The main advantages associated with registration as a charity are as follows:-
· relief from tax on surpluses and on any interest earned on sums held on deposit
· the ability to tap funding sources (e.g. charitable foundations) which can only give financial support to charitable bodies.
· the ability to receive donations from companies which can claim tax relief under the Gift Aid scheme for gifts of money to charities
· The ability to maximise the financial return from donations from individual donors through Gift Aid or Payroll Giving
· rates relief in relation to premises occupied by the charity
· special VAT concessions which are applicable only to charitable bodies.
Turning to the constraints associated with charitable status, one of the potential areas of difficulty is that a charitable body should only spend its money in one of two ways: either (a) in directly furthering its charitable objectives or (b) as a sound investment, involving a proper commercial return and proper security.
Difficulties can sometimes arise where a charity wishes to support some local community project which, although of benefit to the community, does not have charitable status or a specific charitable purpose. The charity (lets call it ‘C’) who wishes to provide the support to the community project (lets call it ‘D’) must be able to demonstrate that doing so furthers its own (i.e. C’s) .charitable purpose.
This does not mean that the recipient (i.e. D) has to either be a charity or have a purpose that would be considered charitable if D was a charity. Obviously many voluntary organisations or community groups (most in fact) do have purposes which probably would be deemed charitable if they applied for charitable status (and that might make it easier for ‘donor charities’ to decide to whom to give money) but it is not necessarily a legal requirement.
This may be best illustrated by an example. The charity (‘C’ again) has the following charitable purpose:
“The promotion of civic responsibility through the placement of volunteers with and the provision of support services to voluntary sector organisations”
based on this charitable purpose in the 2005 Act
· the advancement of citizenship or community development (this is stated to include rural or urban regeneration; and the promotion of civic responsibility, volunteering, the voluntary sector or the effectiveness or the efficiency of charities)
A identifies a voluntary organisation (‘D’, again) that it wishes to support through linking D up with a group of volunteers who wish to provide the staff at D with some educational sessions about the nature of the community in which D works.
If C does this for D it will clearly be furthering its own (C’s) charitable purpose. Because of the wording of C’s charitable purpose C can justify its support to D on the basis that D is a voluntary organisation. Whether D is a charity or has a purpose that would probably match a charitable purpose is not immediately relevant.
That is fairly straightforward example. It may well be that in other cases things could be more complicated. Let’s use a second example: Charity X has the following charitable purpose:
“The advancement of the participation of women and girls in the sport of basketball in the area of the city of Glasgow.”
based on this charitable purpose in the 2005 Act
· the advancement of public participation in sport (restricted to sport which involves physical skill and exertion
The charity (X) identifies a youth club (Y) which provides a whole range of activities for young people, of which sport is only one. X wishes to support Y through providing Y with a grant to buy in basketball coaching sessions for Y’s girls groups. In this example, as before, it does not matter whether Y is a charity or whether, if not, it has a purpose that might be deemed charitable if it applied for charitable status. What is important is that X must make sure that its grant is specifically given for the basketball coaching because if it is given for anything else, no matter how worthy it might be, then X is not acting to further its own (X’s) charitable purposes but some other purpose.
This means that there will still be (and may always be) some community ‘projects’ that will not be capable of being supported by some charities, even if the community project is part of the work of a community organisation (which may even be a charity) whose purpose means that the charity could support it in other ways or support different projects that it might be running.
In a way the charity that is in a position to give a grant - or any other kind of support – is simply saying ‘this is the kind of activity that we can support and, sorry, but we can’t support other things’ and using its own charitable purposes (as contained in the objects clause within the charity’s constitution) as the criteria by which it differentiates.
Problems can also arise in a situation where a charitable body wishes to use its funds to support a trading subsidiary. If permissible at all, this would normally have to be on the basis of a loan on commercial terms and with proper security.
Where a charitable body incurs expenditure which does not fall within one or other of the categories (a) or (b) referred to above (page 12) the charity could be assessed to tax on (broadly speaking) an equivalent amount of income. Beyond that, there is also the risk that OSCR might regard this as representing misconduct in the administration of a Scottish charity, particularly where, as is often the case, the trading subsidiary cannot offer any security for the loan, and take steps accordingly. HM Revenue & Customs’ view is that use of a charity’s funds in that manner does not directly further its charitable objects and, if viewed as an investment, it must be one for the benefit of the charity. There are detailed requirements within the legislation in relation to what will fall within the category of a “qualifying loan” or “qualifying investment” – and specific advice should be obtained from a tax adviser if there is any proposal to advance a loan to a subsidiary (or subscribe for shares in a subsidiary, beyond a nominal level).
A further aspect of charitable status which should be borne in mind is that, while charitable bodies may legitimately engage in campaigning or ‘political’ activities; there are some restrictions on this engagement. Broadly speaking, a charity must not engage in party-political activities, and any other campaigning activity would have to be justifiable as being directly relevant to the pursuit of the charity’s objectives.
There is also a specific regulatory framework for Scottish charities; the main elements of this are as follows:-
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· a charity can change its name only with OSCR’s consent
· a charitable body is required to state that it is a charity on its notepaper and certain other documents
· a charity cannot alter the statement of its purposes within its constitution, amalgamate with another body, or wind itself up (or dissolve itself) without OSCR’s consent
· a charity must give OSCR notice of any change in its principal office (or, if it does not have such an office, a change in the name and address of the charity trustee previously notified to OSCR for the purposes of the charities register), a change in any other details set out in its entry in the register, any change to its constitution or administration, receivership or winding up
· a charity is required to provide a copy of its constitution and latest annual accounts to a person who requests them, providing that request is reasonable
· OSCR has power to make enquiries with regard to a charity or a body controlled by a charity (this would include a non-charitable trading subsidiary); and may require information and documents to be supplied in connection with any such enquiries
· if OSCR considers that there has been misconduct in the administration of a charity (or a body controlled by a charity) – or that it is necessary or desirable to act for the purpose of protecting the property of a charity (or ensuring that property is properly applied) - OSCR has wide ranging powers to intercede; there are further powers which can be exercised with the sanction of the Court of Session
· OSCR has power to approve a reorganisation scheme proposed by a charity; in certain cases, though, it will apply to the Court of Session for approval of such a scheme
· a charity has a legal duty to keep proper accounting records and prepare an annual statement of account
· there are detailed regulations imposing requirements with regard to the preparation of annual accounts and the independent examination or audit of annual accounts, and the filing of such accounts with OSCR
· a charity requires to file an annual return with OSCR
· certain people are disqualified from acting as charity trustees (the term ‘charity trustees’ would include directors of a charitable company; and members of the management committee of a voluntary association or IPS which was a charity); the main categories are people who have been convicted of an offence involving dishonesty; an offence under the 2005 Act (disqualification for both these offences being for the period during which the convictions are unspent) or are undischarged bankrupts. Also disqualified are people who have been removed from being a charity trustee by a court order and someone disqualified from being a company director. (although there is provision for people who nevertheless want to serve as charity trustees to apply to OSCR for a waiver).
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It should also be noted that the 2005 Act imposes special duties on charity trustees. The key points are as follows:-
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· charity trustees must act in the interests of the charity; and must in particular
· seek in good faith to ensure that the charity exercises its functions in a manner which is consistent with its purposes
· act with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another person
· in circumstances where a conflict of interest may arise, put the interests of the charity first (or, where some other duty prevents that, disclose the conflict and take no part in the deliberations/decision)
· in addition, the charity trustees must ensure that the charity complies with any direction, requirement, notice or duty imposed upon it by virtue of the 2005 Act
· breach of trustees’ duties specified above is to be treated as misconduct in the administration of the charity
· all charity trustees must take such steps as they reasonably can for the purposes of ensuring that any breach of the above duties by the trustee concerned is not repeated; and that any trustee who has been in serious or persistent breach of any of the above duties is removed as a trustee |
The 2005 Act includes provisions specifically addressing a situation where a charity trustee provides services to a charity. The main points are as follows:-
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. where a charity trustee provides services to a charity or might benefit from any remuneration paid to a connected party for such services, then (unless i) there is a specific provision in the constitution authorising remuneration to trustees that was in force on 15 November 2004 (the day the Charities and Trustee Investment (Scotland) Bill was introduced into the Scottish Parliament) or ii) there is legislation or iii) an order is made by the Court of Session; that allows charity trustees to receive remuneration
. the maximum amount of the remuneration must be specified in a written agreement and must be reasonable
. the charity trustees must be satisfied that it would be in the interests of the charity to enter into the arrangement (taking account of that maximum amount)
. less than half of the charity trustees must be receiving remuneration or benefit from remuneration
. the remuneration must not be expressly prohibited by the constitution
Remuneration contrary to the above will be recoverable. |