Legal basics for teachers: Charities Act 2006 update for independent schools

After nearly three years in the parliamentary system, the Charities Bill received royal assent last November. The Charities Act comes into force in stages over the next two years. This article gives an overview of its provisions.

Some thought that the new Act might not make it to the statute books. This was because of reluctance to confront those who were determined that independent schools should prove they were of benefit to the public.

WHAT DOES THE ACT DO?

The Act:

• extends the statutory definition of 'charity' from four broad classes to 13 extends to educational and religious charities the requirement that all charities must act for the benefit of the public (previously this was presumed)
• alters the status and powers of the Charity Commission
• facilitates the merger of charities
• creates a new type of charitable organisation known as a 'charitable incorporated organisation'
• makes alterations to the rules on professional fundraisers and commercial participators
• changes the threshold for professional audit

We will look at each of these in turn.

THE CHARITY COMMISSION

The charity commissioners now become the Charity Commission. This will be a statutory corporation with a range of objectives, functions, duties and powers.

A charity tribunal will hear appeals against decisions of the commission. The tribunal will also hear cases about charity law, referred to it by the Charity Commission or the Attorney General. In the past all such cases have been heard in court.

DEFINITION OF CHARITY

The new Act gives an extended definition of 'charity', which all charities must fall within. In future, to be a charity, an organisation must be established to promote, for the benefit of the public, one of the charitable purposes listed in the Act:

Charitable purposes:

• the prevention or relief of poverty
• the advancement of education
• the advancement of religion
• the advancement of health or the saving of lives
• the advancement of citizenship or community development
• the advancement of the arts, culture, heritage or science
• the advancement of amateur sport
• the advancement of human rights, conflict-resolution or reconciliation; or the promotion of religious or racial harmony or equality or diversity
• the advancement of environmental improvement or protection
• the relief of those in need by reason of youth, age, ill-heath, disability, financial hardship or other disadvantage
• the advancement of animal welfare
• the promotion of the efficiency
  of the armed forces of the Crown or the efficiency of the police, fire and rescue services or ambulance services
• any other purposes charitable
  in law

PUBLIC BENEFIT

The present four charitable classes (the prevention or relief of poverty, the advancement of education, the advancement of religion, and other purposes beneficial to the community) are all coupled to an underlying requirement that they be for the public benefit.

So independent schools have always had to provide public benefit — but this has always been presumed to exist. In future, however, under the

Charities Act 2006, this will have to be proved. What does this mean for those independent schools that currently hold charitable status?

Certainly this development needs to be taken seriously, because of course the loss of charitable status would remove current tax exemptions and reliefs, and, in the case of charitable trusts, challenge legal validity.

Existing law provides that there must be identifiable overall benefit for the public. The benefit must be for the public at large, or for a reasonably wide section of it. Any private benefit must only be incidental.

What is 'public benefit'?

The new Act provides no new definition of public benefit. Going forwards, the Charity Commission will be responsible for scrutiny, and will in time issue guidelines.

In the meantime the commission will be forming an assessment of public benefit by research, by consultation with the main umbrella bodies concerned, and by asking charities how they consider that they deliver public benefit.

During this process the Charity Commission will scrutinise the independent school sector as a whole and will, in time, consider whether individual independent schools educate only the children of the rich — or whether they are of benefit to the public.

INDEPENDENT SCHOOLS AND PUBLIC BENEFIT

To qualify for registration, charities currently have to demonstrate that their income is more than £1,000 per annum. In future, the income threshold for mandatory registration will increase — to £5,000 per annum — although smaller charities will still be allowed to register voluntarily.

The current exemption for certain charities, particularly universities, national museums and galleries, will continue — but such charities will be subject to increased regulation by the Charity Commission.

GREATER FLEXIBILITY

Trustees of a charity whose objects are out of date or impractical have been able to apply to the Charity Commission for a scheme to change their objects under the cy-près doctrine.

The cy-près (literally 'as near as possible') doctrine allows the court to amend the terms of a charitable trust so that they are as close to the original intention of the testator or settlor as possible, where the original intended purpose is impossible, impracticable or illegal. This prevents the trust from failing.

In considering such applications previously, the Charity Commission could base its decision only on the 'spirit of the gift'. The commission is now entitled to take into account the social and economic circumstances prevailing at the time of the proposed new scheme.

SUPERVISORY POWERS

The Charity Commission will have new powers to:

• suspend or remove a trustee's membership of a charity when suspending or removing their trusteeship
• direct charity trustees to undertake decisions in administering the charity.

There is also greater clarity exonerating charities that request guidance from the commission in relation to their duties and administration of a charity — so that a trustee following such guidance will be deemed to have acted in accordance with his or her duties.

TRUSTEE BENEFIT

The Act extends the capability of trustees to:

• be remunerated for the provision of services other than as a trusteeobtain indemnity insurance subject to certain conditions

MERGERS

The commission will keep a register of charity mergers and will be able to facilitate the merger of charities in a simplified process.

CHARITABLE INCORPORATED ORGANISATIONS

The Act creates a new legal form. The charitable incorporated organisation will be an organisation with limited liability and the ability to enter into contracts in its own name with a greatly reduced burden of company law regulations.

The majority of charitable companies are presently companies limited by guarantee. While these will continue, the charity incorporated organisation is intended for smaller charities that want to achieve the benefits of limited liability without extending their legal formality.

FUNDRAISING

All charities that wish to hold public collections will be required to: 

• apply to the Charity Commission for a public collection certificate and obtain a permit from the local authority if the collection is to be carried out in a public place, or
• notify the local authority if the collection will be carried out door
  to door

All professional fundraisers must tell potential donors how they get paid in their solicitation statement. Currently, while fundraisers are required to tell donors about getting paid, they are not required to disclose the amount.

IMPLEMENTATION

The office of the third sector, in the Cabinet Office, has set out a timetable for implementation of the Charities Act 2006 which, it must be emphasised, is not yet in force.

The outline timetable is:

• in the first half of 2007, the provisions relating to the new Charity Commission will come into force
• in the second half of 2007, provisions relating to the mergers of charities, statements indicating benefits for charities, fundraisers and participators, and the audit and accounting requirements for charities will come into force
• in early 2008, the new definition of charity and the requirement for public benefit will come into force, and also the new charity tribunal and new powers for the Charity Commission
• provisions relating to exempt and excepted charities, including educational charities, will not come into force before 2008

William Colacicchi and Mark Blois are partners at Browne Jacobson.