Charities Act 2006 - an overview

The Charities Act 2006 was given Royal Assent on 9 November 2006. However, the majority of the Act is not yet in force and will be brought in in several stages which began in February 2007 and are due to finish in early 2008.

Burnetts has found that a growing number of trustees for smaller charities are opting to incorporate their charities as private companies (usually limited by guarantee, as opposed to private commercial companies which are limited by shares), in order to take advantage of the benefits this brings – particularly limited liability for trustees.

Whether a charity has incorporated, is considering it, or intends to continue as an unincorporated body, this articles sets out some of the more significant effects the Act will have on small charities by way of a “before and after” approach.

Registration as a charity

Before

Charities with an annual income of less than £1,000 do not have to register with the Charity Commission (“the Commission”), unless they own or occupy land.

After

The threshold will be increased and only charities with an annual income in excess of £5,000 will have to register with the Commission.

That said, these unregistered charities will continue to be regulated by charity law.

Changes to governing documents

Before

All registered charities, whether unincorporated or incorporated, had to obtain the Commission’s consent before amending their governing document (and taking certain actions) – in the case of incorporated charities this is its Memorandum and Articles of Association (“M&A”), but usually an unincorporated charities Constitution.

After

The Act specifies certain types of amendments to a charity’s governing document which will not require the Commission’s prior consent – but the Commission will still need a copy of the resolution effecting such changes.

However, whilst unincorporated charities have been able to take advantage of these changes since 27 February 2007, the provisions relating to incorporated charities are yet to come into force and, when they do, the following are amongst the changes to their M&A which will continue to require the Commission’s prior approval:

* Alterations to the Objects clause.
* An alteration which directs the application of a charity’s property on dissolution.
* Any alteration which authorises a benefit to directors or members (or anyone connected to them) of the charity.

Charitable Incorporated Organisation

Before

Charities wishing to have an incorporated structure, and the benefits (including limited liability for trustees) which it brings, currently have to both:

1) incorporate as a company limited by guarantee with Companies House; and

2)  register as a charity with the Commission.

This imposes a dual regulatory burden on these charities, as they have to comply with the regulation of both Companies House and the Commission, e.g. the separate accounting regimes of the Commission and Companies House.

Currently, an organisation must first incorporate by registering as a company with Companies House, then apply to register as a charity with the Commission. This can cause delays to an organisation obtaining charitable status.

After

The Act provides for a new type of charitable body, known as a Charitable Incorporated Body (“CIO”).

Like incorporated charities at present, a CIO will have attributes of both a company and a charity. The important difference is that a CIO will only be regulated by the Commission, meaning there will be the benefit limited liability for trustees whilst the dual regulatory burden will be lifted (Companies House will have no involvement in the overseeing of CIOs).

This single step registration should also reduce delays in obtaining the benefits of being both a charitable and incorporated body.

Existing incorporated charities will be able to apply to convert into a CIO, reducing their regulatory burden.

The Act also sets out details of what the governing documents of CIOs must contain. These are similar to the M&A of an incorporated charity at present.

Unfortunately, further legislation is required to finalise precisely how CIOs will operate and current estimates are that it will be at early 2008 before CIOs become a reality.

Payment of trustees

Before

Trustees could not receive any payment from a charity for which they acted as a trustee..

After

Trustees still cannot receive payment for their direct duties as a trustee, nor may they be paid employees, of a charity.

However, subject to certain criteria, trustees will be able to receive payment for “additional services” provided to the charity - if it is deemed to be in the best interests of the charity to do so. An example would be an electrician, who is a trustee of a charity, providing electrical services to that charity at a reduced rate.

Trustee indemnity insurance

Before

A charity could not pay for insurance to benefit trustees, even though the possibility of liability, and subsequently having to pay out if found liable, made people reluctant to act as trustees - for unincorporated charities in particular.

After

From 27 February 2007, a charity can now take out trustee indemnity insurance, against certain types of claims, from its own funds and without the prior consent of the Commission – although only so long as the charity’s governing document does not forbid this. It is hoped this will increase the numbers people of willing to act as charitable trustees.

Accounts

Before

The accounting obligations of a charity varied greatly depending upon whether it was incorporated or not.

After

As of 27 February 2007, the thresholds for both incorporated and unincorporated have been adjusted and are now much more similar - meaning the reporting obligations for each are now also more aligned.

However, incorporated charities have to continue to comply with the separate accounting requirements of Companies House – until it becomes possible for them to register as a CIO.

Summary

The Charities Act 2006 seeks to simplify the administrative and regulatory burden which charities suffer. However, charities which are already incorporated, along with those wishing to, will have to wait until the Charitable Incorporated Organisation becomes a reality before this burden is truly reduced.

Sam Lyon is a solicitor at Burnetts in Carlisle, Cumbria. As well as advising charities, he also provides legal support for small businesses.