CIOs: the Commission has existing powers to refuse registration in relation to an application for registration, conversion to a CIO or amalgamating CIOs where the proposed name is the same as or too similar to both a formal and working name of another charity. There is a new right for a charity to appeal against a direction by the Commission not to use a working name.
- Charitable companies: the Companies Act has been amended to enable a resolution of directors to change the name of a charitable company where it has received a direction from the Commission requiring it to do so. This would normally be made by members’ resolution.
- Delaying registration: the Commission has a new discretionary power to delay registration of a charity where it has issued a change of name direction. The Act sets out details on how long such a delay can stay in place.
- Delaying change of name: the Commission’s powers to delay registration (see above) are mirrored in the Act in relation to the registration of a change of name by a registered charity where the Commission has issued a direction requiring the charity to change its new name.
- Exempt charities: there are new powers that enable the Commission to issue a change of name direction to an exempt charity (a charity exempt from registration with the Commission, regulated by another regulator such as the Department for Education). There is a requirement that the Commission consults the exempt charity in question’s principal regulator before exercising this power.
There are various provisions in the Act which relate to charity trustees. The Commission already has a useful power under the 2011 Act to determine who the members of a charity are, where it is not clear or is disputed. The Commission does not have an equivalent power to determine trusteeship, which can be problematic where members are not involved. Additionally, all charities have some restrictions in their governing documents around benefits to trustees – they can be absolute but many charities will have powers to make some payments to trustees where it is in the best interests of the charity. The 2011 Act already includes a power for charities to remunerate trustees for services (which can give charities access to services at advantageous rates) but there is no equivalent for goods.
The provisions of the Act include:
- Ratification of trustee appointment: a new power to allow the Commission to make an order ratifying the appointment or election of a charity trustee where there is either a defect in their appointment or election; or uncertainty as to whether they were properly appointed or elected. These orders can only be made by the Commission where the person to whom they relate gives their consent.
- Remuneration for provision of goods and services: an extension of the rules to allow trustees or connected persons to be remunerated for the provision of goods, services or goods and services to their charity. There will no longer be a requirement to supply goods in connection with services. There are examples provided in the explanatory notes to the Bill - a charity can now pay a charity trustee (or their business) to: decorate the charity’s premises, supply paint to decorate the premises; or do both.
- Remuneration for work already carried out: there is a new section which gives the Commission power to order a charity to remunerate a trustee for work carried out for, or on behalf of, the charity (or to authorise them to keep any unauthorised benefit already received), where the Commission considers it would otherwise be inequitable for them not to be paid or to retain the benefit. There are various factors included in the Bill to which the Commission must have regard when making such an order. This means that charities will no longer need to apply to Court to authorise these payments or benefits in these circumstances.
To further facilitate incorporations (the process by which an unincorporated charity becomes an incorporated charity) and mergers (charity A merging into charity B, or charities A and B merging into a new charity C), the Government accepted recommendations of the Law Commission that will make it easier to transfer property by way of a vesting declaration (meaning that no other instrument is required) and which will do away with the practice of retaining a “shell charity” post-merger to catch legacies which are expressed to be for the merged charity “provided it is still in existence” and which do not expressly provide for the merged charity to receive the legacy – which would otherwise be lost.
Provisions in the Act include:
- Gifts: a new subsection which enables gifts to a charity which has since merged (as part of a “relevant charity merger” within the meaning of section 306 of the 2011 Act) to take effect as a gift to the new charity. This will be the case even where the gift specifies that it will only take effect if the charity continues to exist on the date the gift takes effect.
- Gifts to merged CIOs: there are similar amendments to apply the same rules where two or more CIOs amalgamate or a CIO transfers its undertaking to another CIO.
- Exclusions to vesting declarations: the types of property that are excluded from automatic vesting when a vesting declaration is made in respect of a “relevant charity merger” are amended by the Act.
- Relevant charity mergers: the definition of “relevant charity merger” is amended to ensure consistency with the new definition of permanent endowment.
In this area, the Government has accepted the Law Commission’s recommendations which would facilitate access to the Charity Tribunal by trustees and the Commission but rejected the recommendation that charities should be able to get authorisation to pursue “charity proceedings” from the Court as well as the Commission.
The provisions of the Act include:
- Authorised costs orders: a new section to give the Charity Tribunal the power to make an authorised costs order (ACO). An ACO will provide charity trustees with advance assurance that any legal costs that they incur in proceedings before the Charity Tribunal are a proper use of the charity’s funds and will therefore be payable from the charity’s funds. An ACO will be equivalent to a “Beddoe” order that can be obtained from the Court in respect of costs that are proposed to be incurred on behalf of a trust. The principles to be applied by the Charity Tribunal in deciding whether to grant an ACO will be the same as those applied by the Court in respect of Beddoe applications. The procedure for applying for an ACO will be set out in Tribunal Procedure Rules. An application to the Tribunal for an ACO will not constitute “charity proceedings” because it will not be an application to a “Court”. It will not, therefore, be necessary to obtain permission from the Court or Charity.
The Charities Act is aimed at providing charities with greater freedoms and a broader range of powers to manage their assets and activities. It is broadly welcomed by the sector and promises interesting developments for the sector as the provisions of the Bill are implemented. For further information or advice, please contact your usual contact at Stone King or Sarah Clune by email SarahClune@stoneking.co.uk or telephone 01225 326760 / 07970 890907.