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Practical guidance on duties of a charity trustee

This year marks the 10th anniversary of the Office of the Scottish Charity Regulator (OSCR). It has been a year of continued progress in supporting the charity sector in Scotland. As well as introducing its Notifiable Events scheme, it has published its Targeted Regulation framework, begun publishing charity accounts online on the Scottish Charity Register, and revised its guidance on "Meeting the Charity Test".

OSCR’s Guidance for Charity Trustees has also been a valuable source of guidance and, in the second half of 2015, OSCR revised the guidance and published a draft for public consultation. This revised guidance document is now available on OSCR’s website. Readers of the guidance might wonder what has changed.

Out with the old…

The original guidance document was published around 2008 and set out the legal duties and responsibilities of charity trustees in accordance with the 2005 Act. It was a clear, concise and relatively short document which narrated the statutory position using softened legal language, but the general tone of the guidance document was factual with a bit of a focus on black-letter law.

The legal sections were punctuated with "examples of good practice", but the text was short and the examples were general in nature. It should be remembered, of course, that this guidance document was published only a few years after OSCR’s inception and examples of good practice from OSCR’s own experience by then will have been in reasonably short supply. The guidance dealt with a range of topics: who are charity trustees, disqualification, general duties, specific duties, remuneration, investment powers, and breach of duty, all of which largely mirrored the 2005 Act.

In September 2015, OSCR published a draft of its revised guidance and commenced a public consultation on the draft. OSCR made it clear that the statutory duties had not changed: this was not why the guidance was being revised.

But OSCR had over a decade of regulatory work accumulated a wealth of experience advising on charity trustee duties and conducting inquiries into the actions (or alleged actions) of charity trustees. As a result, OSCR was in a position to offer guidance with wider texture and context, using examples from its practical experience in regulating charities.

…in with the new

The format of the new guidance helps to separate out threads of legal duty on the one hand and good or best practice on the other. The addition of icons indicating "Legal Duty" (what you must do) and "Good Practice" (what you could or should do), as well as different coloured text to indicate links within the guidance to the OSCR website, external links and a glossary, make the document much more interactive and user-friendly.

Case studies and practical advice are largely contained in a "Good Governance" section, which is accessible separately from the main guidance. Guidance sections also end with links to other sources of help and a "Legal Note" which refers to the relevant sections of the 2005 Act and related regulations.

It is important to stress that the guidance explains the duties of charity trustees under the 2005 Act only. It does not go into detail on applicable common law duties, or duties under the Companies Act 2006 for charities whose legal form is a company limited by guarantee. There is also no detailed reference to charity trustees’ duties within other areas of law, such as health and safety, employment, anti-bribery rules, etc.

Of course, that is not the purpose of the OSCR guidance, but it is important for charity trustees to be aware that their duties under the 2005 Act are supplemented by wider legal duties. The OSCR guidance is nevertheless an excellent starting point for charity trustees grappling with their charity law duties.

Restatement of 2005 Act duties

Although the duties and responsibilities imposed upon and expected of charity trustees under the 2005 Act have not changed, it is worth setting out a reminder of these key duties, since they should always be in the forefront of a charity trustee’s mind. As before, the guidance is split between general duties and specific duties.

General duties

The two main general duties are that charity trustees must: (1) act in the interests of the charity and (2) comply with the provisions of the 2005 Act. The first general duty – to ensure that you do what is best for the charity and its assets – is split into three pillars. A charity trustee must:

  1. Act in good faith, and only in a manner which is consistent with the charity’s purposes. The charitable purposes can be found in the charity’s constitution or governing document and should be referred to regularly to avoid mission drift or the charity acting ultra vires (outside its powers).
  2. Act with care and diligence. Charity trustees must deal with the charity’s affairs to the standard of care expected of a person dealing with the affairs of another. Charity trustees must set strategic plans and goals for the charity, and review and update these as necessary, as well as being aware of and managing the charity’s financial position.
  3. Manage and mitigate any conflict of interest between the charity and any person or organisation who appoints charity trustees. Potential and actual conflicts must be disclosed and managed, and the interests of the charity put first. Where a charity trustee faces a conflict in duties, that trustee must refrain from participating in the deliberations and decision-making on that particular matter. The use of a Register of Interests is considered good governance.

Specific duties

Charity trustees must be aware of wider legal obligations which come along with charitable status. The "specific duties" relate to the more detailed operation of a charity. In some instances, carrying out these duties might be delegated to staff members or volunteers, but they remain the ultimate responsibility of the charity trustees. The specific duties are:

  • Ensure that the charity’s details on the Scottish Charity Register are correct and updated as necessary.
  • When seeking to make changes to the charity, ensure OSCR’s prior consent is obtained where required and all changes are notified to OSCR within three months of the date the change took effect. Charity trustees must also ensure that any requirements in the constitution or governing document are complied with.
  • Ensure that accurate financial records are maintained, appropriate accounts and reports are prepared and audited/independently examined (depending on the legal form of the charity and its size), and that OSCR’s annual reporting requirements are complied with timeously. Charity trustees should be aware that from 1 April 2016, OSCR revised its Annual Return form.
  • If the charity is undertaking fundraising as a method of raising income to fund its charitable activities, certain additional rules and conditions will apply. The regulation of fundraising is currently under review in Scotland.
  • Charities must provide certain information and documents to the public upon request and comply with the rules on displaying their name and charitable status.

Guidance sections

OSCR’s revised guidance also contains sections in relation to: Governing Documents and Meetings, Conflict of Interest, Charity Finances, Remuneration and Publicising Charitable Status. The additional detail and practical examples provided under these headings are welcome and useful additions to the OSCR guidance.

Failing to comply

If a charity trustee fails to comply with their duties, it is considered misconduct in the administration of the charity under the 2005 Act. As regulator, OSCR has powers under the 2005 Act to undertake inquiries where there are concerns about a charity or its trustees and to take action against the charity or its trustees depending on the outcome of its investigations.

The options at OSCR’s disposal include powers to suspend an individual from acting as a charity trustee, give directions restricting the types of transactions a charity can enter into, give directions to third parties holding charity assets not to administer the assets without OSCR’s prior consent and, in the worst cases, remove a charity from the register.

Even where there has been a breach of their duties, if charity trustees can be shown to have acted reasonably and honestly, their actions are unlikely to be considered misconduct, and OSCR will typically work with the charity and its trustees to ensure the breach is rectified and doesn’t happen again.

As well as OSCR taking action to deal with concerns of misconduct, charity trustees are also obliged under the 2005 Act to take reasonable steps to ensure that any breach of duty is corrected by the charity trustees in breach and not repeated. Also, if a charity trustee commits a serious breach or is persistently breaching their duties, the other trustees are obliged to ensure that they are removed as a trustee of the charity.

Useful aid

Overall, the revised guidance is a useful aid for charity trustees and charity advisers alike. The expanded explanations and practical content from OSCR gives readers a better understanding of the statutory duties under the 2005 Act, how OSCR interprets them and their everyday application in the operation of Scottish charities. This is an excellent starting place for any charity board wishing to refresh their working knowledge of their formal legal duties.

Turcan Connell\'s Debbie McIlwraith - the revised guidance from the Office of the Scottish Charity Regulator is a useful aid for charity trustees and charity advisers alike.
"The format of the new guidance helps to separate out threads of legal duty on the one hand and good or best practice on the other."
"Charity trustees must be aware of wider legal obligations which come along with charitable status."
"If a charity trustee fails to comply with their duties, it is considered misconduct in the administration of the charity..."

Self-reporting significant events to the Regulator

From 1 April 2016, the Office of the Scottish Charity Regulator introduced, among other new measures, its notifiable events scheme. This new self-reporting, self-evaluating scheme is an active extension of OSCR’s role as Regulator to assist charity trustees to deal with and prevent issues arising within their charity, to increase transparency and accountability, and ultimately to support and improve public confidence in charities.

OSCR has published guidance on the new scheme to help charity trustees understand what a notifiable event is and when a report to OSCR should be submitted.

What is a "notifiable event"?

Broadly, "notifiable events" are serious incidents which have had, or threaten to have, a significant impact on the charity itself (including its reputation) or its charitable assets. Reporting notifiable events is not a legal requirement: there is no statutory obligation on charity trustees to report such instances to OSCR.

It is hoped that charity trustees will adopt self-reporting as part of their general duties and responsibilities. In its guidance, OSCR states that it would be concerned if a serious event occurred and was not reported to it at the time, and they later became aware of it.

Specific to each charity

As with its other recently published and/or updated guidance, OSCR has helpfully provided examples of what a notifiable event may be. Notwithstanding the examples, it is made clear that what is considered a significant event will be specific to each charity and its individual circumstances. The charity trustees must consider the event in light of the size and nature of the charity and its potential impact when deciding whether it is a notifiable event and whether it should be reported.

Categories of notifiable event

There are eight categories of notifiable event listed in the guidance:-

  • Fraud and/or theft – as these are criminal offences, the charity trustees must report the matter to the police in the first instance and obtain a crime reference number prior to reporting it to OSCR.
  • Substantial financial loss – whether the loss is substantial will also be subjective to each charity, however as a guide, OSCR advises that a loss which is 20% or more of a charity’s income should be considered substantial. This should not prevent charity trustees reporting smaller amounts if they consider the loss to be substantial to their individual charity.
  • Incidents of abuse or mistreatment of vulnerable beneficiaries – such incidents and allegations, where there are reasonable grounds for suspicion that such abuse or mistreatment took place, should be reported.
  • Not enough charity trustees to make a legal decision – if your charity does not have enough trustees to form a quorum in accordance with your charity’s governing document, this should be reported to OSCR, along with any decisions taken whilst the board was inquorate.
  • The charity has been subject to a criminal investigation by another regulator or agency, sanctions have been imposed, or concerns raised by another regulator or agency – OSCR would like to be informed of ongoing investigations by other regulators or the police. An update on any key points during the investigation and the outcome should also be submitted.
  • Significant sums of money or other property have been donated to the charity from an unknown or unverified source – suspicious or tainted donations should be reported. The general guidance on the donation thresholds from OSCR adopts the guidance from the Charity Commission for England and Wales: a donation greater than £25,000 from an unknown/unverified source should be reported.
  • There are suspicions that the charity and/or its assets are being used to fund criminal activity (including terrorism) – the charity trustees should be on high alert for such suspicious activity.
  • • A charity trustee is acting whilst disqualified – you are disqualified as a charity trustee if you fall within the provisions of s.69(2) of the Charities and Trustee Investment (Scotland) Act 2005.

Reporting to OSCR

When submitting a report to OSCR, it will want to know the details of the event including:

  • What the event is and how it has (or may have) a serious impact on the charity. There is no fixed format for the presentation of this information, but OSCR needs to receive sufficient information to understand the event which has arisen.
  • What action (if any) has already been taken in response to the event.
  • What further plans the charity trustees have in place to deal with the event.
  • What plans the charity trustees have in place to mitigate similar events which may arise in the future.

It would be prudent for charity trustees to review the guidance to ascertain what additional information OSCR will likely seek in relation to specific categories of notifiable events. Reports of notifiable events should be submitted to OSCR by email to the dedicated notifiable email address.

No deadline for notification

There is no deadline or timescale within which to notify OSCR of the serious event. The time at which to do so will largely be dictated by the nature of the event and the surrounding circumstances. While the charity trustees should not unduly delay reporting, they are not required to immediately report the incident as soon as they become aware of it.

Depending on the urgency of the threat or potential impact, the charity trustees may take reasonable time to review and investigate the situation, and begin to take steps to deal with the matter and mitigate the consequences prior to submitting a report. It will stand the charity trustees in good stead to include in the report the action points they have implemented so far in response to the event.

From its inception under the 2005 Act, OSCR has always attempted to be a proportionate regulator: when it takes action, when it investigates a charity or charity trustees, when it responds to complaints etc., it aims to do so in a proportionate manner. This trait can also be seen in the notifiable events guidance.

OSCR suspects that, in most instances, the issue will either have adequately been dealt with by the charity trustees and/or steps will have been taken to prevent the issue from reoccurring. In such cases, it will simply review the report and decide if any further investigation or follow up with the charity trustees is required. It is anticipated that only in a small number of occasions, OSCR will look into the matter further.

When no need to report

There are two instances when an event which would normally be considered a notifiable event does not need to be reported to OSCR:

  • If the charity is registered with either the Scottish Housing Regulator or dual registered with the Charity Commission for England and Wales – in these cases, OSCR has internal arrangements in place with these regulators and a separate report to OSCR is not required. This exception does not apply to all regulators, only the aforementioned bodies. Therefore, if the charity is registered with any other regulator (such as the Care Inspectorate or Companies House), then a report should be submitted to OSCR.
  • If the incident is a crime – in this case, the charity trustees should report the matter to the police in the first instance. The matter should then only be reported to OSCR under the notifiable events scheme if it has had, or will likely have, a significant impact on the charity overall. The charity trustees’ judgment is a key part of the process.

Effect of the new scheme

It is hoped that the introduction of this new scheme will encourage and assist charity trustees to identify and deal with matters which may have a serious impact on the charity with greater confidence and efficiency. This is a tool through which OSCR can support charity trustees in their management of Scottish charities. It is inevitable that notifiable events will occur at some point during the lifetime of a charity; it is how the charity trustees identify and respond to it that is important.

Other changes from OSCR

The notifiable events scheme was not the only change to be implemented by OSCR from 1st April. Other changes to look out for include:

  • Publishing charity accounts online – this change is also to improve transparency and accountability. Although charity accounts are already a public document, usually a member of the public would need to contact the charity directly to request a copy. All accounts received from 1 April from charities with an income of £25,000 or more and all SCIOs will be published on the charity’s register entry. Charities which already publish their accounts online can also provide OSCR with a link to the accounts to include in their register entry.
  • The Annual Return form – the questions contained in the Annual Return form are changing and will ask more about the governance of the charity and related matters.
  • A new focus on the Targeted Regulation framework - OSCR has published guidance on its revised approach to charity regulation in light of its 10 years of experience. It will target the key areas identified where issues are likely to arise. OSCR has expressed that its Targeted Regulation framework is a living document and it will continue to develop as new issues and areas of concern arise.
Turcan Connell's Debbie McIlwraith - it is hoped that the introduction of the new self-reporting scheme will encourage and assist charity trustees to identify and deal with matters which may have a serious impact on the charity with greater confidence and efficiency.
" is made clear that what is considered a significant event will be specific to each charity and its individual circumstances."
"...the charity trustees may take reasonable time to review and investigate the situation, and begin to take steps to deal with the matter and mitigate the consequences prior to submitting a report."

New implications for cross border charities

It has been five years since the Office of the Scottish Charity Regulator (OSCR) first evaluated Scotland’s cross border charities. Since then the number of charities falling into this category has increased by over 40%, and there are now 965 cross border charities on the Scottish Register.

To comply with the Charities and Trustee Investment (Scotland) Act 2005, all organisations which represent themselves as charities in Scotland must register with OSCR, which has a duty to monitor them. This is the case even where there is already a "home country" charity regulator in the place where the organisation was first established. In almost all cases cross border charities registered with OSCR originate from England and Wales.

It is an important part of risk management that trustees of charities operating in more than one legal jurisdiction (whether at home in the UK or abroad) keep appraised of legal, tax and regulatory compliance issues. These are some of the recent developments from Scotland.

Land reform

The Scottish Government has been seeking to develop a wide range of land reform issues. One particular proposal was to create a new and onerous legal duty on charity trustees “to engage with the local community before taking any decision on the management, use or transfer of land under the charity’s control”. This raised several concerns in the sector as to the uncertainty, cost and complexity that such a new duty could bring to the way in which charities in Scotland manage land.

Although the proposal was not included in the Land Reform (Scotland) Bill 2015 when it was published in June, the Scottish Government is expected to introduce guidance on community engagement for all Scottish landowners, but no longer singles out charity trustees. While this measure may come to focus only on large land owning entities, charities of all sizes could still be affected by the change.

Taxation policy

In order to obtain charity tax status, all Scottish charities must comply with the English and Welsh charity test under UK tax law. HM Revenue & Customs, and not OSCR, therefore regulates charity tax recognition. However, increasing devolution of taxation to the Scottish Parliament creates complexities for cross border charities as Scottish taxation policy diverges from the UK.

Elements of the Scotland Act 2012 are now affecting cross border charities: on 1 April 2015, Land & Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax in Scotland for all property transactions, whether residential or commercial. Specific provision is made for charities to qualify for relief from LBTT, such that a property is exempt from the tax if the buyer is a charity which intends to hold the property (or the greater part of it) for qualifying charitable purposes, and the property transaction has not been entered into for the purpose of avoiding tax.

Purchasing property as an investment qualifies for the relief where profits are to be applied for charitable purposes. Subject to meeting the qualifying criteria, the relief extends beyond Scottish registered charities to those in the rest of the UK, the EU, Iceland and Norway. Care needs to be taken as certain disqualifying events can apply to restrict or remove the relief altogether.

The 2012 Act also introduced a new Scottish Landfill Tax and, from 6 April next year, a Scottish rate of income tax. With this will come the ability to raise or lower income tax. Any change would be applied equally across all tax bands.

The Scotland Bill goes one step further and sets out to devolve to the Scottish Parliament complete control of the rates and bands of income tax. However, central parts of the tax, including reliefs such as Gift Aid, remain reserved to Westminster. Calculating Gift Aid by reference to the UK, and not the Scottish, rates will have an indirect impact on cross border charities. This is because where the rates north and south of the border diverge, discrepancies will appear in the level of tax rebate.

As an example, if the UK income tax basic rate remained set at 20% and the Scottish rate is introduced at, say 21%, a Gift Aid donation would only produce a 20% (UK rate) tax rebate to the donee charity. The additional 1% of tax would not be rebated to the charity or to the donor.

The Chancellor has recently announced changes to inheritance tax but this tax remains reserved to the UK Parliament. The reduced 36% rate which applies to estates where 10% or more of the estate value is left to charity will therefore be unaffected by the recent and proposed Scottish devolution of taxation policy.

Fundraising reporting

To help reinforce public confidence in the Sector and to stamp out aggressive fundraising practices, large charities in England and Wales will soon have a legal duty to publically report their fundraising methods and the number of complaints which they receive. There is no move yet in Scotland to follow suit, but charity leaders are undertaking an immediate informal review of the situation.

Another current area of attention is restricted funds. These can take many different forms, depending on the source of funds. In Scotland, a restricted fund is “Property (including money) given to a charity for a specific purpose and in respect of which conditions have been imposed as to its use”.

Funds raised or gifted to a charity for its operations and work in Scotland will be restricted for use and application in Scotland, to the exclusion of being applied by the charity elsewhere in the UK. It is therefore vital that granters, legatees and fundraisers are clear about the ultimate destination of gifted funds.

The Charities Restricted Funds Reorganisation (Scotland) Regulations 2012 do provide a method of changing the purpose for which funds may be used and to vary or remove conditions attaching to restricted funds.

However, the wishes of a donor or granter can only be overridden where his or her consent to any such variation cannot be obtained, say because the individual has died, lost capacity or cannot be traced, or if the grant giving organisation no longer exists. OSCR also needs to be satisfied that one or more of the Reorganisation Conditions has been met - for example, that the intended purposes of the fund have been fulfilled or have ceased to be charitable.

Regulation initiatives

OSCR’s consultation on "Targeted Regulation" closed at the end of May. It introduced a number of topics aimed at promoting openness and which could bring the Scottish Charity Register closer in line with the Charity Commission’s Register. These include the online publication of charity accounts, the development and (ultimately) online publication of a charity trustee database, and a "Serious Incident Reporting" mechanism.

Efforts to align such initiatives north and south of the border are helpful to cross border charity trustees but care still needs to be taken on the key differences in practice which exist or develop over time.

One recent example of that is the increase from £500,000 to £1m in the audit exemption threshold in England and Wales, for accounting years ending on or after 31 March 2015. There are no plans at present to amend the audit threshold in Scotland, which remains set at £500,000.

Analysis from OSCR’s evaluation reports distinguishes the profile of Scotland’s cross border charities from the wider Scottish charity profile. There is a predominance of charitable companies, as opposed to unincorporated associations, and a heavier weighting towards charities with a higher level of turnover and asset value. Such charities may therefore already be required to have a full audit of their accounts. The impact of this divergence in regulatory practice may therefore be limited but some cross border charities will be affected.

Trustee residency

The concept of all charities registered with OSCR being required to have at least one Scottish resident trustee was raised a number of years ago but has since received little attention. There is currently no restriction on non-Scottish residents (or non-UK residents for that matter) acting as charity trustees, nor are there any additional requirements on them in fulfilling their duties under the 2005 Act.

Nonetheless, Scottish registered charities which are governed and controlled out of another legal jurisdiction must maintain strong engagement with their network of resident employees or branch committee members to keep appraised of local issues.

The results drawn from OSCR’s evaluation and monitoring reports of cross border charities in Scotland establish the need to raise awareness among this group of the requirements of being a Scottish registered charity and of the duties of trustees under Section 66 of the 2005 Act.

Risk management

Managing risk effectively is an essential function of charity governance, the responsibility for which rests firmly at board level. Mitigating the risks associated with operating in more than one jurisdiction requires close engagement with the charity’s local network and keeping appraised of, or seeking professionally advice on, the often complex and diverging legal, tax and regulatory regimes which exist across the UK and elsewhere.

Turcan Connell's Chris Sheldon - there is a need to raise awareness among cross border charities of the requirements of being a Scottish registered charity and the duties of trustees.
"...increasing devolution of taxation to the Scottish Parliament creates complexities for cross border charities as Scottish taxation policy diverges from the UK."
"Funds raised or gifted to a charity for its operations and work in Scotland will be restricted for use and application in Scotland..."
"Analysis from OSCR's evaluation reports distinguishes the profile of Scotland's cross border charities from the wider Scottish charity profile."

Knowing how to meet the charity test in Scotland

The Office of the Scottish Charity Regulator (OSCR) is updating its guidance note on what is a fundamental assessment under Scottish charity law – "Meeting the Charity Test". Under S.5(1) of the Charities and Trustee Investment (Scotland) Act 2005, OSCR may enter an applicant in the Scottish Charity Register, and subsequently allow it to call itself a charity, only if the applicant meets the charity test.

The test itself is found in S.7 of the 2005 Act. The test is two-fold: (1) the applicant’s purposes must consist only of one or more of the "charitable purposes" (of which there are 16 and these are slightly different from the purposes applicable in England and Wales and Northern Ireland), and (2) it provides, or intends to provide if the activities are not already established, public benefit in Scotland or elsewhere.

The charity test is not only applied to bodies seeking to become a charity; once the test has been met at the point of registration, the charity is then under an ongoing obligation to continue to comply. Under S.30 of the 2005 Act, if after carrying out the necessary inquiries, OSCR is of the opinion that a charity no longer meets both arms of the test, it can issue directions to encourage compliance and/or it can remove the charity from the Register.

Serious issues

Removal from the Register can result in serious issues for the body (as it can no longer hold itself out as a charity). For example, Scottish Charitable Incorporated Organisations (SCIOs) will cease to exist if they are removed, which means a total inability to carry on activity.

Therefore it is clear that ensuring their organisation meets, and continues to meet, the charity test is vitally important for all trustees. To assist them and their advisers, OSCR issued guidance on the application of the test. The most recent version was issued in November 2008, not long after OSCR’s inception. The guidance was based on the bare bones of the legislation and was largely theoretical since OSCR did not have extensive practical experience of applying the test at that time.

Over the greater part of the last decade, OSCR has granted charitable status to approximately 10,000 organisations, a figure that does not include any applications which were rejected. It has also amassed practical experience applying the test in a number of inquiries both on individual charities and groups of similar bodies. Recently, OSCR published reports on its review of fee-charging schools and Arms’ Length External Organisations (ALEOs).

Consultation closed

To put this first-hand experience to good use, OSCR has revised its "Meeting the Charity Test" guidance and as per S.9 of the 2005 Act, prior to issuing it, OSCR must first consult representatives of the charitable sector and other such persons as it thinks fit. To fulfil this obligation, OSCR put the draft guidance out to consultation. The consultation closed on 26 May and the final version of the guidance will be available later in the summer.

WHAT´S DIFFERENT? At first glance, the guidance is more informal and the wording and structure have been softened for an easier read. There is no denying the new guidance is designed to be more user-friendly, however, some commentators question whether OSCR has gone a little too far.

References to the legal principles in the 2005 Act appear to have been sacrificed for the new colloquial nature of the guidance. It is important that the reader understands the test itself and why OSCR are applying the rules in the manner it does. I believe that references to the law should be reinserted.

Interactive quality

A leap forward is the new interactive quality of the guidance. It was produced for consultation in an electronic PDF format, similar to the current guidance. However, the new PDF contains links for easier movement throughout the 84 pages. Key words are linked to a useful glossary to expand on their meaning. The guidance also contains hyperlinks to relevant external sources.

The most significant additions to the new guidance are the cases studies under the different charitable purposes which OSCR uses to demonstrate common issues and themes it has encountered and explain the practical application of the test. The case studies help illustrate OSCR’s processes and considerations.

Even though this is the main amendment, OSCR has not provided case studies for all of the charitable purposes. Could this be due to a lack of available material? Also, all of the examples are from new applicants. As the test is equally relevant to established charities, some examples from their perspective would be welcomed.

Consistent range

A consistent range of case studies would be particularly valuable to the reader. If each of the charitable purposes contained a successful and unsuccessful application or inquiry as well as an example where OSCR sought further information or directions were given, this would cover a number of potential outcomes.

CAN OSCR LEARN ANYTHING FROM THE CHARITY COMMISSION/CHARITY COMMISSION NORTHERN IRELAND? While I am not seeking to compare the charity test across borders, the way the guidance of the respective tests is published, and the elements of that guidance, can be. One thing that isn’t clear at the moment is whether the OSCR guidance will be published as a PDF only, or whether it will also be set out in a web-based format and allow for ease of flow and reference between pages.

The OSCR guidance is wrapped up in a single "Meeting the Charity Test" package, whereas the Charity Commission guidance is split into different components to allow the reader to drill down into each part quicker. While I am not suggesting OSCR simply follows the Charity Commission (the Commission´s website contains a greater volume of information and it is easy to get lost), consideration should be given to how the guidance is made available online.

Familiar feel

The Charity Commission Northern Ireland counterpart is not too dissimilar to the new OSCR draft document; the flow of movement through the documents feels familiar. One thing I noticed, and this may seem a trivial point, is that the key words/words with a link to the glossary are in bright green and pink in the CCNI guidance. There is no missing these beacons on the white page. OSCR has chosen deep blue and purple.

If you are going to the effort of highlighting significant words for different reasons, they should be given prominence through use of easily distinguishable colours or it is a wasted exercise.

As is the collaborative way of the third sector, OSCR should look to its regulatory neighbours for ideas.

One final point which may be up for discussion in more detail after the consultation closes, is that reviewing the guidance has reminded me and no doubt others that the test the guidance is talking about is now 10 years old. The principles behind the guidance remain the same; the guidance is simply being updated to reflect OSCR’s experiences and current practices.

Is this an indication that the 2005 Act should be reviewed and updated? Has the application of the test and OSCR’s role as "assessor" changed enough to warrant a legislative review? Many different charity applications are crossing OSCR’s desk with purposes which may not fit squarely into the categories of the 10 year old list. It may be time to re-evaluate the Scottish charity legislation as a whole.

Turcan Connell's Debbie McIlwraith - it is clear that ensuring their organisation meets, and continues to meet, the charity test is vitally important for all trustees.
"The charity test is not only applied to bodies seeking to become a charity...the charity is... under an ongoing obligation to continue to comply."
"The most significant additions to the new guidance are the case studies under the different charitable purposes which OSCR uses to demonstrate common issues and themes..."
"The principles behind the guidance remain the same; the guidance is simply being updated to reflect OSCR's experiences and current practices."

Appreciating the importance of governance in charities

One of the fundamental things charity trustees have to get right is governance. Good governance can underpin everything else that a charity does – but getting governance wrong can open the door to poor decision making, regulatory inquiry and in serious cases financial or even (in the most extreme cases) criminal liability.

Governance is generally understood as “the way a charity operates” – it can cover everything from how the board of trustees is appointed to how meetings are run and documented. But it also extends to lines of authority between board and staff and ensuring that financial and other regulatory requirements are met.

However, governance can be so much more than this. It can be a way to help charity trustees meet their long term objectives, implement policies, ensure accountability to all kinds of stakeholders and comply with the law.

How can governance achieve all of this? It is not just the case that good governance provides a framework of guidelines within which a charity manages the structuring of its day to day work. Good governance can ultimately offer protection to the charity trustees themselves and it can protect or enhance the reputation of a charity.

This is especially the case where something does go wrong. Charity trustees who follow a clear governance framework in line with good practice will find it easier to justify their decisions later and to explain why the trustees can be shown to have acted with a charity’s best interests at heart.

Several governance issues coming from Scotland recently help to emphasise the importance of governance in charities – with lessons for the entire charity sector across the UK.

Arms Length External Organisations

Arm’s Length External Organisations (ALEOs) are charitable bodies which are separate from the local authority but which are generally subject to local authority control and influence. They typically run services on behalf of local authorities – commonly sports and leisure activities – but they can have a much wider remit including regeneration, housing or general charitable works.

The reason that ALEOs have come to the fore recently in Scotland is thanks to a study by the Office of the Scottish Charity Regulator (OSCR) into whether ALEOs present particular areas of risk in terms of meeting the charity test or the public benefit test.

Those risks were thought to include the degree of control over their activities by third parties (in this case, the relevant local authorities concerned), whether there were adequate boards of charity trustees in place within each ALEO, and whether there were non-charitable activities being carried out.

Problem cases

Two earlier inquiries had caused OSCR to treat ALEOs as high risk charities: Glasgow East Regeneration Agency and Shetland Charitable Trust.

In the case of Glasgow East Regeneration Agency, the charity trustees decided to make severance payments to their outgoing chief executive in advance of the winding up of the agency. The severance payments included a standard redundancy payment and a payment to the chief executive’s pension fund, neither of which was objectionable in itself. But a problem arose over an additional ex gratia payment made to the chief executive and how that payment was benchmarked.

Instead of looking at charity sector benchmarks for such ex gratia payments, the charity trustees only looked at local authority benchmarks – which OSCR considered to be an inappropriate measure for a charitable body. The resulting payment of several hundred thousand pounds was therefore considerably out of kilter with what OSCR would expect a charity to pay in similar circumstances.

There was also some evidence that not all of the charity trustees were involved in the decision making process, and no external advice was taken on the quantum of the payment. In short, the governance procedures in place were lacking, and led to the charity making a payment which OSCR considered to be in clear breach of charity law.

In the case of Shetland Charitable Trust, OSCR was concerned about the degree of control which the local authority (Shetland Islands Council) had over the charity, and the inability of the charity trustees to exercise independence of judgment. There was an inherent conflict of interest for the charity trustees which OSCR considered to amount to an ongoing breach of the charity trustees’ duties to manage conflicts.

It was impossible to say that the charity trustees were only acting with the charity’s best interests at heart as the decision making process of the charity trustees was so seriously compromised.

Lessons for the sector

Taking up the lessons from these two examples, OSCR carried out a desk based review of 11 of the 64 charitable ALEOs in existence in Scotland. By the end of its review, OSCR was clear that the risks in these charities were less in practice than had been anticipated – but the detailed findings still present a number of useful pointers towards good governance, especially if decision making may be compromised by a mixture of competing interests.

For all charities, it is critical that the board possesses the relevant skills required to ensure that the affairs of the charity can be properly controlled and managed. This means that the board structure itself must also be fit for purpose, with a proper process in place for board appointments.

Boards should consider carefully whom best to appoint as a chair and, where there are competing interests such as in the case of ALEOs, every charity board should reflect on whether the chair ought to be independent of any external party of influence, or whether it is simply a case of appointing the best person for the job. Different charities may reach different conclusions, but the important thing is to think about it and to reach a deliberate decision which is in the charity’s interests.

Where charity trustees are also local councillors (such as in the ALEOs examples) or where they are also members of some other third party body with a degree of control or influence, those charity trustees must have a clear understanding of their legal duties under charity law and they must comply with them.

Charity trustees in this position need to be able to achieve a separation of the different roles they hold. This is not just about achieving independence within the charity; it is also important that there is a clear perception of trustees´ independence when viewed from outside the charity.

If there are competing interests which need to be managed on an ongoing basis, then charities should consider some form of memorandum of understanding which sets out clearly how potential or actual conflicts will be managed, and the charity trustees should then adhere to that memorandum. There should also be robust induction procedures for charity trustees and regular reviews of the charity’s and the charity trustees’ performance.

Higher Education Governance Bill

The question of how charity trustees are chosen also arose as a key feature of the consultation on the Scottish Government’s proposed Higher Education Governance Bill. Amongst other things, the Scottish Cabinet Secretary for Education and Lifelong Learning was reported last year as saying that part of the intention was “…to improve the gender balance on governing bodies… In the Higher Education sector, I want you to discuss with the sector how women’s representation on governing bodies in senior positions can be improved.”

Does this mean that charities ought to have gender quotas in place when filling vacancies on charity boards? In almost every case, this will not be required – the focus ought instead to be on the right person for the role. But it is clear that charity trustees should ensure that their boards represent a balance not only of skills and experience, but also a degree of gender balance and indeed a degree of balance when it comes to any of the protected characteristics under the Equality Act where that can reasonably be achieved.

Challenges and opportunities

There is no doubt that getting governance arrangements right can sometimes be a challenge, and this article only picks up on a few governance themes, but discussions around the subject across the sector and the lessons which can be drawn from reports and inquiries provide a set of principles which every charity can and should consider when putting arrangements in place. Managing the process can take time and sometimes money, and some charity trustees may find it difficult to see the benefits – at least initially.

On the other hand, there are clear opportunities arising from properly conducted governance reviews. They can be a chance to stand back and critically review how a board is functioning, and they provide a framework for assessing policies and even existing relationships. They can be a useful occasion for bringing forward new, fresh ideas to a board. These are challenges and opportunities that all charity boards should seek to embrace.

Turcan Connell's Gavin McEwan - for all charities, it is critical that the board possesses the relevant skills required to ensure that the affairs of the charity can be properly controlled and managed.
" trustees must have a clear understanding of their legal duties under charity law and they must comply with them."
" is...important that there is a clear perception of trustees' independence when viewed from outside the charity."
"...there are clear opportunities arising from properly conducted governance reviews."

Delivering more from a grant making programme

Charities, big and small, are currently operating in a very difficult economic climate. Even the best funded and most efficient charities are feeling the pinch. Last year, according to the Charity Commission, 265 charities – each with a turnover of £500,000 a year – were forced to shut down or merge. As the pressure on household budgets sees even the most generous cut back on their donations, charities are looking for ways to become ever more efficient with the resources they have.

It was against this backdrop that we at the Bank of Scotland Foundation thought creatively and, working with Lloyds Banking Group, launched a volunteering initiative to complement our Grant Making and Matched Giving Programmes as we sought to provide additional support for charities. The idea was for us to push boundaries, think innovatively and provide added value for charities by thinking beyond donations.

Launched on 11 November 2010, the Bank of Scotland Foundation is an independent charity supporting people and their local communities across Scotland. We receive an annual donation of £1m from Lloyds Banking Group to fund our Small Grants Programme and a Matched Giving Programme for Lloyds Banking Group's colleagues in Scotland.

Volunteer projects

In less than two years the foundation has already distributed over £2m to over 450 charities. Working closely with the group, we have recently announced the launch of a Volunteering Grants Programme which has the ability to deliver both money and manpower to successful charities.

The programme opened to applications in June 2012, and successful charities will each receive up to £20,000 from the foundation for volunteering projects, with group colleagues engaged to help deliver and bring the projects to life. This collaboration will allow the foundation and the group to provide Scottish charities with not just the funding but also the manpower to really make a difference within their communities.

Underscoring our commitment to community volunteering projects, the foundation has allocated a total fund of £100,000 to the Volunteering Grants Programme.

A COLLABORATIVE APPROACH. We already have had some first-hand experience of the strength that a collaboration of volunteering and grant giving could provide. The foundation previously worked with Waverley Care, Scotland's leading charity providing care and support to people living with HIV or Hepatitis C, and to their partners, families and carers.

We provided a grant of £20,000 towards the salary of an advocacy and information worker who delivered 488 one to one support sessions to around 80 individuals. Such advice resulted in a wide variety of positive outcomes for individuals such as improved mental health, reduced social isolation and increased self-esteem.

Unrestricted use

In addition to the grant from the foundation, Waverley Care also benefited from colleague volunteers from the group. The volunteers completed a range of fundraising and volunteering initiatives which included decorating and gardening at the charity's residential unit, installing a pond in the charity’s allotment, bucket shaking during the Edinburgh Fringe and holding dress down-days. As a result of their efforts, the colleagues who volunteered from Lloyds Banking Group were also able to claim £8,695 from the foundation’s Matched Giving Programme for Waverley Care. Our Matched Giving funding is unrestricted, meaning charities can use it where it is needed most. Waverley Care used its Matched Giving funding to help fund its one to one and group support in Edinburgh.

Grant Sugden, director of Waverley Care, says: “There is a clear need for a specialist and confidential information and advocacy service for people living with HIV and Hepatitis C. The stigma of these conditions means that service users are often unable to speak openly, and consequently they can be isolated and reluctant to engage with mainstream services. We are thus extremely grateful to the foundation for its generous donation and to the bank's employees for their loyal and continuing support."

EXISTING POOL OF VOLUNTEERS. The charities which are successful in obtaining funding from the foundation's new Volunteering Grants Programme for their community volunteering projects will also be in a position to benefit from the access they will be given to a huge pool of the group's colleague volunteers in Scotland to help deliver their projects.

The group has a mature, tried and tested volunteering programme and its aim is that its colleagues will deliver one million hours of volunteering by 2015. This year alone the group saw 4,500 of its colleagues volunteering for Business in the Community's nationally recognised Give and Gain Day.

Extra mile

"We have some truly extraordinary people, who want to go the extra mile and want to help others,” says Paul Turner, group community and sustainable business director at Lloyds Banking Group. “We are able to tap into the hearts and minds of around 20,000 colleagues in Scotland – the vast majority of whom truly want to make a difference within their Scottish Communities, and who know they can do this through volunteering activities.”

As one of the UK’s biggest employers, the group recognises that its colleague volunteering initiatives can make a real difference. Thousands of colleagues are active participants in local community organisations, in and out of company time. And its Day to Make a Difference programme enables all colleagues to spend at least one day a year during work time volunteering for a charity or local community project.

The group has stated publicly that it wants to make a positive and lasting contribution to the prosperity of its customers, communities and the UK economy. Through its branches which are at the heart of communities, it serves the financial needs of over 30 million customers. It appreciates that it has the ability to touch nearly everyone in the UK and knows it has a key role to play in helping Britain prosper.

Linking expertise

By linking its volunteering expertise with the funding expertise of the Bank of Scotland Foundation, it believes it can further help charities and communities by its ability to match colleague volunteers with real local needs projects being funded by the foundation's Volunteering Grants Programme.

The benefits to those colleagues who take part are immense also. An effective volunteering programme develops employees and provides them with the confidence and skills which are of mutual benefit to the colleague as well as the organisation. It also goes some way towards building and improving public awareness which, in turn, can positively impact perceptions of the organisation by encouraging community spirit. “We really believe this volunteering partnership between the group and the foundation is a win-win formula for success," says Paul Turner. "Charities, communities, the foundation, the group as well as those colleagues who choose to volunteer will all benefit greatly.”

Beyond funding

More people than ever before now benefit from the extraordinary work that charities do every day in communities. Our aim for 2012 and beyond is to continue to be a funder which is responsive to needs and looks for areas where we can add real value. To begin with, our Volunteering Grants Programme – the collaboration of funding with volunteers – puts us in an exceptional position where we can provide significant benefits for charities beyond funding alone. Our aim with this programme is to engender a spirit of volunteering across Scotland where the funding and the volunteers act as a catalyst for local community volunteering.

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Kate Guthrie
Bank of Scotland Foundation's Kate Guthrie – providing added value for charities by thinking beyond donations.
volunteers decorating
The idea is to provide both volunteers and money for projects.
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Applying for funding in Scotland

Regardless of size, for any charity or other third sector organisation applying for and securing funding can be a daunting task. Many do not know where to start, who to contact or what information to collate. In the vast majority of circumstances, spending thousands of pounds on an expensive consultant to do the ground work is not the answer.

Statistics gathered by the Scottish Council for Voluntary Organisations (SCVO) show that since 2009 the sector's income has remained static at £4.4 billion. This is the first time there has not been growth since records began in 1998. Charities and voluntary organisations have seen a huge income drop since 2009 and at 45%, self generated income makes up the largest share of total income.

However, I'm convinced that this trend could be reversed, if only third sector organisations began to look elsewhere for funding rather than purely at mainstream providers.

Firstly, it is important that charities and third sector organisations remember funding organisations exist to help, not hinder. A third sector funder's main priority is to support growth within that sector and within communities by providing a wide range of finance products tailored to the unique requirements of those organisations.

Funders invest in charities and third sector organisations which they believe have the capability to make sustainable social impacts, create employment prospects, aid community engagement and enhance economic development.

Asking questions is acceptable

If charities and social businesses adopt this mindset and remember that funding organisations exist for their benefit, they will understand that it's acceptable to ask as many questions as possible. One finds that applicants often feel inhibited from asking basic questions about financial terms and requirements.

However, one would much rather that an customer is fully armed with as much knowledge as possible early on in the process rather than come back further down the line with concerns regarding certain terms within their agreements. Those funders working with third sector organisations of all shapes and sizes every day will no doubt have already encountered similar challenges or questions with a different applicant.

So how should a charity make the first approach for funding? In the preparation for sourcing funding, there are some key points charities should keep in mind.

Only a snapshot is required

It is not necessary to spend hours preparing a detailed, in-depth business plan. Many charities waste valuable time pulling together a plethora of background information that the funder could quite easily read about on the charity's website. While it's important to tell the story of an organisation, a snapshot of where the charity is at that particular time is what the funder needs to understand.

I would always recommend that a potential customer speaks with the funder first, so they are clear on exactly what information is required. And it doesn't have to involve hours of data analysis and administration. The sensible funder will understand the resource pressures that applicants are under, so they should try to make the process as straightforward as possible.

Funders will like to see key information on financial projections, and, crucially, the assumptions that underpin them. Funders will test the assumptions in the plan and analyse figures using various "what if" scenarios.

When applying for funding, charities should always acknowledge the main risks. The funder must have an understanding of what these risks are as well as a clear understanding of how the particular customer would mitigate against those risks or deal with them should they arise.

It is also important for applicants to provide a clear illustration of the management and governance set-up of their organisation. After all, a funder is backing the people as much as the organisation, so it's essential for them to find out, get to know and build a relationship with the person or team who will be delivering the charity's vision.

Demonstrating viability

Finally, it is up to the charity to persuade the funder of its viability. In order to do this I would recommend that applicants provide annual and management accounts, as well as forward projections. By doing this, funders can then assess their own contacts and signpost applicants to other organisations which could provide business support to the charity either at that time or in future. Funders are incredibly well connected in the third sector and their genuine wish to help should not be overlooked.

By understanding the alternative funding sources which exist to the main traditional lenders, I'm confident that the third sector can flourish once again. The bottom line for charities and other third sector organisations in Scotland to remember when applying for funding from social lenders is that trust is crucial. Neither the funder nor the customer exists to make profit and a foundation built on a mutual level of trust must be formed in order for a positive working relationship to grow and develop.

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Alastair Davis
Social Investment Scotland's Alastair Davis – applicants for funding should provide annual and management accounts, as well as forward projections.
"When applying for funding, charities should always acknowledge the main risks."
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Public benefit and Scottish independent schools

The need to be able to demonstrate "public benefit" has of course been a worry for independent Schools in Scotland since the 2005 Bill was introduced and even when enacted, the guidance on what constituted public benefit was at that time extremely scant.

From the outset of their review programme the Office of the Scottish Charity Regulator "considered that fee-charging schools might have a high likelihood of failing the charity test because the fees they charged…might unduly restrict access to the benefits the charities provide". For that reason OSCR has selected schools for review at all stages of the Rolling Review.

Schools correctly identified early on that the most effective way of combating any unduly restrictive conditions was to provide means tested access arrangements, which all did anyway, to a greater or lesser extent. It was not clear, however, how the sufficiency of those arrangements might be measured (or fully funded) and so schools also looked at what they provided by way of "public benefit for which there was no fee or charge".

OSCR did recognise that in addition to the means tested access arrangements, schools also provided public benefit for which there was no fee or charge, but assessed in its Phase 1a Review Report that, in most cases, this kind of benefit was neither significant enough nor closely enough related to the charity's purposes to have critical impact on OSCR's assessment of public benefit. Again, however, although individual schools which did not at first pass the charity test were given a steer from OSCR as to which activities would, there was little public guidance on the subject.

OSCR's report, "Protecting charitable status: A report on individual charity reviews 2006-11", published in June 2012, usefully summarises the "Activities providing public benefit in furtherance of the school's charitable purposes for which no fee is charged" which the four schools being reviewed under that heading were now providing and which OSCR considers contribute to the public benefit element of the charity test.

The activities all appear to be consistent with the existing educational activities of the schools concerned, largely utilising facilities and resources which the schools have without material extra expenditure. Clearly the beneficiary pool extends beyond pupils attending the schools and presumably the schools concerned are not restricted in their constitutions from extending the range of beneficiaries in this way. Other schools following these examples should, however, be satisfied that their constitutions and the terms of any relevant endowments permit this.

Importantly, these activities all appear to fall within the statutory charitable purpose "advancement of education" and do not include activities which might be covered by other charitable purposes, such as the advancement of arts, heritage, culture or science, or public participation in sport, for which schools facilities and resources might also be used and which might also provide public benefit.

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Morag Radcliffe
Gillespie Macandrew's Morag Radcliffe – clearly the beneficiary pool extends beyond pupils attending the schools.