The new Charities Bill – what will it cover?

On 22 March, the government published its response to the Law Commission's 2017 Report, Technical Issues in Charity Law, which made a number of recommendations to maximise the efficient use of charitable funds whilst ensuring proper safeguards for the public. The Report made 43 recommendations, the vast majority of which the government has accepted in principle.

The new Charities Bill will not make sweeping changes to charity law once it has been enacted, but it will bring into force long-awaited reforms designed to reduce the amount of unnecessary bureaucracy faced by charities. As Lord Ashcroft put it when the Law Commission's review was first announced:

"In my 2012 official review of the Charities Act 2006, I found that charities faced a number of historic obstacles under the current law. These unnecessary burdens on trustees act like barnacles on a boat, causing a drag when all should be plain sailing."

Many of the recommendations are technical in nature (the clue is in the name of the Report) but, taken together, they will nonetheless have a significant impact on the sector. The government response is divided into 13 sections, covering each of the areas identified for review by the Law Commission. We look at some of the main proposals below.

Financial thresholds

The first recommendation in the Report was that the financial thresholds contained in the Charities Act 2011 should be periodically reviewed, with a view them being increased in line with inflation. The government has accepted this proposal, on the basis that set financial thresholds present difficulties and can be restrictive, and can create additional administrative burdens for small charities in particular. The thresholds will be reviewed every ten years, with the first review taking place in 2022, by which the government expects the necessary legislation will be in place.

Changing purposes and amending governing documents

The process for amending a charity’s governing document varies depending on the form that the charity takes. The Report made a number of recommendations designed to simplify the process and to align it more closely across the different types of charity, all of which were accepted by the government.

In future, there will be a much wider statutory power for unincorporated charities to change their governing documents, modelled on the one that is already in place for companies and CIOs, which enables such charities to make whatever changes they see fit, provided that they are not "regulated alterations" (such as changes to the objects or to provisions dealing with trustee benefits). Regulated alterations will require the prior consent of the Charity Commission, as is already the case with companies and CIOs, and the list of what constitutes a regulated alteration for unincorporated charities will be longer, including specific safeguards to protect third-party rights.

As we mentioned in a previous issue, however, while it will bring about an alignment of the various processes, the associated legislation could make it more difficult for incorporated charities to change their objects because, when it is approached by such a charity for consent to a change of objects, the Charity Commission will be required to have regard to the following matters:

• the purposes of the charity when it was established;
• the desirability of securing that the property is applied for charitable purposes which are close to the purposes being altered; and
• the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances.

These "similarity considerations" are currently only applied in respect of unincorporated charities but will in future apply to all charities. The Charity Commission will also be given a power to require the trustees of a charitable company or CIO to give public notice of any amendment in respect of which its consent is required – again, a requirement that currently only applies to unincorporated charities. Consequently, if your charity is a company or a CIO and you are considering a change to your objects, you may wish to start the process sooner, rather than later.

Charities governed by statute or Royal Charter: changing purposes and amending governing documents

The government has accepted that there should be an express power for Royal Charter charities to amend their Royal Charter, subject to Privy Council approval. More recent Royal Charters have tended to include an express power of amendment, some older ones do not, meaning that the charity's trustees must apply for a Supplemental Charter whenever changes are necessary – a more costly and time consuming process.

The Report also made a number of other recommendations designed to provide greater clarity with regard to the processes for changing the constitutions of charities governed by statute or Royal Charter, but these were either not accepted by the government, or accepted only in part.

Cy-près schemes and the proceeds of fundraising appeals

As the government's response points out, some charity fundraising appeals raise too much, or too little, money to achieve the appeal’s aim. The existing current law requires charities to contact donors to offer to return their donation if a fundraising appeal does not achieve its target, and the effort involved can be disproportionate to the size of the individual donations. 

The Law Commission has recommended thresholds below which charities will not have to contact donors if a fundraising campaign to which they contributed had not met its target, and a simplification of the process that charities will need to follow if they do have to contact donors. The government has agreed with these recommendations and a new threshold of £120 will be introduced when the Bill is enacted. The threshold will be reviewable in line with the Law Commission's first recommendation referred to above.

Acquisitions, disposals and mortgages of charity land

The Law Commission’s review considered the extent to which charity trustees should be compelled to seek advice before disposing of or mortgaging charity land, as well as what that advice should cover and, having consulted widely within the sector, it recommended that the current regime – which requires charities to seek advice and make certain statements or certificates in the transaction paperwork – should be retained. It did, however, recommend that trustees should be able to access professional advice that is proportionate and appropriate to the particular circumstances of the land disposal, rather than necessarily having to obtain a qualified surveyor's report, and the government has accepted this. The Bill will also deal with gaps in the protection available to buyers of charity land, which can currently deter buyers or increase the charity’s cost of selling. In addition, it will make the position clearer as to when some of the Charities Act requirements should not apply, such as where the land is held for multiple beneficiaries, and when it is being disposed of by a liquidator or administrator.

One of the Law Commission's recommendations was that charity trading subsidiaries should be excluded from the definition of "connected persons" but the government disagreed, citing Charity Commission casework which shows that charities frequently fail to appreciate the need to deal with subsidiaries on an arm’s-length basis and do not appropriately manage conflicts of interest. The government agreed with the Charity Commission that removing subsidiaries from the definition would result in an increase in disposals of charity land to wholly owned subsidiaries on terms that would not be in the charity’s best interests. Consequently, an order of the Commission will continue to be required before a charity can dispose of land to its trading subsidiary.

The government also disagreed with the Law Commission that the requirement to give public notice in connection with disposals of designated land should be abolished, again agreeing with the Charity Commission that this would create a risk of trustees disposing of charitable community assets without a complete understanding of the implications, including the impact on beneficiaries and the local community.

Permanent endowment

The government agreed with the Law Commission that the statutory definition of "permanent endowment" should be reformulated to remove inconsistencies and give greater clarity.  It also accepted the recommendations that the criteria for releasing permanent endowment restrictions should be simplified and that a conditional new power to borrow against permanent endowment (up to 25% of its value) should be introduced.

Remuneration for the supply of goods and the power to award equitable allowances

As the law stands, trustees can be paid for services to their charity but not for goods supplied (unless those goods are supplied in the course of providing services). Recognising that this is inconsistent and prevents charities from accessing goods that may be offered at more favourable terms by a trustee than elsewhere, the government has accepted the Law Commission's recommendation that the inconsistency is resolved. It has also agreed that trustees should be allowed to be paid for work they have carried out that has generated a profit for the charity, subject to the approval of the Charity Commission. It did not, however, accept that the basis on which decisions of the Charity Commission can be challenged in the Charity Tribunal should be reviewed, considering the current arrangements to be "appropriate".

Ex-gratia payments out of charity funds

Ex-gratia payments are payments out of charity funds that trustees feel morally obliged to make, but which they have no legal power to make. This situation typically arises in the context of Wills: if, for example, a testator leaves an estate to a charity and later decides to change his or her Will to include a legacy to a family member, but subsequently dies before the new Will can be executed. In a case such as this, the trustees may feel morally obliged to make an ex-gratia payment to the family member in question.

As the law stands, charity trustees must seek Charity Commission permission for all ex-gratia payments, which can be disproportionately time-consuming and cause delay. The government has accepted the Law Commission's recommendation that charities should be able to make relatively small ex-gratia payments without seeking consent, and to delegate the power to make such payments to an appropriate person within the charity. The proposed thresholds, which will again be reviewable, are payments of up to:

• £1,000, in the case of a charity with a gross income in its last financial year of up to £25,000;
• £2,500, in the case of a charity with a gross income in its last financial year of more than £25,000 and up to £250,000;
• £10,000, in the case of a charity with a gross income in its last financial year of more than £250,000 and up to £1 million; and
• £20,000, in the case of a charity with a gross income in its last financial year of more than £1 million.

The new statutory power will apply insofar as it is not excluded by a charity's governing document.

Incorporations, mergers and trust corporation status

One of the unintended consequences of the Charities Act 2006 was that, while it contained provisions designed to ensure that all legacies left to a charity that had merged with another prior to the testator's death would pass to the merged body, this did not end up happening in cases where the testator had named a substitute that was to benefit in the event that the first charity had ceased to exist. The government has agreed with the Law Commission that this position, which resulted from unclear drafting, should be rectified.

The government has also agreed that trust corporation status should be conferred automatically on existing and future corporate charities in respect of any charitable trust of which the corporate body is (or becomes in the future) a trustee. Having such a status is necessary in certain situations where there is a single trustee of land (for example, where a charity is appointed as executor of an estate that includes land) because, without it, a sole trustee can not give a valid receipt for the proceeds of sale of the land. This will be a useful amendment, not least because obtaining trust corporation status can be a time-consuming matter, sometimes involving an application to the Ministry of Justice.

Charity and trustee insolvency

The Law Commission found that there is confusion about how the law applies to a charity's permanent endowment assets if it becomes insolvent, and it recommended changes to Charity Commission guidance (Managing a charity's finances (CC12)) to clarify the uncertainties. The Charity Commission has agreed with this recommendation and confirmed that it will update the guidance.

Charity names

The government has accepted all of the Law Commission's recommendations with regard to charity names. The Charity Commission already has power to require a charity to change its name – for example, when it is too similar to another charity’s name, is offensive or could be misleading. The government has agreed that the Charity Commission should have clear and effective powers in cases where a charity adopts an inappropriate name and that they should be consistent across all types of charity, including unregistered and exempt charities. It has also agreed that the power should extend to charities' working names, as well as their formal names.  Once the Bill has been enacted, the Charity Commission will be able to delay entering a charity’s name on the register in cases where it has a concern about the name, which the government believes will avoid the "potentially damaging consequences" of an inappropriate name being entered on the register even for a short time.

The identity of a charity's trustees

The Charity Commission currently has power to determine a charity’s members, but it has no corresponding power to determine a charity’s trustees – a situation that the government has agreed should be rectified. The Bill will introduce a new power enabling the Charity Commission to ratify a trustee's appointment when there are doubts about its validity, which should be of assistance to charities who are trying to demonstrate (having applied for a grant, for instance) that they have a validly appointed board.

The Charity Tribunal and the courts

The government has agreed with the Law Commission that trustees should be able to obtain confirmation that costs of Tribunal proceedings can properly be paid from their charity’s funds ("authorised costs orders") without the expense of going to court to get that confirmation. This will, says the government, help provide reassurance to, and reduce legal costs for, trustees.

It has not, however, agreed with the recommendation that the Charity Commission should be able to make a reference to the Tribunal without the Attorney General's consent, on the basis that the Attorney General has a duty, on behalf of the Crown, to protect charitable interests in England and Wales and that the existing mechanism helps the Attorney General to fulfil that duty.

The next stage

The reforms were announced as part of the Queen's Speech on 11 May. The new Charities Bill was formally introduced to the House of Lords on 26 May under the special parliamentary procedure for uncontroversial Law Commission bills, which requires less parliamentary time than usual and should therefore help to expedite the passage of the Bill through the system.  Members of the Lords will have their first opportunity to debate the main principles and purpose of the Bill when it is presented for its second reading in the coming days.