In this issue:
Curtain opens on the new Act
Introduction by Suzi Leather, new Chair of the Commission
It feels like a good omen to be introducing myself to you as the Commission’s new Chair when the Charities Act 2006 has finally been passed. It’s a testament to the tenacity of everyone involved over the last 5 years since legislation was first proposed. We now have new legislation which gives charities a whole range of options and opportunities. This edition covers the key areas for charities, as well as providing welcome reassurance about the timetable for implementing the different aspects of the Act.
Some will be implemented in a few months time. Others will need some further work before they come into force.
This edition of the newsletter also covers a number of key consultations we’re running – from risk-based regulation to CRB checks – and we want to hear your views on these issues to ensure we give you guidance that’s genuinely useful.
Don’t forget to keep looking at our website regularly to get updates on how the new Act’s implementation is developing as well as information on new guidance and reports.
Suzi Leather, Chair
An Act for all - the new Charities Act
The Charities Act 2006 was passed on 8 November. It’s a major piece of charity legislation, reflecting both the changes in society and in the charity sector over the last decade.
We welcome the Act wholeheartedly and it’s also good news for trustees. Essentially, it will set charities free from some of the previous bureaucracy, enabling them to adapt to new needs in society and new and effective ways of working. There are many opportunities on offer for charities that want to grow and develop in different ways.
We hope this edition of our newsletter covers the main areas which might be of interest to you.
New headings for charitable purposes
The Act defines a charity as a body or trust which:
- is for a charitable purpose, and
- is for the public benefit
It includes descriptions of the main purposes which are charitable:
- the prevention or relief of poverty
- the advancement of education
- the advancement of religion
- the advancement of health or the saving of lives
- the advancement of citizenship or community development
- the advancement of the arts, culture, heritage or science
- the advancement of amateur sport
- the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- the advancement of environmental protection or improvement
- the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
- the advancement of animal welfare
- the promotion of the efficiency of the armed forces of the crown; or of the efficiency of the police, fire and rescue services or ambulance services, and;
- any other purposes charitable in law
This list covers the majority of purposes which are already charitable; the last category means that everything which is currently charitable is included.
Providing public benefit
The Act underlines the requirement that all charities must exist for the public benefit, and the Commission has a new objective to promote understanding and awareness of this public benefit requirement.
Our first step will be to hold a consultation with the sector and the wider public and then provide general guidance on what the requirement means. One size won’t fit all, and public benefit will look different for different groups of charities. We’ll then start to talk to specific groups of charities about how they demonstrate public benefit in their work.
Our Indicative Programme: Taking forward public benefit can be found under The Charities Act 2006 section on our Home Page.
Which charities must register in the future?
New thresholds for registration
For would-be registered charities the new income level for registration will be £5,000. Previously, small charities which had an annual income of £1000 or less didn’t have to register unless they had a permanent endowment or the use, or occupation, of land. The Act gets rid of this permanent endowment or land requirement and raises the income threshold to £5,000. Put simply, if an organisation is charitable and has annual income of £5,000 or above it must be registered with us.
In due course charities under this threshold will be able to register voluntarily if they want to when this part of the Act comes into force. Existing charities under this threshold will be able to ask to be removed from the register, but they’ll still remain charities and have to abide by charity law. We’ll be producing guidance on this process shortly.
New requirements for charities not previously on the Register
Exempt charities have not previously been allowed to register with the Commission because it’s been assumed that they were adequately overseen by other public bodies, such as the Financial Services Authority or Housing Corporation. The Act now makes sure these charities are also monitored for their compliance to charity law.
The Act puts previously exempt charities into two categories:
- Those already regulated by a body other than the Commission, which has agreed to take responsibility for ensuring they meet charity law. These charities will continue to be exempt and will be regulated by their current regulator, now known as a ‘principal regulator’. The Commission will be able to investigate these charities if their principal regulator asks us to.
- If no suitable regulator exists then a previously exempt charity will stop being exempt and will have to register with the Commission. To ease the transition, only these charities with an annual income of over £100k will have to register with us. All these charities will come under our full jurisdiction - the £100k threshold for registration is an interim level and may be reduced in the future, but this won’t happen for at least 5 years when there will be a review of the Act.
The Office of the Third Sector are working with principal regulators to agree how the new arrangements will work and to make sure they have the powers they need for this role, and this will take some time.
Over the years some groups of charities were excepted from registering with the Commission. Examples include some religious charities, Boy Scout and Girl Guide charities and some armed forces charities.
The Act will require some of these charities to register with the Commission. Again, initially only excepted charities with an annual income of £100k or over will have to register. Those under the £100k won’t have to register but will come under our jurisdiction. This £100k threshold is an interim level and may be reduced in the future, but this won’t happen for at least 5 years when there is a review of the Act.
Freedom for smaller charities to evolve and change
Under previous legislation, charities could make changes to their purposes through resolutions agreed with us. The new Act liberalises and extends these powers.
It allows smaller, unincorporated (non-company) charities with income of less than £10k a year to take certain actions, outlined in this section, without having to come to the Commission for permission. We will still want copies of the resolutions passed by the trustees to make these changes.
Trustees of these charities can transfer their charity’s assets to another charity whose objects are consistent with their own.
Changing a charity’s purposes
They can replace their charity’s purposes with new purposes that make more sense in today’s society as long as the changes are consistent with what the charity was set up to do. So, for example, a charity set up to relieve sickness can update its purposes to participate in a health promotion scheme to encourage healthy living.
Opportunities to modernise
Amending admin rules
The Act gives the trustees of all non-company charities power to pass a resolution to alter the parts of their charity’s governing document which set out how they administer their charity, for example the number of trustees needed to form a quorum at meetings. They will only need to use this power if it is not already included in the charity’s governing document.
Flexibility for transferring the assets of ‘failed’ appeals or trusts
Charities occasionally run appeals that fail to get enough money to meet their original aim and funds can exist for which there are no longer any beneficiaries. The cy-près (literally ‘near to’) doctrine has previously restricted the Commission’s and the Court’s ability to allow charities to use these ‘failed’ funds in flexible ways.
The Act allows the Commission and the Courts to take into account current social and economic circumstances when approached by charities seeking more freedom in how they can use these funds. This will give charities greater flexibility in how they can use donated money when they can’t use it as they originally planned, but it will also take into account the spirit in which the original donation was made.
Effective use of permanent endowment
Permanent endowment can be either charitable funds or property, such as land or a building, which a charity can’t spend or sell in its entirety. Trustees of permanently endowed charities can use the income generated by permanent endowment but, except for very small charities, they can’t usually spend the capital. The Act now allows a wider range of smaller charities to spend the capital, and for larger charities power to do the same in certain circumstances and if we agree.
Charitable companies must come to the Commission to get prior consent if they want to make changes to their memorandum and articles of association. The Act cuts down the occasions where they’ll have to seek our permission before making these changes, helping these charities make amendments more quickly and easily.
New structure options
Making it easier to merge
One of the obstacles to charity mergers can be uncertainties about what will happen to legacies and donations which were left to those charities which ‘disappear’ as the result of a merger. The Commission will now keep a public register of charity mergers. Registering a merger with us will be voluntary.
When a merger is registered, gifts and legacies to the previously separate charities will automatically be transferred to the new merged charity. This will reassure both charities and the donating public that the spirit of legacies will be honoured if a charity merges.
We’ll be setting up this register in the next few months and it should go live during 2007. Watch our website for updates.
New structure for charitable companies
Charities which want a corporate structure currently have to register both as charities and as companies, which means they have to meet the dual regulatory requirements of both the Charity Commission and Companies House. The Act creates a new vehicle for these charities – the Charitable Incorporated Organisation (CIO). A CIO will have the advantages of a corporate structure, such as reduced personal liability for trustees, without the burden of dual regulation.
Creating CIOs will require additional, secondary legislation and the recently formed Office of the Third Sector will start consultations in preparation for this legislation in the New Year. We will provide more information when we have it, via this newsletter and our website.
Lightening the load for trustee bodies
The Act brings in a number of changes to allow trustee bodies to act on issues which affect trustees with less bureaucracy than in the past. These provisions are described in this section.
Payment of trustees
The Act does not allow trustees to be paid for being trustees. Voluntary trusteeship still remains a key principle of charity.
However, the Act allows trustees to pay an individual trustee for providing an additional service to the charity – if they think it’s in the best interests of the charity - without having to come to the Commission for authorisation to do so.
An example of this could be a trustee who’s a plumber providing plumbing services to the charity as long as the trustees agree that it’s in the charity’s best interest, for example, because the trustee is charging a better price or in some way delivering a better service than the trustees could get elsewhere. Important points to remember:
- the number of trustees receiving payment in this way must be in a minority
- the amount paid must be reasonable and set out in a written agreement between the trustee and the charity; and
- the trusts or governing document must not contain any specific provision forbidding this type of payment.
Publicity requirements for schemes
When we propose to make a scheme to allow a charity to do things that will affect the way they carry out their purposes or the way they are run, the charity currently has to advertise this at least one month in advance, usually in local papers. This gives charities an additional administrative burden and is often disproportionate to the change proposed.
The Act gives the Commission discretion to decide whether publicity for a scheme is needed or not, with a default that it won’t be needed unless absolutely necessary. Even if we feel publicity is needed, we can choose the length of notice period and whether publicity must occur in the local area of the charity. This will have the practical effect of fewer instances where publicity is needed and shorter notice periods.
Waiver of trustee’s disqualification
We will generally have to grant a waiver for disqualified trustees who were removed from their role for misconduct or mismanagement in a charity, as long as the disqualification period has lasted for 5 years or more, and there are no special circumstances for not doing so.
We can’t grant it if the trustee is disqualified as a company director, is an undischarged bankrupt or has defaulted under a county court administration order.
Removing some of the worries
Relief from personal liability for trustees
Recruiting new trustees can be made harder if potential trustees are worried they may be personally liable for mistakes they make which put the charity’s assets at risk. Before the Act, only the courts could relieve trustees of this sort of liability.
The Act allows charity trustees to apply to us, as well as the courts, for relief from personal liability for a breach of trust where the trustee has acted honestly and reasonably. This obviously only applies where mistakes have been honestly made. The Commission and the courts will still take deliberate breaches of trust by trustees very seriously.
Trustee indemnity insurance
Trustee indemnity insurance covers trustees from having to personally pay out when claims are made against them, such as health and safety breaches which cause an employee injury, as long as the mistake was honestly made and not the result of wilful misconduct. In practice, trustees are not held liable in this way for honest mistakes but anxiety about the possibility may have made people reluctant to become trustees. There was also the issue that the charity’s funds should not be used to pay for insurance which would benefit trustees.
The Act allows trustees to take out trustee indemnity insurance using the charity’s funds without our permission, as long as there’s no provision in the charity’s governing document which specifically forbids this. If there is a specific prohibition in the charity’s governing document then trustees will need to come to us so that we can amend this before they can buy trustee indemnity insurance.
Changing the threshold for professional audit and independent examination
The Act simplifies the rules about when a professional audit is required and gives both charities which are companies, and those which aren’t, similar thresholds.
A non-company charity’s accounts will have to be professionally audited if it has:
- gross annual income over £500k; or
- an aggregate value of assets over £2.8 million and gross annual income over £100k.
Below this threshold, for non-company charities, an independent examiner can be used instead of an auditor. An independent examination is not required if the charity's income is below £10,000. If the income is above £250,000 then the independent examiner must have an appropriate accountancy qualification.
For charities which are companies, accounts will have to be professionally audited if the charity has:
- gross annual income over £500k; or
- a balance sheet total (aggregate assets) over £2.8m.
Charitable companies with an income between £90k and £500k and assets of £2.8 million or less are not required to have their accounts audited if they provide an accountant’s report. For a charitable company with income of £90,000 or less then neither a professional audit nor an accountant’s report is required unless its assets are over £2.8m.
Charities often carry out trading activities, and sometimes charitable activities, through companies and other entities they own or control. To get a full picture of all the charity's activities and the resources it controls, it’s good practice for these charities to prepare group accounts to consolidate the accounts of the charity and any subsidiaries.
The parent charity is legally required to prepare its own entity accounts but there’s no legal basis for preparing group accounts. The new Act will normally require a parent charity to provide group accounts which include these subsidiaries.
There will be consultation to help decide at what threshold level group accounts should be required by law as opposed to good practice.
Auditors who scrutinise the accounts of larger charities are sometimes able to identify abuse or significant breaches of trust during the audit process.
The Act ensures that auditors of charity accounts will be protected from the risk of action for breach of confidence or defamation when they pass on relevant information to the Commission. Independent examiners of charity accounts will also be protected.
In due course, changes will be made to the accounting rules for charitable companies which will bring them in line with unincorporated charities.
New Charity Tribunal
Sometimes charities and others affected by a legal decision we’ve made feel that the decision is wrong and want to challenge it. In order to appeal against a decision by the Commission, the case must currently be taken to the High Court, which is difficult and expensive.
The Act will create a new Charity Tribunal to deal with appeals against, and reviews of, legal decisions by the Commission. It will also take referrals from the Commission or the Attorney General which involve the operation or application of charity law.
Establishing the Tribunal is the responsibility of the Department for Constitutional Affairs and it’s expected it will take at least a year to set it up.
The Charity Tribunal won’t deal with customer service complaints. These will continue to be dealt with by our internal complaints system and the Independent Complaints Reviewer.
Protecting charities’ reputations
The Act provides a number of measures to help the Commission ensure that charities’ property, assets and reputation are protected.
Suspending or removing trustees and others from membership of charities
When we have serious causes for concern about a charity and open an inquiry, occasionally a trustee, employee or other agent of the charity threaten the property or continued administration of the charity. This happens very rarely, but it can make it more difficult to conclude the inquiry as quickly as we’d like and can damage the charity’s reputation.
There are times in formal inquiries when the Commission has to suspend or remove a person from their position as trustee, officer, agent or employee. The Act allows us to make an order to suspend or remove the person from membership of the charity and so prevent them seeking election to their former position.
We are unlikely to use this power often but it will be helpful in those rare instances when a member of a charity under investigation threatens its effective running.
Specific directions for protecting a charity
The Act allows the Commission to direct trustees, officers, employees or a charity organisation to take specific actions to protect a charity, when an inquiry is open. This will be used in those rare circumstances where we’ve found that misconduct or mismanagement has occurred in the charity and we need to ensure that actions are taken to protect the charity’s property or make sure that it’s used for the purposes for which it was intended.
Ensuring charity property is used correctly
On rare occasions, charity trustees are unwilling to apply charity property for its intended purposes. The Act enables us to deal with this by giving us a power to direct them to do so. We can use this power without opening a formal inquiry.
Deciding a charity’s membership
The Act gives the Commission the power to decide who a charity’s members are, either if the charity applies to us to do so or if we need to find out during the course of an inquiry. The power also allows us to appoint someone else to do this, for example, the person who is appointed to undertake the inquiry.
Entering premises and obtaining documents
There are - very rarely - times when documents are deliberately destroyed by those involved in a charity when we tell them that we are opening an inquiry. Where we have reason to believe this might happen, the Act gives us the power to get a warrant from a Justice of the Peace to enter and search premises and take away specified documents, including electronic material.
It also gives us the power to prevent interference with, or the destruction of, specified documents, make copies of them and get information from the charity about what, and where, such documents are.
These powers can only be used as part of an inquiry and we will have to satisfy the Justice of the Peace that we have strong reason to believe the documents are at risk before they will grant a warrant.
Fundraising solicitation statements
Currently professional fundraisers and commercial participators fundraising for charities must have a written agreement with the charity, and must make a statement telling potential donors that they are getting paid when they ask for money. This is so that potential donors can make an informed choice about giving. The Act makes two main changes to these ‘solicitation statements’:
- They will have to include the amount the professional fundraiser or commercial participator will be paid for fundraising for the appeal, or if the specific amount isn’t known, to give a reasonably accurate estimate of what they’ll receive.
- Slightly different statements will also have to be made by employees, officers and trustees of charities who act as collectors. This doesn’t apply to volunteers.
Public charitable collections
The Act provides for a new system for licensing charitable collections in public. It applies to all such collections, including face-to-face fundraising, involving requests for direct debits.
There is a new role for the Commission in checking whether charities and other organisations are fit and proper to carry out public collections and we will be responsible for issuing public collections certificates, valid for up to five years. We need to develop the right regulations and guidance so that we can take on this new role. We also need the necessary resources to set up the new systems and this will take time to set up. We don’t envisage taking on this function for a few years yet.
- Collections in public places
Previous legislation referred to ‘street’ collections. The Act extends this to collections in ‘public places’ which includes some privately owned land, such as railway station ticket halls and supermarket forecourts. Once a charity has a public collections certificate it will be able to apply to a local authority for a permit to hold collections at certain times in certain public places in that local authority area. Local authorities will ensure that there are not too many collections taking place at the same time, in the same place.
Previous legislation referred to ‘house to house’ collections. The Act refers instead to ‘door to door’ collections, to make it clear that this includes business premises. A charity with a public collections certificate will be able to conduct door to door collections without permission from a local authority, but it must inform the local authority that the collection is taking place.
- Local, short-term collections
Some collections will be exempt from licensing and will not require either a certificate or permit, but organisers will have to notify the local authority that the collection is taking place; so small scale activities like carol singing should not be disproportionately affected.
When will these changes happen?
Although the Charities Act was passed on 8th November 2006, it will take some time for the all the changes it introduces to come into force. Some will take effect early in 2007, but many others will require consultation, secondary legislation or guidance before they take effect. There are a number of changes to our powers which will be reviewable by the Charity Tribunal (for example, our decisions on charitable status, the use of many of our protective powers, and the Charitable Incorporated Organisation) so they won’t be introduced until early 2008 when we’re expecting the Tribunal to be up and running.
We’ve listed below details of the first provisions that we expect to come into force early in 2007 and which affect how charities are run and regulated. We will provide more details about the implementation of these and other provisions, including progress updates, on our website and in future editions of this newsletter.
Charities Act – main provisions that will be in place in early 2007
- Introduction of minimum £5,000 threshold for registration as a charity
- Increased thresholds for audit of accounts
- Requirement for us to develop guidance and consult on how we apply the public benefit test – the public benefit test itself is likely to become law in early 2008
- New power for all charities to buy trustee indemnity insurance
- New power for all charities which aren’t companies to change their rules about how they are to be run
- Charities will no longer need our consent where they use their property as security for grants and other transactions
- New powers for the Commission to:
- identify who are the members of a charity
- relieve trustees from liability
- enter premises and seize documents under a warrant
- Relaxation of the need for public notices when we make a scheme
- Common Investment and Deposit Funds will be allowed to accept investments from Scottish and Northern Irish charities
- Unless we have serious concerns, we will be able to authorise disqualified trustees to act as trustees again after 5 years
- The Charity Commission will become a corporate body with new objectives, functions and duties
Where to find out more
New guidance, produced jointly by the Office of the Third Sector and the Commission, will be available on our website by February 2007. Our website will continue to be regularly updated with information about how the Act affects charities under ‘The Charities Act 2006’.
In the meantime, if you’d like more information on the Act please contact Charity Commission Direct on 0845 3000 218, via email or by post to: Charity Commission Direct, PO Box 1227, Liverpool L69 3UG.
Our strategy in action
Criminal Records Bureau checks
In the last issue of this newsletter we explained that from June this year we were asking would-be charities working with children or vulnerable adults to provide us with evidence that they’d carried out CRB checks on trustees before the registration process. This was the first step in creating a more robust, proportionate system to safeguard vulnerable beneficiaries.
Trustees have responsibility for ensuring appropriate CRB checks are carried out on relevant employees and volunteers and they must take this responsibility very seriously. Our guidance Finding new trustees: what charities need to know (CC30) is a useful starting point. Find it on our website under 'Publications' or call Charity Commission Direct on 0845 3000 218 for a copy.
We are aiming to launch a public consultation on our approach early in the New Year. Our website will hold full details of the proposals and how to contribute to the consultation.
Collaboration - the way forward
In June we launched new guidance on collaborative working, encouraging charities to regularly review how they can deliver a better service for their users. Obviously, it’s up to charities themselves to decide how best to work, but in an increasingly demanding environment, innovative and collaborative working between charities can be a positive move.
Collaborative working and mergers (CC34) is aimed at small to medium-sized charities and gives an introduction for those interested in exploring how collaborative working could work for them. It sets out what is involved in various types of partnership and merger and includes real-life examples from charities. Find it on our website under ‘Publications’.
Public service delivery
In October we launched a consultation on our revised guidance for charities thinking about, or actually, delivering public services. The draft guidance takes into account a number of changes, both within the sector and in the relationships between charities and the public sector.
The revision is based on wide discussion with charities, and we’d encourage as many charities as possible to let us have their views before the deadline of 5 January. The draft guidance is available from our website under ‘Promoting effective performance’ then ‘consultation documents’.
We hope to publish the final guidance in February, along with the results of our extensive survey into charities and public service delivery.
Annual report shows a year of delivery
Our annual report for 2005-06, published in July, showed how our new strategy and reorganisation has started to deliver more intelligent regulation. Key highlights of the year included the launch of Charity Commission Direct, making the accounts of the largest 56,000 charities available online, the provision of 23,000 separate pieces of advice and guidance to charities, the registration of over 5,000 new charities and over 29 million hits to our website.
The annual report can be viewed or downloaded from our website under ‘Publications’.
The end of an age-old problem?
From 1 October 2006, new legislation makes it illegal for employers, including charities, to discriminate on the grounds of age. The Employment Equality (Age) Regulations make it unlawful for employers to discriminate directly or indirectly against anyone because of their age unless this is objectively justified. The Regulations apply equally to people of all ages and cover areas such as recruitment, redundancy, retirement and pension arrangements.
It’s wide-ranging and yet a survey by the Employers Forum on Age (EFA) suggested that a lack of action could expose employers to over £70bn worth of claims. Don’t be one of them. More information can be found at the Department for Trade and Industry’s website at www.dti.gov.uk . Acas has also produced useful guides for both employers and employees which can be downloaded from their website at www.acas.org.uk. Hard copies can be ordered online or by calling 08702 42 90 90.
New take on an old scam
A warning to charities that an old scam may be reappearing. A charity receives an unsolicited donation, usually in the form of a cheque. Charities are then told by the donor that the cheque is an overpayment and asked if they can send back a cheque covering the excess amount. If unsuspecting charities fall for this and repay part of the ‘donation’, they find that the original cheque bounces, leaving them robbed of the amount they sent back.
The instances we’ve come across have involved charities that recognised if something appeared to be too good to be true, it probably was – and notified us, the Police and their local Trading Standards office. Fraudsters are, unfortunately, inventive and charities should continue to be on the alert for scams like these.
How to get in touch with us
Charity Commission Direct for general queries and to contact any of our offices:
Charity Commission Direct
PO Box 1227
Telephone: 0845 3000 218
Minicom: 0845 3000 219