The new Charities Bill and the legal implications for trustees
When the Queen’s speech in May announced a Charities Bill to “support the voluntary sector by reducing unnecessary bureaucracy”, it might not have attracted much of the news agenda but, for the charity sector, the Charities Bill should bring in some welcome changes.
Background to the Bill
The Bill comes out of a Law Commission charity law project announced in 2011. After multiple consultations, the Law Commission published a detailed 484 page report in 2017, Technical Issues in Charity Law, which made 43 recommendations for reform and included a draft Charities Bill. With all the political upheaval in the last few years, the Government only responded to the report in March 2021, but it accepted the vast majority of the recommendations and an updated version of the Charities Bill was published on the UK Parliament website on 26 May 2021.
Contained in the Bill
The Bill’s 41 clauses and 2 Schedules give effect to the Law Commission recommendations by amending existing legislation, in particular the Charities Act 2011. This can make the Bill a heavy read on its own (helpfully, a “Keeling Schedule”, a marked up version of the current legislation as amended by the Bill, is available on the Law Commission website), but there are explanatory notes which are comprehensive and genuinely explanatory. The main changes made by the Bill are highlighted below.
Changing governing documents
The Bill makes changes to how charities alter their governing documents, in general aiming to make each process as similar as possible, whatever legal form a charity has. The biggest change here is to give unincorporated charities (such as charitable trusts or unincorporated associations) a much wider statutory power to amend their governing documents.
The power is based on the permissive approach in place for charitable companies and charitable incorporated organisations (CIOs), where changes can be made unless they are “regulated alterations” (such as changing the charitable purposes) which require Charity Commission consent to be effective. For unincorporated charities, the amendments which will require Commission consent will be a wider class so as to take account of relevant third party rights.
Some tweaks are made to the regulated alteration process for charitable companies and CIOs, aligning it more closely with aspects of the unincorporated charity regime. This will mean that the Commission will consider different factors (such as current social and economic circumstances) in deciding whether to consent to a change of charitable purposes, although it is not clear that this will make a difference to consent decisions in practice.
Royal Charter charities would have a new power to amend their charter, subject to Privy Council approval, where they lack an express power to amend. Where a statute establishing or regulating a charity is amended by Charity Commission Parliamentary schemes, the process will be slightly easier.
Dealing with land
The current restrictions on land disposals and mortgages in the Charities Act, requiring suitable advice and statements in the documentation (or Commission order in some cases), are retained, but refined with some sensible improvements.
There will be more flexibility in the choice of adviser and it is clarified that the adviser (if suitably qualified) can be a trustee, officer or employee of the charity. The requirements for the survey report will also be more practical. The drafting of the provisions is also clarified so that, overall, the process for land disposals or mortgages should be broadly the same but with less scope for hitches.
Helpfully, a new exception from the restrictions will mean that Charity Commission consent will no longer be needed for a short fixed-term or periodic tenancy to a charity employee to use as their home. The interaction of the restrictions with social investments is also clarified, making it clear that the usual advice process must be followed if price is a motivating factor (even if only partial in the case of social investment).
Permanent endowment simplified
The Bill simplifies the definition of “permanent endowment” in the Act, bringing it more in line with the conventional understanding of the phrase, so that it will be property which is “subject to a restriction on being expended which distinguishes between income and capital”. The current legislation has wide statutory powers to release permanent endowment restrictions on spending capital, in some cases with Charity Commission oversight, but they can be complex to apply.
The Bill introduces simplifications, both in terms of identifying when Charity Commission oversight is required (reducing it to a test of market value of the fund) and in the process for obtaining approval from the Commission, where the time limit for the Commission to respond is also reduced to 60 days in line with time limits in other sections.
A new statutory power to borrow from permanent endowment is introduced, subject to repayment requirements, and some additional flexibility is brought in for using permanent endowment to make social investments.
Charity mergers
On a charity merger or incorporation, existing charity legislation seeks to ensure that subsequent gifts to a merged charity will take effect as a gift to the new charity. However, a defect in the current drafting means that a gift can fail if it specifies that the intended recipient charity must still exist on the date the gift takes effect. The amended provision will override that and apply even if there have been subsequent mergers. Some helpful examples of how this will work in different merger situations are provided in the explanatory notes to the Bill.
Charity trustees
Some new Charity Commission powers in the Bill should be helpful to charity trustees. For example, the Commission will have power to confirm a trustee’s appointment where there is doubt or a potential defect in the appointment or election process. The power could allow the Commission to clarify a situation where a person may be in limbo, happy to act as trustee but unsure whether or not they can.
The Commission will also be given quasi-court powers to authorise payment to a trustee, or retention of a benefit, where it would be inequitable otherwise. This might arise in a situation where the trustee has provided value to the charity, but an oversight means their payment was not authorised properly - the Commission would now have discretion to allow the trustee to be paid. The statutory power which permits payment of trustees for services will be extended to paying for goods (whether or not in connection with services).
A very technical, but useful, provision will confer trust corporation status automatically on a corporate charity acting as trustee of a charitable trust. Trust corporation status is needed in certain situations, such as where there is a single corporate trustee of land or in order to relieve outgoing charity trustees of their obligations. It is a point which can easily be missed but can cause problems, so the statutory solution offered here is really welcome.
Charity names and working names
The Bill expands the Commission’s current regulatory power to direct a change of charity name, to remove time limits on its use and to apply it to all charities, including unregistered and exempt charities. The Commission will also be able to direct charities to stop using a working name, something which was not consulted on so may be controversial as its possible effects are untested. The Commission will also have power to delay registration of a charity’s proposed change of name, or of the charity itself on a new registration, if it issues a direction to change the name.
Ex gratia payments
An ex gratia payment is one where the charity trustees feel a moral obligation to pay but have no legal power to do so. For example, if a testator dies before they can execute a change to a will which otherwise benefits charity, the charity trustees may feel a moral obligation to honour the testator’s intentions. If so, they can apply to the Charity Commission for permission to make the payment.
The Commission’s authority is an important safeguard where charity funds are expended otherwise than for the charity’s purposes, but it was also recognised that some flexibility might be suitable. As the amount involved can sometimes make the application to the Commission disproportionate, the Bill will allow charity trustees to make small ex gratia payments (defined by reference to the charity’s income) without Commission authority. Delegation of ex gratia payment decisions outside the trustee body (within the delegation functions of their charity’s governance structure) will also be permitted.
Other points
The Bill provides for the simplification of the current legislative framework for applying funds from fundraising appeals which fail, while also paying due regard to donors’ wishes. For charities involved in legal proceedings, the Charity Tribunal will have a new power to make “authorised costs orders” so that charity trustees can seek advance assurance that they can pay the reasonable costs of the proceedings out of charity funds.
Next steps
The Bill has only just started its progress through Parliament, so none of these changes will happen soon and it is expected that, when the Bill is passed, there will be a process and guidance to help charities adjust. While the reforms in the Bill are highly technical and may seem minor in the scheme of things, they have been likened to removing “unnecessary burdens on trustees [which] act like barnacles on a boat, causing a drag when all should be plain sailing”. Plain sailing may still feel aspirational for many, but the Bill should hopefully remove some “barnacles” along the way.
