Generally speaking, an organisation can only call itself a charity in Scotland if it has been granted charitable status by the Office of the Scottish Charity Regulator (OSCR). OSCR was established under the auspices of the Charity and Trustee Investment (Scotland) Act 2005 (the “Act”).

OSCR maintains an index of all Scottish charities which is available to the public, and requires all charities registered with it to submit accounts on an annual basis, together with an annual return detailing the charity’s purposes and its benefit to the public. Crucially, the charity must meet one or more of the 16 charitable purposes set out in the Act and satisfy the “public benefit” test. OSCR is tasked with the monitoring and supervision of charities’ activities, a responsibility which previously rested with the HMRC. HMRC still grants the tax reliefs which flow from charitable status.

Types of charitable organisation

In the past, charities were usually constituted as either a trust or as an incorporated company. Recently, a new type of corporate vehicle has been introduced, specifically with the charitable organisations in mind -- the Scottish Charitable Incorporated Organisation. We expect SCIOs to become a fairly popular option for charities which are just forming.

  1. Trusts

Trusts are formed by a granter signing a trust deed which sets about the charitable purposes, appoints trustees, and sets out their powers and responsibilities with regard to the trust assets.

  1. Charitable companies

Charitable companies offer more transparency and formality as they are registered under the Companies Act in the usual manner and are subject to company law. So, charitable companies are regulated by Companies House and OSCR. The Memorandum of Association and Articles of Association set out the company’s purposes and how the company should be run internally. Directors and a secretary are appointed in the normal manner. The directors of a charitable company are usually considered charitable trustees for the purposes of the Act, as they are charged with the management and control of the charity. The main attraction in incorporating as a company is that members of that company are afforded limited liability in the event that the company is wound up.

Community Interest Company (“CIC”)

CICs are limited companies which are aimed at social enterprises (social enterprises can be broadly defined as being businesses which trade for a social purpose). They were introduced several years ago to address the lack of an appropriate legal vehicle for non-charitable social enterprises. A CIC must meet the “community interest test” -- this means that the CIC regulator must be satisfied that its purposes could be regarded by a reasonable person as being in the community or wider public interest. A CIC cannot be a charity. The main benefits are that a CIC:-

  • does not need to be recognised as a charity and is therefore subject to less regulation;
  • enjoys limited liability; and
  • can act more commercially than charities.

The main disadvantages are:-

  • it cannot be a charity;
  • it does not benefit from as favourable tax treatment as that applied to charities;
  • its assets are subject to an “asset lock” which means that all surplus assets must be retained for use for the CIC’s social or community purpose, and if transferred out of a CIC, the transfer must either (a) be made for full consideration; (b) be made to another asset locked body (a CIC or charity); or (c) be otherwise made for the benefit of the community.

For more information on CICs, click here.

  1. Scottish Charitable Incorporated Organisation (“SCIO”)

SCIOs are a new legal form which will allow Scottish charities to incorporate without having to become a company. This new legal form provides the benefit of legal personality and limited liability for the members but without the dual regulation by OSCR and Companies House. SCIOs will only be regulated by OSCR. The SCIO is a form exclusive to Scotland (though there will be an English equivalent), and will be subject to Scottish Charities legislation and regulation by OSCR (not the Registrar of Companies). A SCIO must meet the charity test. There are rules which set out the minimum requirements for a SCIO’s constitution.

The main purpose of a SCIO is to give a charity the benefits and legal protection of an incorporated body -- specifically the limited liability of its ‘members’ -- but without the perceived disadvantages associated with being a limited company or some other type of incorporated body.

For more information on SCIOs, click here.

Trading Companies/VAT registration

Consideration must also be given to whether the charity needs to be registered for VAT and if any repayment of VAT is applicable thereafter. A charity should also consider its trading activity and whether it would be beneficial for it to set up a trading subsidiary.

For more information, click here.

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