Charity update

The charity sector has been a perfect paradigm for those issues facing the country in recent months, buzzing with talk of cuts and efficiencies, how best to manage public functions and the impact of changes to taxation. A number of public services are transferring to the third sector but at the same time cuts are clearly affecting both charities and their regulator, the Charity Commission.

Charitisation

In February the majority of the Public Bodies Act 2011 came into force. Allowing for the reduction in the size of the public sector, the Act gives ministers the power to abolish, merge or modify certain non-departmental public bodies. The Act specifically contains the power for a minister to make an order to transfer the functions of certain bodies to an 'eligible person', which includes a company limited by guarantee, a community interest company or an unincorporated body such as a trust.

Transferring public services or assets can of course be controversial. You may recall the furore when the coalition proposed selling much of the Forestry Commission's estate. The opposition was understandable, the plan announced without the public understanding how sales would be handled and to whom. It was also clear from the outset that the private sector would be involved, as well as the charity sector. The text in the then Public Bodies Bill was subsequently amended.

The imminent transfer of the functions of the British Waterways Board to a new charity has provoked a different and more positive reaction, testament in part to the amount of consultation that preceded it and the fact that its structure utilises charitable tools to safeguard the waterways' future. The British Waterways Board has statutory responsibility for operating and maintaining the inland waterways. The transfer, pursuant to The British Waterways Board (Transfer of Functions) Order 2012 (in draft) and a transfer scheme made pursuant to the Public Bodies Act 2011, will transfer the entire waterway management duties and powers for England and Wales to the Canal & River Trust (CRT).

CRT is a charitable company registered with the Charity Commission. Its objects in its articles of association include preserving, protecting, operating and managing the inland waterways for public benefit.

The documentation (which is yet to be finally agreed) between the secretary of state for environment, food and rural affairs (Defra) and CRT contains agreed safeguards and includes:

• a trust settlement, which places the waterways infrastructure in a permanently endowed trust with CRT as the first trustee. This will prevent CRT selling any part of the waterways infrastructure without the consent of the secretary of state (which would require consultation) and, in some cases, the Charity Commission;
• documentation under which CRT and Defra jointly appoint a protector, to monitor how CRT manages the non-trust assets which are transferred to it in accordance with certain agreed investment principles; and
• a 15-year grant agreement, pursuant to which CRT will receive funding of around £800m and in return agrees to various reporting and other requirements.

Defra retains class membership in CRT enabling it to replace CRT as trustee of the permanently endowed trust and replace CRT's own trustees in the unexpected event that CRT materially breaches the arrangements. Importantly, the arrangements enable CRT to operate independently of the state, but Defra to protect public funds if required.

CRT is the largest public transfer into the charity sector. The transfer of smaller public services to the charity sector continues apace. Academies, for instance, are exempt charities (charities regulated by a body other than the Charity Commission). Although most maintained schools are also exempt charities, the emphasis on academies is clearly to operate more independently from the local authority. As of 1 April 2012, the Department for Education reported that there were 1,776 academies open in England.

With a focus on distributing the ownership of public assets (and liability for them) at a local level, the majority of the Localism Act 2011 came into force in April. The new community rights most relevant to charities are:

• Right to challenge '“ charities/voluntary groups can submit expressions of interest to take over providing services. The local authority must consider these and carry out an appropriate procurement exercise.
• Right to bid '“ local authorities will maintain a list of nominated assets of 'community value', meaning the land's use furthers the social wellbeing or interests of the local community (including cultural, recreational and sporting interests). The owner is then prevented from selling the land without first notifying the local authority and waiting six weeks to see whether any community interest group wishes to bid. If one does, there is a 20-week moratorium to develop a bid and raise money, although the owner is under no obligation to consider it.
• Right to build '“ subject to qualifications, allows a 'community organisation' (a body corporate established for furthering the social, economic and environmental wellbeing of individuals in a particular area) to apply for an order to take forward development without the need for planning permission. The benefits of any such development will remain within, and managed for, the community.

The need to protect themselves from liability and the requirements of the right to build will require some community groups to undergo a corporate restructuring. For this purpose, some government grants have been made available, although groups will need to be savvy to maximise these limited funding opportunities.

A similar right was launched by Labour in 2008 within the NHS. The 'right to request' enabled primary care trust employees to express an interest in providing NHS services through a social enterprise. There was not much initial uptake and, later, it was reported that interest was somewhat sporadic and regional, likely due to a lack of knowledge of how to start and operate a social enterprise and a lack of support.

Tightening the purse strings

In January, the Charity Commission published Our regulatory approach to protecting the public's interest in charity: how we assess and manage risks, in which it outlined its new approach to regulation, placing greater emphasis on preventing problems rather than curing them. This revised approach has been taken in light of the commission's funding being reduced by the government by approximately a third to 2014/15.

The commission has developed a three-stage methodology to assessing risks and managing resources, which includes considering whether it absolutely has to be involved (bearing in mind the remit of other bodies and public interest), the nature and level of risk and what is the most effective response in the circumstances.

The commission will apply fewer resources to charity registration applications using model or standard governing documents and will fast track any such applications. It will continue to make public various resources and refer trustees to its web-based guidance wherever possible. Further, trustees will be encouraged to use powers available to them where commission involvement is not strictly required.

As charity lawyers, we usually only engage with the commission in relation to complex or high-profile matters. In accordance with the new framework, we have continued to find the commission very willing to correspond on such matters. More interestingly, however, we might formerly have advised trustees to seek advice or 'comfort' orders from the commission in cases that fell short of 'complex' but were not straightforward or where powers were only implied; we have already seen the commission pushing back on such requests.

The contrast between the ability of third-sector organisations to take on a greater role in the provision of community activities and the Charity Commission taking a lesser role in the establishment of new charities is noteworthy.

Some feel government is giving with one hand and taking with the other. However, others are instead looking at ways to give increased support to charities from other organisations '“ in unveiling its new regulatory approach, for example, the Charity Commission called on umbrella groups to provide increased support.

Also making news...

The Charities Act 2011 came into force on 14 March, replacing most of the Charities Acts 1992, 1993 and 2006 and all of the Recreational Charities Act 1958. The new Act only consolidates existing legislation '“ it does not create new law.

It would be misleading to emphasise too strong a connection between the recent public sector re-jigging and the review of the Charities Act 2006 currently being undertaken by Lord Hodgson, mainly because this five-year review is enshrined in the Act itself.

However, it is clear that the review is likely to be hugely flavoured by recent spending cuts. At the time of writing, Lord Hodgson is reviewing the responses to his call for evidence and is due to produce recommendations for reform by June.

I wish to only mention recent discussions on capping individuals' income tax reliefs and the impact this will have on charities' gift aid donations. However, this issue, driven centrally by concern over public funds, will also inevitably make some in the sector query how it is expected to accommodate increased provision against decreased funding and support.