The Charities Act 2006 finally became law at the end of last year (having been temporarily dropped from the Government's legislative calendar as a consequence of the General Election in 2005!). The Act will bring into force some fundamental changes to English charity law and to the regulation of the charity sector. The Charity Commission describes the Act as “amajor piece of charity legislation”, and in this briefing we look at some of themost important provisions of the Act and comment on their impact on the sector. Some parts of the Act are expected to come into force during the course of this year, other parts will come into force during 2008 or 2009. If you think that some of the issues raised in this briefing are relevant to you please do not hesitate to contact any of our charity law specialists listed below.

New descriptions of charitable purposes

The Act sets out a comprehensive new list of 13 charitable purposes, replacing the previous four heads of charity established by case-law, reflecting the changes that have taken place in society and the charity sector over the years. Although unlikely to be of immediate impact on existing charities, unless they are wishing to establish a subsidiary charity, this new list is expected to provide a clearer framework for new charities that are going to be created and registered with the Charity Commission. The new list of 13 charitable purposes will be subject to the “public benefit” requirement discussed below.

New requirement of “public benefit”

One of themost controversial aspects of the Act is the new “public benefit” requirement that will apply to existing and new charities.Whereas previously there was a presumption in the case of educational, religious and relief of poverty charities that there was public benefit to their purposes, it will now be necessary for all charities to satisfy a public benefit test. The Act does not provide a definition of public benefit; instead, the precise parameters of the concept will be decided by the Charity Commission, who has stated that it will develop the concept of public benefit using underlying case law and taking into account changing economic conditions and social attitudes. The Charity Commission also recognise that a “one size fits all” approach is unlikely to be appropriate and they intend to prepare guidance on public benefit that is relevant to particular types of charity.

The Charity Commission has now announced what appears to be an ambitious timetable within which to undertake the important task of developing the principles of public benefit and producing detailed guidance for charities: 

  • January 2007: Charity Commission to launch a three month consultation on the principles of public benefit, the ways in which itmay be determined and how it should be assessed. 
  • June 2007: Charity Commission to publish their results provisionally titled Principles of Public Benefit. 
  • September 2007: Charity Commission to begin a pilot assessment of public benefit. In addition, the Charity Commission will produce detailed guidance for specific types of charity and consult with themon that guidance. 
  • April 2008: Charity Commission to publish the results of the pilot assessment and a formal assessment will commence.
  • Summer 2008: Charity Commission to report to Parliament on the progressmade regarding the formulation and application of the public benefit test.

It remains to be seen what the outcome of the review process will be for those charities whomay have difficulty in fulfilling the public benefit criteria. The Charity Commission have said that they intend to be proactive in working with charities to consider how theymight be able to adjust their activities in order to satisfy the criteria. Some charitiesmay consider whether or not to seek a review of the Charity Commission's findings if the outcome of the review is not favourable; it should be noted that the Act provides for the establishment of a new Charity Tribunal which will hear challenges to the Charity Commission's legal decisions, including those relating to whether a charity fulfils the public benefit criteria or not. It is intended that the forumof the Charity Tribuinal should be cheaper and easier than the current appeals systemto the High Court.

Changes to the cy-prés rule

The Actmakes some changes to the cy-près rule which applies when the purposes for which charitable property is held are no longer suitable, or where a gift to charity fails. The situations in which the charitable purposes of the original gift can be changed will not only include a consideration of the “spirit” of the original gift but will also take into account the changing social and economic circumstances; in some cases thismay require a departure fromthe “spirit”. This is intended to provide greater flexibility for failed gifts that are to be applied for charitable purposes and should give charitiesmore freedomwhen dealing with such gifts.

Where funds have been given for specific charitable purposes which have failed, they should be returned to the donors unless, after certain statutory steps have been taken, they cannot be identified or they waive their rights to the property. Although the Charities Act 1993 gave the Court authority to direct that donors shall be deemed to be unidentifiable, the Act has now given this power to the Charity Commission which shouldmake it easier and cheaper for charities seeking to apply such funds where donors cannot be identified.

Mortgaging charity land

The Act extends the circumstances in which a charity does not require the formal authority of the Court or the Charity Commission to allow charity land to be used as security to repay a loan. The principal extension is tomortgages which are intended to secure not only a current loan but also any future loan which the lendermightmake to the borrower (so called “allmonies” charges). The new provisions, once they come into force, will be subject to the requirement that any future loan transactionmust not be entered into unless proper advice has been taken in respect of that transaction.

Merger of charities

The Act contains provisions which are intended to help with makingmergers between charities easier. A register of mergers is to be established which will contain registrable mergers that are notified to the Charity Commission. There are two types of registrablemergers. The first is when a charity transfers all its property to another charity and then, on or after the transfer, ceases to exist. The second is when two or more charities create a new charity and then transfer all their property to the new charity and, on or after the transfer, cease to exist.Mergers of both typesmay only be registered once all of the charities transferring their property to another charity have completed the transfer of all of their property.

A newmechanismis contained in the Act to allow for the automatic transfer of property to the new entity. This is to be done by way of a vesting declaration that ismade by the trustees of a transferring charity before any actual transfer takes place. However, certain property cannot be transferred using the vesting declaration, including: land held by the transferor as security for money subject to the trusts of the transferor; land held by the transferor under a lease containing a covenant against the assignment of the transferor's interest without the consent of another, unless that consent has been obtained; or, shares, stocks, or other property which are only transferable in books kept by a company or in amanner directed by or under any enactment.

Where a gift ismade to a charity which takes effect after the date of registration of amerger, such as legacies under wills written before themerger which fall due to a charity after it has ceased to exist, such a gift will generally take effect as if the gift had originally beenmade to the new charity.

Liability of trustees

Relief frompersonal liability

Prior to the Act, a charity trustee seeking relief from personal liability for a breach of trust had to apply to the Court, which could grant relief where it believed that the trustee had acted honestly and reasonably and ought fairly to be excused. The Act now confers this power on the Charity Commission and extends it to persons appointed by a charity as an auditor or independent examiner and to persons appointed by a charitable company as auditor or reporting accountant.

In addition, the Court’s existing power is extended to grant relief to an auditor or independent examiner of an unincorporated charity and power to relieve fromliability all those who report on the accounts (including group accounts). It also gives the Court power to relieve charity trustees of a Charitable Incorporated Organisation (CIO) fromliability.

Trustee indemnity insurance

The Act provides trustees with a statutory power to purchase trustee indemnity insurance and to pay the premiums with the charity’smoney, (unless it is expressly prohibited by the charity’s trusts) subject to certain limitations and conditions. However, trusteesmust satisfy themselves that it is in the charity's best interests to purchase trustee indemnity insurance. Suspending and removing trustees from membership of the charity

The Charity Commission canmake an order suspending or removing fromoffice any trustee, officer, agent or employee of a charity who is also amember of that charity. Before the Act came into force a person who had been suspended or removed fromoffice could use hismembership of the charity to help vote himself back into, or reacquire in other ways, the office fromwhich he had been suspended or removed. The Act gives the Charity Commission the power to prevent this by; suspending themembership of someone whomit was suspending fromoffice (for as long as his suspension fromanother office); or, terminating the membership of someone whomit was removing fromoffice and prohibiting that person fromtaking up hismembership again without the Charity Commission's agreement.

However there is a presumption that a person should be entitled to take up hismembership again five years after it was terminated, which can be overturned only if there are special circumstances.

New charitable company structure (CIO)

The Act creates a new vehicle for charities which want a corporate structure without the dual regulatory burdens of both the Charity Commission and Companies House. A CIO will have the advantages of a corporate structure, such as potentialmitigation of personal liability for trustees, without the burden of dual regulation. Creating CIOs will require additional secondary legislation and the recently formed Office of the Third Sector will start consultations in preparation for this legislation during the course of this year.

Changes to audit and accounting requirements

The Act sets out a new test to decide whether a professional audit is required for a charity; essentially, if a charity's income level is above £500,000 per annum, or, the charity's gross incomemore than £100,000 per annum and it has an asset value threshold of £2.8million, then the requirement will apply.

Charities with incomes above the old threshold of £250,000, but below the new threshold of £500,000, would have been required to have an audit under the previous regime but will not be so required under the new regime. If these charities do not have their accounts professionally audited, the accounts are still required to be independently examined. In addition, the accounts of charities with incomes above £10,000, but below the new threshold of £500,000, are now subject to independent examination.

Auditors of registered charities which are not companies have a specific statutory duty (a “whistle-blowing” duty) to report to the Charity Commission any abuse or significant breaches of charity law or regulation. Auditors who comply with this duty have statutory protection from the risk of action for breach of confidence or defamation. Auditors of charitable companies, however, would have to rely on the protection given by case law if theymade a similar report in the public interest. The Act prescribes the “whistle-blowing” duties and powers of auditors and extends those duties and powers to independent examiners. In addition, where auditors or independent examiners act in accordance with their “whistle-blowing” duties or powers, no duty to which they are subject, for example the duty of confidentiality towards their clients, would be contravenedmerely as a result of the information or opinion contained in their report.

The Act also confers on the auditor or independent examiner of an exempt charity, which is not a company, the same duties, powers and protection as auditors and independent examiners of unincorporated charities are given.

A new requirement has been introduced so that a “parent” charity (ie, one which has subsidiaries under its control) has to prepare annual accounts relating to the whole group. The group accounts need to be submitted to the Charity Commission with the copy of the annual report, along with a copy of the report on the accountsmade by the auditor or independent examiner.

Audit thresholds for charitable companies

The Act has revised the thresholds in order to achieve greater consistency in the audit thresholds for charitable companies and unincorporated charities. The Act increases the reporting accountant conditions, so that charitable companies with gross incomes ofmore than £90,000 but notmore than £500,000, and those with assets of notmore than £2.8million, would be able to have a reporting accountant's report as opposed to an audit.

Miscellaneous

Relaxation of restriction on altering memorandumand articles

The Act now limits the occasions on which alterations to a charitable company'smemorandumor articles of association would require the prior written consent fromthe Charity Commission.

Reduced publicity requirements for Charity Commission Schemes

The purpose of this change is to speed up the formal procedure for themaking of schemes and orders by the Charity Commission and to reduce the cost to charities, by making the advertising of the changes amatter of Charity Commission discretion.

New requirements for agreements between charities and professional fundraisers The Act now requires a professional fundraiser to state the amount of his remuneration in connection with an appeal; or, if that amount is not known at the time of the appeal, to give as accurate an estimate of the amount as is reasonably possible in the circumstances.

The Act also amends the requirements of what must be included in a statementmade by a commercial participator, outlining themethod of determining the benefit to the charitable institution or institutions concerned. The statementmust include information concerning: the amount (or an estimate if not known at the time) of the consideration given for goods or services sold or supplied by the commercial participator which is to be given to or applied for the benefit of the charitable institution or institutions concerned; and the amount (or an estimate if not known at the time) of the proceeds of the promotional venture undertaken by a commercial participator which are to be given to or applied for the benefit of the charitable institution or institutions concerned.

The Act also provides that where paid employees, offic`ers, or trustees of a charity or a connected company are acting as collectors, theymustmake a statement whenmaking appeals.

It is an offence for failure to comply with these provisions, (conviction for which carries amaximumpenalty of a level 5 fine (currently £5,000)).

The Government has accepted the Strategy Unit recommendation that a self-regulatory initiative should be established based on a new voluntary Code of Practice, to promote and raise awareness of good practice in fundraising. The Institute of Fundraising sponsored an independent to explore differentmodels for a systemof self-regulation, to consult and to recommend a preferred model. Proposals for the scheme were published early in 2005 and the Fundraising Standards Board launched to the charity sector in summer 2006. It is expected to launch to the public early in 2007. The Government believes that selfregulation should be the first resort in improving fundraising standards and practices. However, the Act empowers the Minister for the Cabinet Office to impose statutory regulation, should self-regulation prove to be ineffective.

Payment of a trustee for the provision of additional services to the charity

The Act provides a statutory power for the trustee body to pay remuneration to a person who either is a trustee of the charity, or is connected with a trustee of the charity who might receive a benefit as a result of the connected person's remuneration. However, this section does not apply to remuneration for services provided by a person acting in their capacity as a trustee, nor under a contract of employment.

Powers to protect a charity and ensure that charity property is used correctly

The Act now allows the Charity Commission, at any time after starting a statutory inquiry into a charity, to direct the trustees, officers or employees of the charity, or, if a body corporate, the charity itself, to take a specific action which the Commission thinks is expedient in the interests of the charity. The Charity Commission can only exercise this power if it has found that there is or has been any misconduct ormismanagement in the administration of the charity, or that it is necessary or desirable to act for the purpose of protecting the property of the charity, or securing a proper application of that property for the purposes of the charity.