Where do SCIOs sit in the Scottish charities legal structure landscape? It is something we have been asking ourselves for a while. Indeed, we publish graphs showing our research into the number of charities that choose different types of legal form when they obtain charitable status. We also track the set up of Community Interest Companies to get a flavour of the wider third sector legal entity choices.

Now OSCR has released the results of an empirical review into SCIOs (Scottish Charitable Incorporated Organisations). We report below on some of the findings in that study. But first…. here is our graph that takes the data on new charities and legal vehicle choice up to summer 2019:-

What do these legal vehicle choices show us?

  • SCIOs are increasingly popular… and appear to be taking ‘market share’ from companies.
  • Behind the statistics, in our experience, SCIOs are used for a range of charities from grant-giving foundations, to community groups through to service providers and charities undertaking a capital project.
  • Trusts are almost unheard of now for new charities. We struggle to readily identify a situation in which a new charity would wish to use a trust.
  • CICs have a certain popularity. But they might not always be the ‘right’ solution for social enterprise as they are often trailed. Charities can be commercial.
  • Sadly, unincorporated associations remain used as the vehicle for charities. This can, and does, open personal and unlimited liabilities for trustees and members. Unincorporated associations require extreme caution. The better news is they seem to losing their appeal.
  • Whatever legal vehicle is to be used it should be selected on the basis of informed choice and kept under review.

The OSCR commissioned research

The study throws up many interesting statistics. It also perhaps shows that with SCIOs being relatively ‘young’ it might be some time until concrete empirical evidence will be available to reveal certain characteristics of SCIOs. This is possibly a factor in the study’s findings about the low rate of dissolution for SCIOs.

The introduction to the OSCR study quite rightly noted that SCIOs were designed to address certain issues for charities and in particular the large number of charities operating without limited liability or corporate status. Factors that could people off from becoming trustees or put third parties off from working with an unincorporated organisation. As the reports notes the SCIO aimed to be a “credible legal structure” which would “engender trust and confidence amongst those it interacted with.” The SCIO working groups that considered matters ahead of the introduction of SCIOs had, the study reminds us, expected SCIOs to be used by charities in the low to medium income brackets (£25,000 to £1m) with larger charities expected to opt to use companies and “it would be most sensible for many smaller associations to stay unincorporated.” On the last point, and as we have said above, we struggle to think why any charity would wish to be an unincorporated association.

The study looked at four principal questions:-

  • For individual bodies, what have been the costs or benefits of changing to this legal form?
  • Has the uptake of SCIOs been with the bodies that were anticipated to take on the form?
  • How do important organisational and regulatory events, such as dissolution, public complaints and other compliance issues occur in SCIOs compared to other legal forms?
  • Are charity trustees of SCIOs aware of their obligations?

Who uses the SCIO? Are there detectable financial trends associated with SCIOs?

On expected uptake of SCIOs, the study found that 1,136 existing charities have taken steps to ‘become’ SCIOs. Of those 65% were unincorporated associations, 18% were companies and 16% were trusts. It perhaps surprising the number of companies that have opted to become SCIOs. Given the finding in the report that many unincorporated associations deliver services, it is no surprise 65% of the charities ‘turning into’ SCIOs were unincorporated associations perhaps seeking a safer legal vehicle to deliver their activities. Similarly, the study notes that trusts would be more likely to be grant disbursing charities and therefore might feel less inclined to become a SCIO notwithstanding benefits it could have. While it was anticipated that small to medium sized charities would wish to use the SCIO, the study found that the charities of various levels of income and total assets chose to change to a SCIO.

Of those charities that did change to a SCIO, under the first question posed, the study found there was no significant trends in income before or after the change. However, the findings show that at the time of change to a SCIO there is a ‘bump’ in income (perhaps due to a large grant or contract award). It might be an income spike that coincided with a desire to adopt a more robust legal structure- particularly for unincorporated associations. While not covered in the report, we have experienced situations where funding is closely connected to a decision to use a SCIO where a funder refuses or has less appetite to fund an unincorporated association.

What do SCIOs tend to do?

We have noted the rise of the SCIO in our graphs looking at new charities. The study confirms this. In 2011 only 10% of new charities were SCIOs. By 2018 that had become 58%. One thing that has struck us is that over the piece unincorporated associations have retained a popularity (although that is falling away in the last year or so) while the proportion of companies has fallen away noticeably. It might be that the move from new charities choosing to be SCIOs rather than companies has been the bedrock for the growth of SCIOs with the almost complete disappearance of trusts cementing the SCIO’s position as the legal vehicle of choice. We certainly do see SCIOs being used for grant disbursing charities, but the study notes that SCIOs are more likely to carry out services than give out grants. It is interesting to note (figure 2.7) the very high proportion of new charities (of whatever legal form) delivering activities themselves.

A conclusion was that SCIOs and non-SCIOs have markedly different beneficiary groups. SCIOs tend to support older people whereas non-SCIOs’ most popular area of focus is children and young people. The research pointed to the prevalence of Girlguiding and Scouts groups continuing to use unincorporated associations.

We noted in the report that SCIOs seem just as likely to make OSCR consent request as non-SCIOs. That is interesting as given the ‘oldest’ SCIO will be just over 8 years old, it shows a need or wish to make changes to the charity at a relatively early point in its life.

SCIO = better governance?

The research sought to get a sense of whether or not SCIO trustees were more aware of their duties. The findings brought out that unincorporated associations are the most likely to default (default being a failure to submit an annual return on time) with trusts, companies and SCIOs all having a positive report card on timeous annual return submission.

People seem to like being trustees of SCIOs. Well perhaps. The statistics show that SCIOs tend to have larger trustee boards (SCIO average is 6 whereas non-SCIO average is 4). While both are even numbers (chair might be using any casting vote), both indicate sensible numbers of trustees to balance potential skills-mix while not being too unwieldy.

The report ended with good news. SCIOs were more likely to have reported to OSCR that they had reviewed their governing document in the last 12 months. That is in response to the key introductory question on the substantive part of the OSCR annual return – a question which has been a recent addition to the annual return. A well-governed charity will keep its constitution under review to make sure it remains current and relevant.

So, what does the landscape look like and what can we takeaway from it?

Here are some observations:-

  • There are lots of SCIOs being set up.
  • SCIOs (as with all charities) come in sorts of shapes and sizes. Perhaps the flexibility of the SCIO (an often forgotten characteristic of the SCIO) has supported this. Saying that, SCIOs do seem more popular by the service deliverer rather than the grant-giver (indicating limited liability is indeed an attractive element of the SCIO’s nature).
  • Charities are keeping their governing document under review and hopefully this will continue.
  • More than 1,000 existing charities have become SCIOs but that is a relatively small number of the existing charities (particularly given how many unincorporated charities there are). Maybe more existing unincorporated charities should be exploring the SCIO as an option.
  • No doubt there will be a whole host of interesting information on SCIOs as the get ‘older’.