Technical Issues in Charity Law: Government responds to Law Commission report

This week, the Government published its long-awaited response to the Law Commission’s report on Technical Issues in Charity Law.  The response promises some interesting developments for the charity sector since the Government has accepted most of the Law Commission’s recommendations, many of which were aimed at providing charities with greater freedoms and a broader range of powers to manage their assets and activities.  Baroness Barran, in her Ministerial Statement, says that the accepted recommendations “will make it simpler for charities to achieve their charitable purposes in an effective, sustainable and impactful way. The recommendations also maintain important safeguards to ensure the best use of charities’ resources.”

How we got here

The primary piece of legislation currently affecting charities is the Charities Act 2011.  The 2011 Act brought together provisions of earlier enactments relating to charities into one piece of consolidating legislation but it did not fundamentally amend the law.  Alongside the passage of the Act through Parliament, however, the Law Commission began a review of the technical issues in charity law, examining issues raised by Lord Hodgson in his review of the Charities Act 2006 (the last piece of legislation to bring significant change to the charity law landscape) and the procedures affecting Royal Charter and statutory charities. 

Following a consultation on social investments by charities in 2014 (which would lead to the Charities (Protection and Social Investment) Act 2016), the Law Commission launched its consultation on Technical Issues in Charity Law in March 2015 and then a supplementary consultation in 2016.  Stone King participated extensively in the consultation, producing our own response and contributing to the Charity Law Association’s response as well. 

In 2017, the Law Commission produced its final report, taking into account the wide range of responses and referencing Stone King’s input on a number of occasions.  For anyone with an appetite for the technical side of charity law, the report is a fascinating insight into the historic nature of charity law in this country and how it has evolved over time, the resulting complexity of the legal landscape and the diversity of form, purposes and size among the many organisations that populate the charity sector.  

The report made 43 recommendations and was accompanied by a tracked changes version of the 2011 Act suggesting amendments for the more effective management and regulation of charities.  It is that report and those recommendations which the government has now considered, and its responses are expected to form part of a Charities Bill to be put in front of Parliament.

What can we expect?

The response covers a number of areas which are certainly technical in nature but which, if they pass into law, will have real practical implications for charities.  These are the main themes in the response:

Financial thresholds.
Certain legal requirements (including the requirement for a charity to register with the Charity Commission, and whether charities are required to have their accounts audited or independently examined) depend on financial thresholds set out in legislation.  If the recommendations are made into law, these financial thresholds would be reviewed every ten years with a view to increasing thresholds in line with inflation.  Subject to resources, a first review may be carried out in 2022. 

Changing purposes and amending governing documents. 
Different rules apply to charities wishing to make changes to their purposes and governing documents, depending on their legal form.  The recommendations accepted by the government include provisions which would:
  • Align more closely the rules governing changes to constitutions of charitable incorporated organisations (CIOs) and articles of association of charitable companies.
  • Introduce a new power for all unincorporated charities to amend any provision in their governing document, subject to the consent of the Commission for certain types of amendments (including changes to purposes, trustee benefit provisions and dissolution clauses).  Currently, the larger unincorporated charities without a power of amendment (or with a limited power) need to rely on the Charity Commission exercising its powers if they wish to make changes other than to the charity’s powers and procedures. 
  • Require the Commission to have regard of 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.  The standardisation is welcome but could make it more difficult for incorporated charities to amend their objects in future since the Commission will now consider as a relevant factor “the purposes of the charity when it was established”.
  • Introduce 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!  Tom Murdoch, a Partner in the Charity & Social Enterprise Team, comments on these proposals (and the recommendations rejected by the government, in his opinion piece. A more detailed look at these new provisions will follow in next month’s Essentials

Fundraising appeals. 
Charities conducting fundraising appeals for specific purposes could be granted a new power to retain small donations (less than £120) if the charity raises too much or too little to achieve the appeal’s aim, and greater flexibility to apply those funds to similar purposes.  This is to protect trustees from having to expend disproportionate resources to return small donations.  Even if the proposals do make it into law, our advice is 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 purposes – this will make it much more straightforward to deal with any unused funds.   

Acquisitions and disposals of charity land. 
The recommendations which the government accepts will introduce greater flexibility in the regime governing disposals and acquisitions of land by charities, including in connection with the requirement to obtain and consider professional advice.  Two of the Law Commission’s recommendations in this area were not accepted, according to the government, to ensure that disposals of charity land to wholly owned subsidiaries are on terms that are in the charity’s best interests and to safeguard designated land.  Colleagues in our specialist charity property team will be looking into these recommendations (accepted and rejected) in more detail in next month’s Essentials.

Permanent endowment. 
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 accepted recommendations in the government’s response clarify and simplify the provisions in the Charities Act 2011 which enable trustees to unpick those restrictions (including to increase the value of funds that can be released without Charity Commission consent) and could see the introduction of a new statutory power for charities to borrow from their permanent endowment.  As charities look ahead to a difficult economic context, increased powers to spend and borrow from permanent endowment could become particularly helpful.

 

Remuneration for supply of goods and award of equitable allowances. 
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 government accepts the recommendation to include a similar power to remunerate a trustee for providing goods to the charity.  It also accepts the recommendation that charities should have a statutory power to remunerate a trustee where they have done work for the charity and it would be inequitable for the trustee not be remunerated (for example because the charity has profited from it).

Ex gratia payments. 
Particularly relevant for charities with significant legacy income, the recommendations accepted by the government would allow charities to make relatively small ex gratia payments without seeking Charity Commission permission (currently, all ex gratia payments require the Commission’s consent), and to delegate the power to make those payments to an appropriate person within the charity (currently, they are decisions that only the trustees can take).

The Charity Tribunal and the Courts.  
In this area, the government has accepted the Law Commission’s recommendations which would facilitate access to the Tribunal by trustees and the Charity Commission but rejected the recommendation that charities should be able to get authorisation to pursue ‘charity proceedings’ from the court as well as the Charity Commission.  You can read Tom Murdoch’s views on that position here.

Identifying charity trustees. 
The Charity Commission already has a useful power under the 2011 Act to determine who are the members of a charity, 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.  The Law Commission recommended, and the government has accepted, giving the Commission a power to ratify the appointment or election of a person to trusteeship.

Charity names. 
The accepted proposals would give the Charity Commission the power to direct exempt and unregistered charities (in addition to registered charities) to change their names, and extend that power to include a charity’s working name (as well as its legal name).  The Commission would also have the power to delay registration of a charity or of 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. 

Incorporations and mergers. 
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 has accepted recommendations 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. 

 

 

What’s next?

Considering the significant political events that have taken place since the report was published in 2017, it is perhaps not surprising that it has taken this long for the Government to publish its response.  Long-awaited though it has been, the (mostly) positive nature of the response is very welcome and it is hoped that these enabling and empowering provisions will pass into legislation.

Unfortunately, the government has only committed to move legislation on this subject “when parliamentary time allows”.  Given the continuing political focus on Covid and the post-Brexit relationship with the EU, it is difficult to know when that will be.  And, just as significantly, will the focus on more effective charity management and regulation be retained?  Time will tell.

If you have any questions on the subjects covered in this article or would like further information, do not hesitate to contact our team of experts.

 

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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