Charities Act 2011: all change on 14 March for prescribed statements in charity dispositions of land?

05/03/2012

Briefly, it appears that the answer to this question is: no.

The Charities Act 2011 consolidates the existing charities legislation, and repeals the entirety of the Charities Act 1993. It comes into force on 14 March 2012.

It does not change the law for charities on the disposal or acquisition of land, but the numbering of the existing provisions in the Charities Act 1993 (CA 1993) which relate to such dealings with land will change. The provisions of sections 36 – 40 CA 1993 will appear at sections 117 – 129 of the new Act.

Prescribed statements (which refer to the appropriate section numbers in CA 1993) must be used in the documents completed by charities to effect the transfer of land, and guidance on the statements to be used can be found in Land Registry Practice Guide 14 (LRPG 14)

Guidance issued by the Land Registry has now indicated that it will rely on the transitional provisions of Schedule 8 of the new Act, rather than update the Land Registration Rules 2003 (LRR 2003) immediately. The transitional provisions mean that the repeal of the sections of CA 1993 under which the LRR 2003 were made does not affect the validity of the LRR 2003. In addition, there is no need for the LRR 2003 to be amended to refer to the relevant sections of the new Act.

The Land Registry has said, however, that it is going to update Land Registry Practice Guide 14.

In the meantime, trustees with transfer documents sitting on their coffee tables containing prescribed statements which refer to CA 1993 need not panic, as, thanks to the transitional provisions, new documents will not need to be prepared. However, solicitors are being encouraged by the Land Registry to start referring to the new Act in such documents from 14 March, so trustees will see the change starting to creep in, over time.

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When is a letter of pledge not enough?

14/11/2011

Well, according to a telephone conversation I had with a Charity Commission employee on the helpline today, a letter of pledge is now never going to be sufficient proof that a charity will receive more than £5,000 in income in its first year of operation for registration purposes.

I asked why this change had come about, and the answer was the Charity Commission had been told by a number of fairly newly registered charities that the funds pledged never came through from the donors. Fair enough, I suppose.

I asked when this change in approach had occurred, and was told that it was “ages ago”, and, when I pressed for more detail than this, that it must have been close to the beginning of the year.

I asked whether this change had been publicised to those assisting with the creation and registration of charities, and was told that I had missed nothing. It had not been publicised at all.

This was slightly annoying. When you’re trying to help people to set up and register charities as quickly and efficiently as possible, it seems perverse for the regulator to make such a decision but not publicise it.

Gritting my teeth slightly, and trying to find out what might now do the job of the letter of pledge, I asked whether a copy of a contract under which the charity is entitled to at least £5,000 of income in its first year of operation would be sufficient proof of income. It would. I then asked if a deed of gift by an individual, which is similarly enforceable by the charity in the courts, would also be sufficient evidence. It would.

So, it looks as though there’s more paperwork for me to prepare (and so more costs incurred for the client), and more paperwork to submit to the Charity Commission on registration. Joy…


For the public benefit, initial thoughts on the judgement

17/10/2011

Firstly, my apologies for the delay in the arrival of this post, but the judgement was the length of a short novel (at 116 pages), even without the inclusion of any summary of the submissions made by the parties.

However, maybe that’s only to be expected, given that work on this decision by the Hon Mr Justice Warren, Judge Alison McKenna, and Judge Elizabeth Ovey began long, long ago…

How this all started
Those of you with long memories who can remember the origins of this case are to be congratulated. For those with less good memories, briefly, its origins were as follows.

The Charity Commission issued guidance, in accordance with its statutory duty under the Charities Act 2006 (the 2006 Act), on the application of the public benefit principle. It gave general guidance, and also guidance specific to fee charging charities (amongst others).

The Independent Schools Council (ISC) considered that the guidance provided went beyond mere interpretation of the existing law on public benefit, which was meant to be unchanged by the legislation, and in a way which would particularly affect its membership. So, it made an application for judicial review of the guidance, on the grounds that the guidance was incorrect and that the law should be clear in its requirements.

The Attorney General (post change of government) also raised a number of points in a reference to the tribunal on the matter of public benefit and fee charging schools, and the application for judicial review and the reference were dealt with at the same time, at the end of May.

The judgement
Both the ISC and the Charity Commission have claimed success in their press releases, and considering the number of points addressed in the judgement, that’s not altogether surprising.

For those of you who can’t be bothered to wade through the entire decision, I made a summary of what seem to be the main points, while reading the judgement, and these are set out below. I must emphasise that there is a lot more to be found in the judgement itself. However, even my summary is quite lengthy in itself, and some of you may just want to skip to the end!

1. Did the 2006 Act change the existing law?
Immediately before the 2006 Act, the meaning of ‘public benefit’ incorporated both the need for (i) the nature of the purpose itself to be such as to be a benefit to the community, and (ii) those who may benefit from the carrying out of the purpose to be sufficiently numerous as to constitute a ‘sufficient section of the public’.

Public benefit in the sense of (i) above can be presumed where a trust falls into the category of being for the advancement of education (although this is a rebuttable presumption), but there is no case law to suggest that there is also a presumption of public benefit in the sense of (ii) above for such trusts.

Section 2(2) of the 2006 Act, which sets out the descriptions of charitable purposes, reflects the pre-existing categories of charitable purposes, and is includes in the 2006 Act to provide a hurdle – in order to be charitable, the purpose of a trust must fall within one of the descriptions. If it does not, then the question of public benefit, i.e. falling within section 3(3) of the 2006 Act, does not arise.

The statement in section 3(2) of the 2006 Act, that it is not to be presumed that a particular purpose is for the public benefit, reflects the conditions relating to public benefit applied in the past, but transforms them into a separate element of the ‘charity’ test.

2. Should ‘dis-benefits’ be taken into account in the test as to charitable status?
It was noted that no-one suggests the provision of mainstream education is not for the public benefit in the sense of (i) above, but it is right to ask whether the public benefit in this first sense is outweighed by the ‘dis-benefits’ caused by such provision being made for a fee.

The Education Review Group (also joined as a party to the proceedings) had suggested that impaired social mobility and diversity were dis-benefits caused by the provision of education by the private schools. However, the judges decided that a clear case would have to be shown that a purpose which would ordinarily be charitable is not because of the resulting consequences for society, and this not had been provided in respect of the dis-benefits allegedly caused by private schools.

3. What is a sufficient section of the public?
Although there is no case which decides the point, it is right as a matter of principle that a trust which excludes the poor from benefit cannot be a charity.

‘Poor’ does not mean destitute, and can cover people of modest means and even people of ‘some means’. It might on occasion even include people who might be seen as ‘quite well off’. Therefore, charging fees is not a bar to an institution being a charity, where the cost is within the ability of the ‘not very well off’ to meet, without any element of subsidy.

It is correct to look beyond the immediate beneficiary to ascertain whether the beneficiary is poor (i.e. to look at the beneficiary and his/her family), but this is not necessarily appropriate where a beneficiary is supported by a third party – a beneficiary who is supported by a grant from an educational grant making charity because he/she comes from a poor family is still poor notwithstanding the financial position of the grant making charity!

4. How do you determine whether a fee charging school’s purpose is for the benefit of the community?
Whether or not an school is established for a charitable purpose is to be ascertained by reference to its constitution, and not its subsequent activities. Generally, a school which, by its constitution, is open to all, will be considered as being established for charitable purposes only.

The status of a fee charging school registered before the 2006 Act remains the same – if it was eligible to registered as a charity then, impliedly it complied with the public benefit condition within the sense of (i) above. Whether such a school is a charity under the 2006 Act does not depend on the way in which it operates now any more than it did prior to the 2006 Act.

5. What kind of benefits can be taken into account if it is queried whether the public benefit requirement under section 3 (3) of the 2006 Act is met?
When considering whether a school which is a charity is operating for the public benefit in accordance with its charitable purposes, the primary focus must be on the direct benefits it provides. Scholarships and other direct assistance to students are therefore important.

Account can also be given to arrangements allowing children educated in the state sector to attend classes at the private school, or teacher sharing arrangements. To a lesser extent, account can also be given to arrangements to share teaching materials, via the Internet, for example.

Making facilities available to students of the local state schools was considered to be more difficult to identify as appropriate benefits to assist to demonstrate meeting the public benefit requirement, because it is not usual for a school’s objects to include the provision of facilities. In addition, there was some consideration as to whether it would make a difference if the facilities provided were classrooms or, for example, a swimming pool. However, it was included that making facilities should be taken into account in deciding whether a school established as a charity was operating for the public benefit.

If the same facilities are made available to the general public, however, this could not be taken into account, as the benefits were too indirect.

While it might be said that there was a benefit provided by private schools in their removal of pupils from the state sector, who would otherwise have had to be educated at the expense of the state, it was noted that this point could not be taken too far, as the suggested benefit to the state is highly speculative!

6. What does a fee charging school have to do to meet the public benefit requirement under section 3 (3) of the 2006 Act?
Bearing in mind that the concern regarding fee charging schools that they must be seen to be doing enough to benefit those who cannot afford the fees, the judges considered whether:

  • the test would be satisfied if the school provided some benefit to the poor which is more than token, or de minimis, benefit at which the school can point to ‘cock a snook’ at the Charity Commission, or
  • a more nuanced approach should be taken, and it was necessary to look at what a trustee, acting in the interests of the community as a whole, would do in all the circumstance of the particular school under consideration, and ask what provision should be made once the threshold of the de minimis has been met.

The judges decided that the second approach must be correct, although they acknowledged it would be a difficult approach to apply, and would make the laying down of guidelines difficult. It would not be possible to be prescriptive about the benefits which a school must provide. It is for the trustees of the school concerned to address and assess how their obligations might be fulfilled, in the context of their own particular circumstances.

However, it was noted that where “facilities at what [they] might call the luxury end of education” are provided, it will be more incumbent on the school to demonstrate a real level of public benefit.

The judges concluded that while the trustees must seek to conduct the school in such a way that its pupils or other beneficiaries include the poor, there is no legal requirement on the trustees to act in a way that the Charity Commission would consider reasonable.

7. Decisions on the points raised in the judicial review
The judges came to the conclusion that, while it is not possible for them to provide clarity on the requirements of the law on public benefit in the context of fee charging schools, the Charity Commission’s guidance was incorrect in its interpretation of the public benefit requirements when it stated as follows:

    “2b Where benefit is to a section of the public, the opportunity to benefit must not be unreasonably restricted by:

      i) geographical or other restrictions or
      ii) the ability to pay any fees charged.

    2c People in poverty must not be excluded from benefit.”

These statements were then amplified upon in further guidance provided by the Charity Commission.

The judges considered the interpretation to be incorrect because it implied a need for ‘reasonable’ provision of benefits to the poor, when this is not the case (see point 6 above). Therefore, the Charity Commission should be required to amend its guidance.

8. Responses to the points in the Attorney General’s reference
This part of the judgement contained responses to the questions regarding hypothetical fee charging schools, which the judges recognised were designed to elicit from them conclusions as to where the line can be drawn between what is and is not a sufficient element of public benefit for a fee charging school. They specifically declined to give any sort of ruling which was intended to be definitive!

As this is intended to be a summary of the judgement, I will not go into detail on the responses, but it is interesting to see the application of the judges’ approach. Those who are interested will find the text of the judgement here, and should refer to pages 101 to 108.

So, who did win, and how much help is this judgement going to be?
Well, it seems fair to say that there were successes on both sides.

The ISC can legitimately claim success because it was decided that the Charity Commission guidance was incorrect in some respects in its interpretation of the public benefit requirements, and should be amended.

However, the Charity Commission’s stance that it cannot provide detailed information on what is required of each fee charging school to meet the public benefit requirement in its guidance was clearly endorsed by the judges. The particular circumstances of each school must be taken into account.

The decision that, effectively, a de minimis provision of benefits to the poor is required in order for the school to meet the public benefit requirement, and that what more is required will be for the trustees to decide, taking into account the particular circumstances of the school, may provide some comfort to trustees.

It remains the case that trustees do not know what constitutes a de minimis provision, so there is still some uncertainty. However, it seems, potentially, there is a much lower bar for the trustees to achieve, and it is recognised in the judgement that what further provision may be needed above the de minimis provision may be quite modest, in some cases.

The judges acknowledge that their judgement does not give the clarity in the requirements of the law which was hoped for, and will please neither side of the political debate. They are right, but they are also right that the political issue in question – whether fee charging schools should have the fiscal advantages granted to charities – is one for Parliament. Whether Parliament ever finds the political will to address this question is another matter.


A late record of a recent CLA meeting

15/06/2011

The meeting of the Charity Law Association (CLA) last Thursday evening (blame DIY in a new home and a demanding kitten for the delay in the arrival of this post) was interesting for a number of reasons. Well, to me, anyway.

Amongst the items of interest was the first ever election to the CLA committee by online means – truly, we are entering the 20th century! Joking apart, I much appreciated the ease of use of the online voting method

There was a tale of cuts and woe (i.e. an overview of the Charity Comission’s Strategic Review) resignedly told by Sam Younger of the Commission. The Commission is having to face 33% cuts to its funding over four years, meaning that it is going to have to focus on its core regulatory duties, and on doing the things that only the Commission can do, and, by the looks of it, not much else

However, by far the most entertaining section of the evening was the talk given by Ben Harrison of the Office of Civil Society.

The presentation started well, with an explanation as to the role of the OCS in ‘translating the Big Society vision into practical policies’, and its five teams: Big Society Policy & Analysis, Giving White Paper, Behavioural Insights (i.e. the ‘Nudge’ team), Open Public Services, Charities & Sector Support, Social Investment & Social Enterprise, and, lastly, Social Action.

Yes, you read that list correctly. That would be ‘five’ teams. Having dealt with the introductory formalities, Mr Harrison moved onto his update on the Charities Act implementation.

With tranche two of the exempt charities (including academies, foundation & voluntary schools, and sixth form colleges) being regulated by the Secretary of State from the start of August, he confirmed that the OCS would soon be able to start work on tranche three (including further education colleges, charitable industrial and provident socities, and registered social landlords).

There was then the now familiar reprise of ‘the charitable incorporated organisation (CIO) structure should be available soon’. The CIO will be, as the name suggests, an incorporated charitable entity, but it is a form specifically designed for the charity sector, and CIOs will be regulated by the Charity Commisison alone.

In my former employment, I was fortunate enough to be responsible for preparing an occasional ‘Charities Briefing’. If I had a pound for each time I had reported that the Government had announced this new structure would be available in ‘Spring [insert year of Government’s choice]’, I would have…oh, at least £3.

Frankly, I now feel the same way about the CIO as I do about the guided bus from St Ives to Cambridge. I’d like to think that it will be available soon, but I simply won’t be able to believe it until I see it.

The latest news is that legislation for CIOs will be placed before Parliament after the summer recess. Once through Parliament, its implementation will be phased, and initially the new structure will only be available to new charities.

This is bad news for existing unincorporated charities, which may have been waiting for the opportunity to incorporate into this form for a number of years now, and for existing incorporated charitable organisations, such as charitable companies limited by guarantee, which may have been seeking to convert to the CIO structure to escape dual regulation by both the Charity Commisison and another regulator. However, if phased implementation is the price to pay for having the structure available sooner rather than later, I suppose I can live with it.

There was then a brief justification as to why the Charities Bill (Consolidation) has been introduced in March this year, when the Charities Act Review is due to begin before 8 November – all the preparatory work has been done, and this is the last opportunity to take it forward with Law Commission support (which means a shorter journey through Parliament).

In relation to the Charities Act Review, although we know it must begin before 8 November 2011, its finishing date cannot be predicted, although it is likely to be Spring / Summer 2012. Its duration very much depends what the Government decides needs to be reviewed. For example, there is already a ministerial commitment to review the options realting to the licensing of public charitable collections.

At the end of his presentation, I exercised considerable will power and managed not to ask Mr Harrison to translate the Big Society there and then.

Anyway, it is late and I have rambled on enough.


Love them or hate them…

04/04/2011

Despite my (almost four) years of acting for charities, it still never ceases to amaze me quite how many charities seem to be trying to get along without trustees.

I don’t mean the charities out there without trustees, although they do exist. I mean the charities that, nominally, have trustees, but some or all of those trustees are so disengaged that they may as well not exist.

Charity trustees have many duties and responsibilities, but chiefly their role is to direct the affairs of the charity, and ensure that it acts in pursuance of its Objects, with the aim of delivering these for the public benefit. It is not possible to do this from a distance!

Unfortunately, the nature of voluntary work like charity trusteeship is such that it can easily get squeezed out by other important family or work commitments. If one charity trustee is too busy to be involved for a short period, but others can step in to fill the gap temporarily, a lapse of this sort is likely not to be disastrous. However, it is not something that can be tolerated in the long term.

If a charity trustee is suffering from a prolonged period of ill health, or lack of interest, it can sometimes be best for a fellow trustee to take the absentee trustee to one side and suggest that he or she has a bit of a break from the trusteeship until he or she has the time, energy or inclination involve him or herself more fully in managing the charity.

Charity trustees who feel they may have slipped into bad habits of absenteeism, or charity trustees who have colleagues who may have slipped into such bad habits, may find the information provided by the publication ‘Good Governance – A Code for the Voluntary and Community Sector’ (prepared by The Code Founding Group) helpful. It is on the Charity Commission website here.

Sensibly, the first principle is that an effective board will provide good governance and leadership by understanding their role.

Many charity trustees are aware of their basic legal responsibilities, in terms of providing reports and accounts to the Charity Commission / Companies House / the CIC Regulator / HMRC, and their responsibilities to safeguard the assets of the charity, and to seek to further the Objects of the charity.

However, a considerable number seem to forget that they are also are responsible for setting the vision of the organisation, overseeing its work, and managing and supporting any staff and volunteers.

This last area of managing staff can be a particular minefield. All too frequently, charity trustees can delegate duties and powers to paid staff, and then forget that they retain overall supervision for the exercise of those duties and powers.

Of course, the real problems start when the staff forget that their duties and powers are only delegated and not absolute, and try to run the charity while the trustees take a back seat. This is bad news for all concerned.

The trustees retain their responsibilities, and possibly incur liabilities, while exercising no actual control over the management of the charity. Meanwhile, the staff are quasi-trustees, as they have control of the day-to-day management of the charity, and as such as also are potentially exposing themselves to liabilities, but often believe that the trustees still have ultimate responsibility for actions they, as staff, carry out on behalf of the charity.

A good induction pack and training can help remind trustees of their responsibilities, and I would certainly recommend at least one training session per year for trustees. The cost of training, provided it is reasonable, is a legitimate expense of the charity.

However, a number of organisations offer this kind of training for free – for example, the Cambridge Council for Voluntary Service runs governance workshops which are free to member organisations. In addition, there are now online resources. So, there’s no excuse for charity trustees to plead ignorance of their role!


‘Tainted donation’ rules: worth the wait?

08/03/2011

Welcome to my blog. At the moment I’m feeling more than a little aggrieved by the drafting of the new ‘tainted donation’ rules, intended to replace the old ‘substantial donor’ rules from 1 April 2011. Therefore, it seemed a good topic for a first post.

A brief history of the ‘substantial donor’ rules

The ‘substantial donor’ rules were introduced by the Finance Act 2006 (without any prior consultation by the then Government) with the intention of preventing the misuse by individuals of the tax reliefs available on donations to charities.

The rules applied where an individual made a relievable donation to a charity in excess of either £25,000 in any 12 month period or £100,000 over any six year period, and subsequently entered into one of a number of transactions specified in the legislation with the charity on terms which were favourable to the donor.

Even before the rules came into force, they were subject to widespread criticism for being too broad in their effect, and too likely to catch innocent transactions.

In addition, the rules placed a significant administrative burden on charities which received such donations, and, if the charity was found to have infringed the rules, the charity lost the benefit of any income tax or capital gains tax reliefs which would otherwise have been available.

The ‘substantial donor’ rules have now been under review since 2008 and, finally, with the Finance Bill 2011, replacement legislation has been unveiled in the form of the ‘tainted donation’ rules.

The ‘tainted donation’ rules

The new rules come into force on 1 April 2011. They differ in two key ways from the existing ‘substantial donor’ rules:

  • not only ‘substantial’ donations are caught – any donation can be open to scrutiny, no matter how small; and
  • the donor is liable for any penalties, jointly and severally with the charity in certain circumstances.

A donation will be considered to be tainted if:

  • a donor or connected person enters into an arrangement (involving, for example, a transaction such as the sale of property, the provision of services or a loan, or investment in a business) whether before or after the donation is made, and it is reasonable to assume that the arrangement and the donation would not have been entered into independently of each other (Condition A); and
  • the main purpose of the donation is to obtain an advantage directly or indirectly from the charity which is the recipient of the donation (Condition B); and
  • the donor or connected person is not a wholly owned subsidiary of the charity in question (Condition C).

So, were the new rules worth the wait?

Unfortunately, it appears not. The ‘tainted donation’ rules seem as likely to catch innocent transactions as the ‘substantial donor’ rules, if not more so. In addition, there are no de minimis provisions for the ‘tainted donation’ rules, which means that many more charities will be affected by the new rules than are currently affected by the ‘substantial donor’ rules.

One particular problem is that, although the purpose of the donor in making the donation seems to be key as to whether a donation is tainted or not, the rules seem to apply where there is no intention on the part of the donor to obtain an advantage. This is a result of proposed s.809ZK of the Finance Bill 2011, which ‘deems’ an advantage to arise and for Condition B to be satisfied in certain circumstances.

As a result of this, matched funding gifts would appear to be treated as ‘tainted donations’, as would a donation conditional on the completion of a marathon, for example. It is hard to believe these are the kind of donations the Government intended to target!

Therefore, it seems the only significant improvement in relation to the ‘tainted donation’ rules is that this Government has as least seen fit to consult with the sector before bringing the new rules into force.

Now, it can only be hoped that the Government listens to the criticisms of its legislation which have emerged during the consultation. The charity sector does not need another set of anti-avoidance rules which are not fit for purpose.