Many organisations which operate on a not-for-profit basis are not registered as charities, but others are. So, what are the benefits of being a charity and are there any disadvantages?
The Government treats charities differently from other organisations – the principal aim being to enable charities to direct as much of the money which they raise or earn towards their charitable purposes. Some of the advantages of this treatment are as follows:-
- exemption from the payment of tax on most income and gains;
- the right to apply for relief or reduction in business rates and stamp duty;
- eligibility to apply to certain grantmaking organisations;
- eligibility to receive gifts made under tax effective schemes such as Give As You Earn, and Gift Aid; and
- eligibility for some specific VAT reliefs.
In addition, being able to call your organisation a charity may help to raise its profile and gain public support.
The flip side of being registered as a charity is that a charity must comply with charitable legislation. In Scotland, the relevant legislation is the Charities and Trustees Investment (Scotland) Act 2005. The principal aim of the legislation is to increase public confidence through effective regulation. The Act therefore created a new regulator of Scottish charities – the Office of the Scottish Charity Regulator (or ‘OSCR’ for short). OSCR’s general functions are to:-
- determine whether bodies are charities;
- to keep a public register of charities;
- to encourage, facilitate and monitor compliance by charities with the provisions of the Act;
- to identify and investigate apparent misconduct in the administration of charities and to take remedial or protective action in relation to such misconduct; and
- to give information or advice, or to make proposals to the Scottish Ministers in matters relation to OSCR’s functions.
So, the quid pro quo of being registered as a charity is that the organisation in question is held accountable and that its activities are transparent. This means that:-
- charities with a gross annual income under £25,000 must complete an Annual Return Form which confirms basic information about the charity, such as its name, principal contact, and charitable purposes together with a copy of the charity’s most recent accounts;
- charities with an income over £25,000 must also complete a supplementary Monitoring Return Form, which provides OSCR with more detailed financial information.
There are some other restrictions which are imposed on charities:-
- the charity must only have a charitable purpose or purposes and must also provide public benefit;
- the charitable body should only spend its money either (i) in directly furthering its charitable objectives or (ii) as a sound investment, involving a proper commercial return and proper security;
- an organisation cannot be a charity if its constitution allows it to distribute or otherwise apply its property for a non-charitable purpose (whether on being wound up or at any other time);
- to be a charity in Scotland an organisation needs to be independent from the control of Scottish Ministers;
- an organisation cannot be a charity if its purpose is to advance a political party; and
- some changes to a charity require OSCR’s consent in advance and/or notification after the change.
Remuneration of trustees
Another disadvantage to becoming a charity is the restrictions which are imposed on the ability to pay trustees for their services (the rationale being that any personal benefit must – in OSCR’s words – be treated with caution). Broadly, the position is that a trustee must not be remunerated unless the following conditions are met:-
- the maximum amount of the payment is set out in a written agreement;
- the maximum amount is reasonable in the circumstances;
- it is in the interests of the charity for the services to be provided by the charity trustee for that amount (this must be agreed before the agreement is entered into);
- less than half the trustees receive the remuneration; and
- the charity’s constitution or governing document does not expressly rule it out.
The exception to this is if the constitution contains a specific provision which was in force on or before 15 November 2004 permitting such remuneration to be made.
These restrictions go beyond applying only to trustees. They also apply to:-
- immediate family and domestic partners; or
- a company in which the charity trustee or a connected person may have a substantial interest; or
- a partnership in which the charity trustee or a connected person is a partner.
There is no doubt that registering as a charity has its advantages, principally in relation to tax savings and the ability to apply for certain grants. Recognition as a charity brings with it however an additional reporting burden and restricts the activities of the charity and its ability to pay its trustees or connected persons.
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