OPERATIONAL GUIDANCE

EXEMPT CHARITIES

CHARITIES COVERED BY SCHEDULE 2 TO THE 1993 ACT: INTERPRETATION AND PRACTICE

OG 57 C1-01 March 2000

Divisional responsibility

For action:

Registration Division
Charity Support Division

For information:

Investigation Division
Charity Database Division

Contents

1. Summary
2. What is the effect of paragraph (w)
3. When paragraph (w) does not apply

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

1. Summary

1.1 Charitable status
1.2 Paragraph (a)
1.3 Paragraph (c)

1.1 Charitable status

Schedule 2 of the 1993 Act defines what institutions, so far as they are charities, are exempt charities for the purposes of the Act. The phrase "so far as they are charities" is particularly relevant to those parts of the schedule which refer to groups of organisations, some of which will be charities and some of which will not. For example, it is possible to set up an industrial and provident society as a charity, in which case it will be exempt by virtue of paragraph(y) of schedule 2. But it is equally possible to set up such a society as a non charitable organisation, in which case the issue of exempt charity status will no longer be relevant.

The phrase also provides an element of flexibility, by recognising that the claim to charitable status of any group or specific organisation listed in the schedule may cease, in which case the exempt status conferred by schedule 2 would no longer be relevant.

Most of the paragraphs in Schedule 2 refer to specific named institutions or to institutions which can be identified by reference to some other document, for instance:

• an Order in Council where exemption is extended to additional named universities or colleges under (paragraph (c));

• a register in the case of Industrial and Provident Societies and Friendly Societies (paragraph (y)). Only in the case of paragraph (w) do we have to consider the trusts of the charity to decide whether it is exempt.

A charity may be exempt under paragraph (w) even though the institution to which it is subsidiary is not itself a charity. For example, the prize funds and sholarships of a non-charitable exempt institution could be established for charitable purposes, even though that institution itself is not charitable.

1.2 Paragraph (a)

Paragraph (a) of Schedule 2 covers a finite number of individual institutions. These are included in the alphabetical list of exempt charities set out in OG 57 E2.

1.3 Paragraph (c)

Paragraph (c) of Schedule 2 makes it possible to extend exemption to universities, university colleges and institutions connected with universities not covered by paragraphs (a) or (b). A list of current exemptions is included in the alphabetical list of exempt charities set out in OG 57 E2. But we need to bear in mind that this list is not static. There will be additions as new exemptions are made and we will not necessarily know if an institution has changed its name. It would be helpful if caseworkers could pass any new information to the PGU so that this list can be updated.

2. What is the effect of paragraph (w)

2.1 Paragraph (w) of Schedule 2 to the 1993
2.2 Basic conditions
2.3 Administrative connection - criteria to be satisfied
2.4 Potential pitfalls
2.5 Compatibility of purpose

2.1 Paragraph (w) of Schedule 2 to the 1993

• is administered by or on behalf of an institution included in paragraphs (a) to (v) of Schedule 2;

and

• is established for the general purposes of, or for any special purpose of or in connection with that institution.

An institution must satisfy both conditions to be exempt. If it satisfies only one, it will not be an exempt charity.

The criteria we should follow in considering whether the two conditions are satisfied are set out in sections 2.3 and 2.5 below. As the number of institutions which are likely to be exempt under paragraph (w) of Schedule 2 will increase, it is important that we adopt a uniform practice.

The possibility of exemption for subsidiary bodies does not apply equally to all exempt charities (see sections 3.1 and 3.2. below)

2.2 Basic conditions

For a subsidiary charity to be exempt, both of the conditions laid down in paragraph (w) must be satisfied. That is, there must be:

• a sufficiently close administrative connection between the subsidiary charity and its primary institution (see section 2.3 below); and

• sufficient compatibility of purpose (see section 2.5 below).

If a case-worker has any doubts as to whether or not a particular charity satisfies these conditions, the case should be considered at senior officer level (pay band 4/5). If necessary, Legal Division should be asked for advice.

2.3 Administrative connection - criteria to be satisfied

The first condition laid down in paragraph (w) is that the subsidiary charity must be administered by or on behalf of the primary exempt institution.

The first condition laid down in paragraph (w) is that the subsidiary charity must be

• To be administered by an exempt institution, the subsidiary charity must be administered directly by it as trustee.

If this is the case, the first condition will be satisfied.

• To be administered on behalf of an exempt institution, there must be an administrative connection between the two which makes the affairs of the subsidiary a matter of direct concern to the trustees of the primary institution.

In these cases, we have to look at the constitutional provisions which connect the administration of the two institutions. Both their nature and extent are relevant.

Every trustee body must exercise its discretions itself. Therefore, administration on behalf of an exempt institution cannot be interpreted as meaning "in accordance with the instructions of" or "in a manner which is subject to review by" the trustees of the primary institution.

Examples of provisions which are likely to satisfy this condition are:

• The trusts of the subsidiary charity provide that its charity trustees shall consist wholly of, or of a majority of:

• those responsible for the management and administration of the primary institution;

• some other constitutional body of the primary institution (eg the finance committee); or

• the officers of the primary institution.

• The constitution of the primary institution:

• provides for the establishment of the subsidiary; and

• the primary institution wholly or substantially funds the subsidiary; and

• the trusts of the subsidiary charity require it to account for those funds to the primary institution.

2.4 Potential pitfalls

The necessary connection could not be deduced simply from the fact that:

• the constitution of the subsidiary charity provides for the primary institution to appoint some (or even all) of its trustees, where the appointees may be people who have no connection with the administration of the primary institution;

• the trustees of the subsidiary charity need the consent of the primary institution (or one of its officers) to exercise some aspects of their discretion;

• the constitution of the primary institution provides for the establishment of the subsidiary. (This may however provide forcible supporting evidence if there are other factors present which indicate a sufficiently close administrative connection.)

Nor is the necessary connection present where:

• only a minority of the trustees represent the primary institution in some way.

For example:

• The Parent Teachers Association of a voluntary aided school would not normally satisfy the condition even if the headmaster were given some right of veto over applications. Their administration would not, typically, be related to the administration of the school.

• Prize and scholarship funds associated with a voluntary aided school will normally satisfy the condition because they are usually administered by the school governors or the headmaster ex officio.

(See OG 57 E1 for worked examples.)

2.5 Compatibility of purpose

The second condition laid down in paragraph (w) is that the institution must be established for the general purposes of or for any special purpose of or in connection with the exempt institution.

We must look at the objects of both the subsidiary charity and the primary institution to ensure that:

• they are compatible; and

• the objects of the subsidiary charity are no wider than those of the primary institution.

In practice, most primary exempt institutions will have objects which are very wide. Incompatibility will, therefore, rarely be a problem.

Where the primary institution acts as trustee of the subsidiary charity there should be no question of incompatibility. It would normally be beyond the powers of a primary institution to undertake directly the administration of a subsidiary charity with incompatible objects.

Where the subsidiary charity is administered on behalf of the primary institution by individuals, the situation is slightly different. The trustees would not be acting beyond their powers simply because the objects of the two charities were not compatible. However, compatibility is still demanded by the terms of paragraph (w).

3. When paragraph (w) does not apply

3.1 Paragraph (x)
3.2 Paragraphs (y), (z) and (za)

Paragraph (w) only applies to organisations listed from paragraphs (a) - (v). Paragraphs (x) - (z) appear after paragraph (w) and the position relating to subsidiaries is as follows.

3.1 Paragraph (x)

In the case of the Church Commissioners, subsidiary exemption is granted only to institutions which are administered directly by them.

3.2 Paragraphs (y), (z) and (za)

In the case of:

• Friendly Societies;

• Industrial and Provident Societies;

• The Board of Governors of the Museum of London; and

• The British Library Board,

only the primary institution is exempt.

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

•
•

the 1993 Act
trustees

Go to: Index to further related information