The Beginner’s Guide
to Charity Law
Sarah Payne and Tamsin Anderson
Thursday 15 May 2014
Essential Charity Law: What we will cover
• What is a charity?
• Public benefit requirements
• The Charity Commission and HMRC
• Different legal structures for charities
• Duties of Trustees
• Activities to watch out for
Why be a charity?
• No tax on primary purpose income
• Corporate and individual gift aid
• Rate relief
• Grant funding
• Public perception
On the other hand…
• Charity Commission registration/
• Fiduciary duties for trustees
• Restrictions on trustee benefits
• Other restrictions:
– Trading
– Political campaigning
Key features of a charity
• An organisation established for purposes which are regarded as
exclusively charitable under the law of England and Wales
• Must deliver public benefit
Charitable Purposes (1)
• Prior to Charities Act 2006, set out in case law
• Charities Act 2006 introduced statutory list of charitable purposes
• Now consolidated into Charities Act 2011 – no change to the law
Charitable Purposes (2)
• 13 heads:
– *prevention or relief of poverty
– *education
– *religion
– health or the saving of lives
– citizenship or community development
– arts, culture, heritage or science
– amateur sport
Charitable Purposes (3)
– human rights, conflict resolution, reconciliation, religious/racial harmony,
equality and diversity
– environmental protection and improvement
– relief of those in need from youth, age, ill-health, disability, financial
hardship or other
– animal welfare
– armed forces; police, fire and rescue services or ambulance services
– *other purposes (catch-all)
Public Benefit
• “A purpose… must be for the public benefit if it is to be a charitable
• No change in law – charities have always had to be for the public
• Meaning of “public benefit” not defined
• Particular issues around fee-charging
Public benefit – practical implications
• “Trustees must have regard to Commission guidance”. Trustees
should be:
– Aware of the guidance
– In making a decision where it is relevant, take it into account
– And if they decide to depart from it, they should have good reasons
• Annual report to include statement of public benefit explaining
activities undertaken to achieve public benefit.
The Two Aspects of Public Benefit
Aspect 1 – Benefit Aspect
• A purpose must be beneficial
– The benefits must be clearly identifiable
– The benefits must be capable of being proved if necessary
– Not based on personal opinion
– Any detriment or harm that results from the purpose must not outweigh
the benefit
The Two Principles of Public Benefit
Aspect 2 Public Aspect
• Benefit must be to the public or section of the public:
– “A charitable purpose can benefit a section of the public, but the section
must be appropriate (or sufficient) in relation to the specific purpose.”
– People in poverty must not be excluded, eg. independent schools working
with state schools
– Any private benefit must be incidental
How to approach the public benefit test?
1. Read the Charity Commission guidance PB1, 2 and 3
2. Understand your charitable objects
3. Ensure all activities relate to charitable objects
4. Review all publicity material – esp. website (Charity Commission
5. Ensure Trustees’ decisions are appropriately authorised and minutes
6. Do you need to expand or amend your objects?
Role of the Charity Commission
• Registration: income threshold
• Main regulator – a friend and policeman
• Moving towards online forms
Registration with HMRC
• ChA1 form
• Fit and proper person test
Fit and proper persons (1)
• Applies to all “managers”
• Anyone having general control and management over running the
charity/application of its assets
• HMRC says “managers, not just trustees”
Fit and proper persons (2)
• Nominate an authorised official and between 2 and 4 other officials
• Notify HMRC when changed
• Assumption that F&P
• What if cease to be fit and proper?
• Changes to HMRC details only for officials
• Use declaration
• Managers to read HMRC guidance
• Form ChA1 for new charities
Different legal forms
Incorporated forms:
• Companies (usually limited by guarantee)
• Charitable Incorporated Organisations (CIO)
• Industrial & Provident Societies (IPS)
Unincorporated forms:
• Trusts
• Unincorporated Associations
Charitable trusts
• Trustees
• Trust Deed
• Examples: small organisations, no membership, grant-making bodies,
Unincorporated Associations
• Executive or Management Committee
• Unincorporated – no limited liability or legal personality of its own
• Constitution or Rules
• Examples: clubs, small organisations, local societies
Incorporation – why do it?
• Legal personality
• Limitation of risk – major contracts, employees, risky work (eg. with
• Clear ownership structure/governance
• Accountability/disclosure
• Can enter into contracts, own or lease property and employ staff in its
own name
• Usually limited by guarantee
• Separate corporate legal entity
• Directors (Trustees) and members
• Regulated by Companies House
• Articles of Association
Charitable Incorporated Organisations (CIOs)
• New legal form for charities
• Existing charitable companies – no date yet
• CIOs give charities benefits of incorporation (limited liability and legal
personality) with a single regulator – Charity Commission
• Downsides?
Is a charity a social enterprise?
• The Department of Trade and Industry:
“social enterprises are businesses with primarily social objectives
whose surpluses are principally reinvested for that purposes in the
business or in the community, rather than being driven by the need to
maximise profit by shareholders and owners”
• CICs – not charities
Who is in charge of a charity?
Committees of Trustee Board
Chief Executive
Employees / volunteers
Trustees’ duties
Six Main Responsibilities
Ensure compliance
Accept responsibility
Act reasonably and prudently
Safeguard the charity’s assets
Act collectively
Act in the best interests of the charity
and avoid conflicts of interest
• Assets must be used only for the objects/purposes of the
• Charity must be run in accordance with its constitution,
charity law and all of the relevant laws and regulations
Prudence and Care
Use charity assets wisely and in pursuit of charitable purposes
Avoid undue risk
Borrowing and investing – special care
Overall duty to “exercise such skill and care as is reasonable in the
N.B. Higher duty if special expertise or paid
Conflicts of Interest
• Conflicts arise where a trustee’s personal interests or
those of someone connected to him or her conflict (or run
a real risk of conflicting) with those of the charity.
• Is benefit authorised?
• Conflicts policy
Liability of Trustees
• Consequences of breach of trustees’ duties
• For charitable companies, directors’ duties under the Companies Act
and charity law
• For CIOs, duties under the Charities Act 2011
Activities to be careful about
• Trading
• Fundraising
• Making grants overseas
• Employment
• Safeguarding
• Property
• Campaigning and political activity
• Payment of trustees
• Key question: Is the trade is exercised in the course of the actual
carrying out of a primary purpose of the charity?
• Profits of primary purpose trading are exempt from tax if they are
applied solely for the purposes of the charity
• The total turnover from all of the charity’s non-exempt trading activity
(i.e. non primary purpose trading) must not exceed the annual
turnover limit:
– £5,000; or
– If the annual turnover is more than £5,000, 25% of the charity’s
total incoming resources up to a maximum of £50,000.
• Corporate sponsorship
• Commercial participator relationships
• Engaging professional fundraisers
Making grants overseas
Trustees must take such steps as HMRC considers reasonable to ensure
that the payment will be applied for charitable purposes
• HMRC guidance
Campaigning and political activity
• An organisation is not charitable if one or more of its purposes are
• Campaigning = to raise awareness, educate the public, mobilise
support, change public attitudes
• Political activity = trying to obtain change in law, or policy or public
• Objects based political activity (raising awareness issues) OK
provided no attempt to persuade voters
Payment of Trustees
• General rule that Trustees cannot profit
• Some exceptions to this
• Conflicts of Interest
• CC11 guidance
Useful sources of information
Charity Commission:
0845 300 0218
020 7713 6161
Charity Law Association
HMRC Charities
0300 123 1073
Sarah Payne and Tamsin Anderson
Charity and Social Enterprise Department
Bates Wells & Braithwaite London LLP
2–6 Cannon Street
London EC4M 6YH
Tel: 020 7551 7777
E-mail: [email protected] & [email protected]

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