Charitable status

In austere times the activities of not-for-profit organisations become even more important. Clients who want to set up new charitable organisations want to do so as quickly and efficiently as possible. The legal advice and services they receive from the outset is crucial.

Public benefit

Clients often assume that the organisation they are proposing to create will automatically be entitled to charitable status. They may not understand that they must prove this to the Charity Commission when making an application for registration. It is important that legal advisers understand the intended aims of a new organisation and how the client proposes to achieve those aims.

This enables us to consider whether the organisation is likely to be accepted as charitable by the Charity Commission and, if not, what changes need to be made. A failure to give this due consideration at the outset could, at best, delay registration and potentially lead to the denial of registration. Agreeing the aims of a new charity and ensuring that those aims comply with the public benefit test introduced by the 2006 Charities Act is one of the first and most important tasks for a client and their advisers when seeking to set up a charity.

Before the 2006 Act there was no statutory definition of ‘charity’. To establish charitable status it was necessary to consider a list first contained in the 1601 Statute of Charitable Uses and then expanded and altered by centuries of case law. The size and undefined nature of that list generally made it relatively easy for organisations to establish charitable status. This was particularly the case for organisations which advanced education or religion or which aimed to relieve poverty, as there was a legal presumption of charitable purpose for them.

However, the 2006 Act, in codifying the law, has created a set of conditions which must be satisfied by any organisation wishing to be granted charitable status. An organisation must show that, not only does it have charitable purposes (as defined by the 2006 Act), but that the purposes and resulting benefits are for the public, be it the public as a whole or a section thereof. So, those wishing to establish a charity must consider the benefits their organisation will provide and ensure that those benefits are both available to, and accessible by, the public. The benefits should not merely be available to members of restricted groups.

Once an adviser has established that a client’s proposed organisation should pass the public benefit test, the objects of the charity should be drafted to demonstrate this. Well drafted, clear and defined objects are the starting point of a successful registration application. The objects show the Charity Commission the aims of the organisation and should enable it to make a quick decision about the organisation’s charitable status. Inappropriately drafted objects will delay the process and may ultimately need redrafting to obtain commission approval.

Service delivery

Under current law a charity can be set up in two different ways – as an unincorporated body with rules, a constitution or trust deed, or through incorporation and registration at Companies House. The majority of our charity clients choose to set up either as a trust or a charitable company.

The decision as to which will be used depends much on the nature of the work the charity will do. An unincorporated body is preferable if the charity is going to be relatively small, with limited or no property and is primarily going to be a grant-making organisation. Being unincorporated avoids dual regulation by both Companies House and the Charity Commission and ensures that administration can be kept relatively simple. However, the downside is the personal liability exposure of the trustees, and the cumbersome process of changing details when trustees are added or retire.

Incorporation is strongly recommended where the organisation is likely to be involved in different commercial arrangements through the delivery of its services, the employment of staff or ownership/management of properties. A charitable company is a legal entity in its own right and as such is able to enter into transactions in its own name. The charity trustees, being the directors, would be protected from liability through the organisation’s status as a body corporate.

The Charities Act 2006 introduced a hybrid option in the form of a Charitable Incorporated Organisation (CIO). The intention of this structure is to enable charities to obtain incorporated status, and therefore limited liability protection, without the need for dual regulation. However, the regulations setting out the legal framework for CIOs are still to be agreed by parliament and as yet a CIO cannot be created. At present, therefore, charities must choose between the simpler process of an unincorporated organisation and the higher regulation but greater protection of incorporation through Companies House.

Having discussed and agreed the structure, an appropriate model governing document should be ?used to facilitate registration and to ?ensure the appropriate administrative provisions are included. Even the wording of model documents does still need to be considered in depth and discussed with the client because variations are permissible and quite often needed.

The adviser should ensure that the governing document contains the powers needed to enable the charity trustees to run the charity in the most appropriate way to achieve the charity’s objects. It can therefore be necessary to amend the governing document to add additional provisions or to remove provisions that are not required.

It is important to consider whether registration at the Charity Commission is required. An adviser who does not consider this before progressing with a registration application will incur unnecessary costs and delay for the client.

Certain charitable organisations do not need to be registered at the Charity Commission although they may still fall under its regulation. There are three types of organisation that do not need to be registered – those that are excepted, those that are exempt and those that have an annual income of less than £5,000.

An ‘excepted’ charity is one that has been granted excepted status by legislation or by a Charity Commission order. This category includes churches, charitable service funds of the armed forces and Scout and Guide groups. However, it should be noted that even an organisation that is potentially excepted will still need to register if it has an annual income above £100,000.

An ‘exempt’ charity is not regulated by the Charity Commission although the commission does have some jurisdiction in respect of them in some circumstances. Charity Commission guidance CC23 is very useful as an explanation of the commission’s role in respect of exempt charities.

Exempt charities include universities, many national museums and galleries and charities set up as industrial and provident societies and academies established under the Academies Act 2010. A charity can be exempt either under schedule 3 of the Charities Act 2011 or under other legislation.

Name game

Before applying for registration it is vital to check that the chosen name of the charity is not similar to an existing organisation. This should be checked by searching the Charity Commission online register and the Companies House register if the charity will be incorporated. If a charity is set up with a name that is too similar to another organisation, the name will have to be changed before the organisation can be registered.

Generally, a charitable company will need to be registered at Companies House before registration at the Charity Commission and this should be factored into any time estimates given to clients. However, if the name of the organisation includes the words ‘charity’ or ‘charitable’ it will be necessary to obtain approval from the Charity Commission before Companies House will issue a certificate of incorporation. In those circumstances, the application to register at the Charity Commission should be made before registration at Companies House.

All registration applications to the Charity Commission need to be made online, with all supporting documents attached in pdf form when submitted. Relevant supporting documents will include governing documents, trustees’ declaration and bank statements. The trustees’ declaration should be signed manually by the trustees before submitting the application form.

The process of setting up and registering a charity can require legal skills in a number of areas, including governance, corporate law and property law. It is vital for an adviser to be in a position to consider all of these aspects and ensure all appropriate steps are completed before proceeding to registration. A well set-up charity will ?be in the strongest position to move forward with its work and achieve its charitable objects.

Simon Leney is a partner and Kate Arnold a solicitor at Cripps Harries Hall LLP