Charities Act 2006
What trustees need to know
Contents
A.Foreword4
B.Guide to the booklet6
B1.Why this booklet?7
B2.Scope of the booklet7
B3.Who has written the booklet?7
B4.Using the booklet7
C.Summary for trustees of smaller charities 8
C1.Introduction9
C2.Effective administration9
C3.Development and growth9
C4.Building public confidence9
C5.Grey areas9
C6.When things go wrong9
D.The big changes for your charity10
D1.What is a charity? Charitable purposes and 11
public benefit
D2.Registration12
D3.Audit, accounts and annual returns13
D4.The Charitable Incorporated Organisation (CIO) – 15
a new structure for charities
E.Less red tape18
E1.Changing your purposes19
E2. Altering your governing document19
F.What has changed for the individual trustee?22
F1. Is the role of trustee still a voluntary one?23
F2. Trustee liabilities23
G.What can the Commission do for you?26
G1. Resolving problems and better administration27
G2. Protecting charities28
G3.Wider powers in conducting statutory investigations29
H.Specific circumstances30
H1. Excepted and exempt charities: what’s changed?31
H2.Small charities and the transfer of property32
H3.Register of mergers 33
H4.Spending from endowment funds 33
H5.Mortgaging charity property for a loan or grant34
H6.Fundraising 35
H7.The Charity Tribunal37
I.About the Commission40
I1.The Commission’s role41
I2.The Commission’s status and structure42
J.Glossary44
Appendix
Sources of further useful information48
A. Foreword
Welcome to our essential guide, which summarises what trustees need to know about the new Charities Act 2006.
Charities themselves have been central partners in shaping the Charities Act 2006 – from initial suggestions, to the review in 2001, to the final stages of parliamentary debate. The result is a set of changes that aims to make life simpler for trustees, modernises the definition of charity, and provides new safeguards to uphold public trust in the charitable sector.
First, the Act aims to provide trustees with more flexibility and less bureaucracy – particularly smaller charities. It offers new, easier ways for charities to make changes to their purposes, structures and administration. There are new provisions for transferring assets, winding up, changing objects and merging. Before, charities that wanted the benefits of incorporation had to face two sets of regulation, as both a charity and a company. Now, there is a new legal structure specifically for charities – the Charitable Incorporated Organisation (CIO).
Second, the Act modernises the definition of ‘charitable purposes’, bringing it up to date to reflect how charity has evolved and developed over many years. All purposes that were recognised as charitable before the Act are covered by the new definition. The Act ensures that the test of ‘public benefit’ remains a cornerstone of charity, underlining the requirement that all charities must be for the benefit of the public. It also addresses the need to make the public aware of the ways in which charities deliver public benefit, and charges the Charity Commission with making sure this happens.
Third, the Act protects public trust. Confidence in charity is vital, and it is something we cannot take for granted. The Act strengthens the charity sector’s accountability and transparency. It will bring around 13,000 larger charities, which were previously exempt or excepted, onto the register of charities. Itthereby ensures that these charities are regarded in the same way as other charities.
The Commission itself has been given updated objectives and powers to support its role as a modern and effective regulator. It will be cheaper and easier for charities to challenge the Commission’s decisions through the Charity Tribunal. As well
as improving the Commission’s accountability, this will help charity law develop more flexibly over time.
We hope this guide clearly explains the changes made by the Charities Act 2006 and that it provides the information trustees need to identify the opportunities available now, and inthefuture.
ED MILIBAND MP DAME SUZI LEATHER
Minister for the Third Sector Chair, Charity Commission
B. Guide to the booklet
B1.Why this booklet?
The Charities Act 2006 – called simply ‘the Act’ in this booklet – was passed by Parliament in November 2006 but did not come into force immediately. Some parts of the Act came into force on 27 February 2007. Most of the rest will come into force by early 2008. The booklet gives trustees an overview of the Act, and is mainly for those whose charities have an income of less than £500,000 a year. However, it may also interest the trustees, employees, volunteers and advisers of all charities.
B2.Scope of the booklet
The booklet covers a wide range of topics about charities in England and Wales, their trustees and the Charity Commission. Our short explanations are accurate, but they aim to highlight the main changes introduced by the Act and help you find out which ones will or may affect your charity. The Act deals with complex legal matters. To be clear about any next steps that you may need to take and when to take them, please seek further guidance.
B3.Who has written the booklet?
The booklet comes from the Office of the Third Sector and the Charity Commission.
The Office of the Third Sector is part of the Cabinet Office. It advances and develops the role of the third sector, and its responsibilities include the reform of charity law. The Charity Commission (usually called simply ‘the Commission’ in this booklet) is the independent regulator of charities in England and Wales. The Commission’s aims include improving charities’effectiveness and increasing public confidence andtrust in charities.
B4.Using the booklet
To get a flavour of the main changes at a glance, turn to sectionC. Sections D to I give more detail. Under each heading, we mention significant changes introduced by the Act which will interest you as a trustee. Individual provisions of the Act will come into force at different times. Some have started already, while others need consultation, regulations to be made, and guidance to be published. You can generally find more information about the next steps at the end of each section of the booklet, as well as details of what further guidance is available now from the Commission’s website. Progress updates will also be posted on the websites of the Office of the Third Sector and the Commission (see the Appendix for details). The online version of this booklet will be updated from time to time, and will be available on both of these websites.
The headings within the sections alert you to the broad areas affected by the Act. Generally we give a concise summary of what has changed (‘The short answer’ or ‘In brief’) and then give more background (‘In more detail’).
We have arranged the booklet to fit the way you work, so the changes most likely to affect your routine work are near the start. In a few places there are technical words that may not be familiar to all readers. The glossary in section J explains them.
C. Summary for trustees of smaller charities
Some of the Act’s provisions may seem modest, but together they will have a positive impact on the work and efficiency of your charity. They will apply whatever the type and size of your charity, and will help a diverse sector to flourish. In writing this guidance, the Office of the Third Sector and the Commission have been particularly mindful ofyourneeds.
This booklet will guide you through what has changed in key areas such as definitions, financial thresholds and trustees’ individual duties.
C1.Introduction
Small charities make up the largest part of the sector. Many of the Act’s provisions should benefit your work and efficiency. Below we list some key benefits for you, and give pointers as to where to read more.
C2.Effective administration
Nobody likes red tape. For some significant areas, the need for consent from the Commission has been removed (see in particular sections E and F):
•You will only have to register with the Commission if your annual income is over £5,000 (see D2).
•Smaller, unincorporated charities will be able to take certain actions without the Commission’s permission (for example changing your purposes or transferring assets).
•It will be easier to change your governing documents.
•Trustees can act with less bureaucracy (and perhaps less anxiety) than in the past. For example, look at what’s changed on personal liability and indemnity insurance, remuneration or fundraising.
C3.Development and growth
In terms of your charity’s development, the Act allows you to adapt more quickly to the social and economic circumstances around you. In particular, it introduces:
•new powers for unincorporated charities to transfer property, spend from endowment funds or mortgage theirland;
•an easier way to transfer legacies and donations when charities merge (see H3); and
•a new legal structure for incorporated charities with limited liability, to avoid dual regulation by the Commission and Companies House (see D4).
C4.Building public confidence
The spirit of the Act is that charities need to be clear about how they benefit the public. Much of the legal framework for charities has been developed by the courts over several centuries. TheAct provides greater clarity and stronger emphasis on thedelivery of public benefit (see D1).
C5.Grey areas
The Commission can help clarify some grey areas that may hold you back. It can give general advice and guidance and has new powers to give directions on donated property and gifts or to rule on the membership of a charity (see G1).
C6.When things go wrong
Occasionally, the Commission needs to open an inquiry into a charity’s activities. Where there are serious problems, the Commission’s powers have been enhanced (see G2 and G3). The Act also introduces a Charity Tribunal to hear appeals against Commission decisions (see H7).
D. The big changes for your charity
The Act aims to help you and the Commission deal with straightforward matters more quickly and efficiently. We are aware of the need to protect charities – in particular smaller organisations – from too much bureaucracy. We want them to be free to use their resources for their beneficiaries and develop and grow easily. The Act introduces a new legal structure for charities, and requires charities to be clear about how they benefit the public.
D1.What is a charity? Charitable purposes and public benefit
The short answer
The Act defines a charity as a ‘body or trust which is for a charitable purpose that provides benefit to the public’. It lists 13 charitable purposes, and any charity must have purposes falling within that list.
The purposes (or aims) of a charity are usually set out in its own governing document. Before the Act, there were four types of charitable purpose (known as ‘heads’). These were the relief of poverty; the advancement of education; the advancement of religion; and other purposes for the benefit of the community. Before the Act, charities relieving poverty or advancing education or religion were presumed to benefit the public. TheAct removes that presumption and all charities will have tobe able to demonstrate how their purposes benefit the public.
In more detail
The legal position: How the law understands ‘charitable purposes’ has developed over several centuries. For example, charitable purposes are described in the preamble to the Charitable Uses Act 1601. Purposes considered charitable today are based either on those original ones or on other purposes already established by the courts to be like them. The range of charities that exists now has clearly evolved considerably since the seventeenth century. By listing these established purposes, the Act updates the scope of charitable aims for a modern society and gives a much clearer idea of what is considered as being ‘for charity’.
Charitable purposes: The new list has 12 specific headings and one general heading. This last general heading keeps within the scope of charity everything which is currently charitable but which may not be covered by any of the 12 specific headings. In that way, all 13 headings together cover everything that is charitable. The list is:
•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
•other purposes that are currently recognised as charitable or are in the spirit of any purposes currently recognised ascharitable.
This last heading encompasses many established charitable purposes, for example relief of unemployment, promotion of moral and spiritual welfare, rehabilitation of offenders, and others. It also covers any purposes that might be recognised as charitable in the future. Charities covered by the thirteenth
general heading are treated the same in terms of regulation or tax as charities covered by the other specific headings.
The public benefit requirement: All charities must have purposes that benefit the public. The Act strengthens this obligation by requiring that all – and not just some– organisations on the register of charities must be able to demonstrate this. All charities seeking registration in the future must provide evidence that their purpose will be for the public benefit. Some existing charities may also be asked to demonstrate how they meet this test.
Developing the law on public benefit: The meaning of ‘public benefit’ is not always straightforward. The Commission will have to assess, for example, what the benefits are, who will benefit and whether that is sufficient given the purposes the charity is set up to achieve. As with the law on charitable purposes, the law on public benefit will continue to evolve and develop. Itwill alter in response to the social and economic context within which charities operate and in response to decisions bythe Commission, the proposed Charity Tribunal (see H7) and thecourts.
The Commission’s role: One of the Commission’s new objectives is to promote understanding and awareness of the public benefit requirement (see I1). To help meet this objective, the Commission has already started consultation and has published some draft guidance on its website, setting out its proposed approach. After consultation, the Commission will carry out public benefit checks on existing charities.
Trustees’ role: You are not legally obliged to follow the guidance but you must have regard to it when it is relevant to your charity.
The public benefit requirement and the provisions on charitable purposes will come into force in early 2008.
Further information on the Commission’s website:
•Consultation on draft public benefit guidance
•Commentary on the descriptions of charitable purposes in the Charities Act 2006
D2.Registration
In brief
Generally, only charities with an annual income above £5,000 must register with the Commission. This threshold has gone up from its previous level of £1,000. The registration requirements for ‘exempt’ and ‘excepted’ charities will also change and are set out elsewhere in this booklet (see H1).
In more detail
The increase to the registration threshold means that most charities with an annual income of £5,000 or less do not have to register. There used to be a requirement that a charity must register (regardless of the level of its income) if it possessed a permanent endowment, or used or occupied land. That is now gone. But all charities that opt for the new status of Charitable Incorporated Organisation (see D4) must register with the Commission, regardless of their income.
Purpose of the change: The Act will save time (and, in many cases, money) for several thousand small charities by releasing them from the duties of registration and of maintaining their registered details. Smaller charities will thus be released from several compliance obligations, while continuing to benefit from charitable status.
This provision came into force on 23 April 2007.
Voluntary registration: The Commission does not usually register any charity that is below the threshold for compulsory registration. Eventually, under changes in the Act, these small charities will have a right to register voluntarily, but this right has not yet come into force. However, the Commission recognises that some charities have a particular need to be registered so in the interim will consider their requests on a case-by-case basis.
The right to voluntary registration is delayed so that the Commission can deal with other work resulting from the Act. We do not expect it to come into force until the Commission has dealt with changes to registration affecting excepted and exempt charities, and it is unlikely to happen before 2009.