Purpose: The purpose of this guidance is to explain the principles regarding distinct charities, and to assist the caseworker in recognising when one exists and how to deal with it.

Divisional responsibility

For action:

Registration Division

For information:

All operational divisions

Contents

1. How do we identify a distinct charity?
2. Registration and reporting requirements

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. How do we identify a distinct charity?

1.1 Why is it important to identify a distinct charity?
1.2 What is a distinct charity?
1.3 What is not a distinct charity?
1.4 Special trusts and restricted funds
1.5 Designated funds
1.6 Factors that might hinder identification

It is important that distinct charities are correctly identified. Some charities have a complex administrative and/or fund structure. There may be a number of different committees all legally deriving their authority from decisions of the charity trustees, but the committees may have the appearance of being distinct organisations. There may be a number of different trusts within a charity, but only those which were intended to be set up as separate legal entities are distinct charities. A single charity cannot fragment its accounts by treating each of its committees or trusts as if it were a separate accounting entity. Accounts prepared on this basis would not give a true and fair view.

Only a distinct charity can be registered, whether as a reporting charity with its own registration number, or as a linked charity under a reporting charity's number, but with its own identifier.

If we do not get this right, there is a danger that reporting and accounting lines, and lines of responsibility may become confused so that those who "run" individual or local groups may think they are trustees with their own responsibilities, when in fact they may be agents or delegates who are fully accountable to the trustees of the reporting charity. This type of situation can often lead to difficult disputes, so if we can clarify the position at the outset, it should reduce the possibility of such disputes.

There may be a situation, for instance, where a group operating within a charity ought to be separately registered as a distinct charity. If it is not recognised in this way, it will simply form part of the reporting charity.

The Glossary contains a full definition of this term. In summary, a distinct charity is one which not only has "distinct trusts", but which has also been separately established with the intention of being a clearly separate charity. A distinct charity may be a reporting charity or a linked charity (eg a special trust).

For example, an incorporated charity - whose governing document will be a memorandum and articles of association, Royal Charter, or Act of Parliament -is alwaysa distinct charity.

A gift to the trustees of XYZ charity for purposes which are wider than those of XYZ charity itself, will be a distinct charity which has been created on the separate trusts established under the terms of the gift. In this instance, the new charity could be linked with the XYZ charity by a uniting direction because of its close administrative ties, but it cannot be a special trust of the reporting charity because its objects are wider.

In contrast to the examples above, the permanent endowment, expendable endowment, and income funds of an existing distinct charity are not distinct charities in themselves. This is because they are essentially mechanisms set up in accordance with the main charity's governing document by which funds with different conditions attached (some of which may be spent, and some of which must be invested) are channelled in support of that charity's objects.

In addition to distinct charities, that are registerable, a reporting charity may also administer other trusts that may not be distinct charities or may be distinct charities that we would not normally register. Such trusts would either have narrower but related objects, or be operated in close connection with the reporting charity. These are usually legally termed special trusts (though they may be shown in the accounts as restricted funds). Where they are of an ongoing nature they:

(a) must always be accounted for by the reporting charity (s.97(1) of the 1993 Act); and

(b) if they are distinct charities not normally registerable they may for the sake of clarity be linked by uniting direction for registration purposes so that they share the reporting charity's registration number and are allocated their own identifier (e.g. 200108/1,200108/2 etc). We should not devote resources to issuing such directions to rectify the registration position in such cases where we are not requested to do so;

An example might be if a donor makes a gift to the trustees of XYZ Charity for specific purposes that are more limited than those of XYZ Charity. This creates a distinct charity in itself, if that was the donor's intention. It may be a special trust of the XYZ Charity and, if it is, it will be included in the accounts prepared by the trustees of the XYZ Charity. We may then register it under the number of the XYZ charity and allocate it its own identifier (eg /1, /2).

Other types of special trust, internally created under a power in a charity's governing document are not considered distinct charities at all. For example, an ERF or CMF created by a scheme would not normally be considered a distinct charity.

There may also be funds that are "designated" or "earmarked" by the trustees for a particular project or any number of special purposes, but these are not distinct charities, and cannot be registered. Designated funds are portions of unrestricted funds which trustees may decide to set aside for designated purposes. They may also be used where donors have expressed a preference without imposing a trust. Funds so designated remain unrestricted since the trustees can remove the designation at any time.

Generally, where a trustee body has a single unrestricted trust fund operating in a single location, there is no problem in defining it as a distinct charity that is a reporting charity for registration and accounting purposes.

However, complexity could arise from factors such as:

• trustees being responsible for more than one fund (endowment funds and/or restricted funds or special trusts); and/or

• the charity's work being carried out in more than one location; and/or

• a connection with other charitable trusts or companies; and/or

• the existence of subsidiary companies, for either charitable or non-charitable purposes.

Additional complications can also arise because one or more of the parts of the reporting charity are subject to additional or alternate accounting regulation or legal form. Typical problem areas here are companies, registered social landlords, and excepted charities.

2. Registration and reporting requirements

A copy of the governing document for each distinct charity is required (whether it is to be registered as linked with a reporting charity or not) and should be filed on the Central Register file. However, there may not be a formal deed or constitution as such. In many cases the trusts may take the form of a Probate Registry extract of a will.

We can accept less formal evidence than this, provided there is a clear indication of how the founder intended his or her gift to be used, or how the funds have been applied in the past. A letter written by the founder or the minutes of a meeting would be sufficient. If there is no formal governing document written particulars of the trusts should be filed on the Central Register file.

In some cases (eg NHS trust funds) a reporting charity will have been deliberately created with purposes wide enough to embrace those of all the other charities administered by its trustees (via a uniting direction under s.96(6) of the 1993 Act). The reporting charity in such a case has no existence separate to the linked charities, but is simply a "flag of convenience" under whose registration number all those other linked charities will be registered.

The reporting charitythen accounts for all the charities linked to it. Only one annual report and one set of accounts are required for the reporting charity and all the other charities that its trustees administer. The individual linked charities retain their own identity for all other purposes.

Care should be taken to ensure that the register and related files are amended to reflect this position. This applies where we have created a reporting charity by means of a uniting direction. Trustees need to understand that even though we have created a single entity for accounting purposes, where the charities that are linked in this way, or some of them, are still registered separately, the mailing system may still tell them that two or more annual returns will be needed. Only one annual return should be submitted (for the reporting charity) and they can avoid being chased for annual returns for the separately registered linked charities by submitting a register check form for each of them which shows a zero (not null) income.

The following words and phrases are defined in the Glossary of Terms:

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1993 Act
annual reports
charitable company
CMF
designated funds
excepted charities
ERF
expendable endowment
governing document
income funds
linked charity
NHS trust funds
permanent endowment
reporting charity
restricted fund
scheme
special trust
trustees
uniting direction

Go to: Index to further related information