Charities: a partial way forward
The Charities and Trustee Investment (Scotland) Act 2005 is approaching its 20th anniversary. The legislation transformed the charity sector in Scotland; however the time has come for it to be reviewed.
Following a series of consultations, punctuated by Covid, the Charities (Regulation and Administration) (Scotland) Bill is currently at stage 1 with the Scottish Parliament and calls for views were heard in March. As the name suggests, this is mainly an administrative bill which seeks to tinker around the edges of charity law rather than trigger a more significant evolution. That said, some of the proposed amendments will require further consideration.
The main intention of the bill is to enhance public faith in charities. Transparency is, of course, key to that.
It is proposed that all accounts and annual returns are published on the Office of the Scottish Charity Regulator (OSCR) website, together with the names of all trustees. While this information may be accessible for many charities on their websites or elsewhere already (depending on their structure), other charities have opted not to publish this information. In addition to a general concern around privacy, there is a concern that this may expose charity trustees to direct communication from service users or grant applicants, which would ordinarily be best directed to another appointed person within the charity. There may be a further administrative burden for charities, as it is anticipated that there will be a requirement to update OSCR with the charity trustees’ details, as and when these change. At present, charity trustee names are only updated with OSCR in the annual return.
The bill contains provisions on the disqualification of trustees and senior managers of organisations. This is broadly welcomed in the sector and brings the current provisions in line with those in England & Wales. The disqualification criteria set out in the bill relate to convictions of serious criminal offences, for example offences of terrorism, money laundering or perverting the course of justice. To provide greater transparency and protection for charities, there will be a search function on OSCR’s website allowing an organisation to check whether a trustee has been disqualified.
Another aspect of the bill is the requirement for charities to have a connection to Scotland, in order to be entered onto the Scottish Charity Register. There were concerns at the initial consultation stage that this was intended to limit charities who operate in other jurisdictions. It has become clear that these provisions are to ensure that any charity seeking entry onto the register has an interest in doing so: for example, it may be registered in Scotland, operational in Scotland, or have trustees, beneficiaries or assets or fundraise in Scotland. If a charity has none of these ties, then it would seem odd for it to wish to be registered in Scotland. Furthermore, if the charity is not compliant with the rules and regulations, there would be no jurisdiction for any action to be taken against it.
A new register of mergers
The legislation provides clarity in relation to legacies left to a particular charity, in circumstances where that charity is no longer operating, due to a windup or merger. Historically this has created issues, albeit avoidable with good will drafting. The legislation will allow OSCR to maintain a register of mergers which can be reviewed by the executry practitioner, to provide transparency around the evolution of the charity. Ultimately, in doing so, the legacy should not fail. Again, a sensible approach.
New powers for OSCR
In addition to the above, the bill provides OSCR with new powers which warrant further consideration.
Appointment of interim trustees: On the face of it this should be welcomed, as it allows charities to apply to OSCR where there is no trustee in place or if the board is inquorate, and for OSCR to appoint a specific individual(s) to that board. The appointment would be temporary but would make the charity quorate, at which point it can assume further trustees (including the interim appointment if desired) and the issue is therefore resolved. One point that needs further consideration, however, is that OSCR will have the ability to appoint interim trustees where there are no trustees acting. The question to be posed is, who OSCR will appoint in such cases and what conflict issues may arise as a result?
Issuing of positive directions: The legislation is relatively broad on this point and essentially will allow OSCR to issue positive directions which it “considers to be expedient in the interests of the charity” (s 15(3)), in line with the charitable purposes. This is an incredibly wide remit. While OSCR has advised that it would see this being used for specific targeted actions, for example for annual accounts to be submitted, the legislation does not currently restrict it to such, and it will be interesting to see how this evolves.
Investigation of former charities (and trustees): Currently if an organisation has wound up, OSCR has no power to investigate the charity or the trustees themselves. The extension of powers to allow investigations post winding-up should help to protect the sector and has been broadly welcomed.
Removal of charities from the register: There are a number of dormant charities on the register that have not engaged with OSCR. The regulator currently has no ability to remove them, therefore again this seems like a sensible approach.
While helpful, the bill does not go as far as many in the sector had hoped. The Scottish Government has acknowledged this in the accompanying narrative since the bill was published, and has undertaken to allow for a second phase of review after this bill has been enacted. While there are a number of areas that could be considered, there are certain changes in particular that could be made to current legislation which would have a positive effect on the sector.
The first of these is the extension of powers for the reorganisation of royal charters. Currently royal charters do not generally fall within the OSCR reorganisation remit; extending the reorganisation provisions already in place would allow far greater flexibility. Another issue that it would be helpful to address relates to Scottish charitable incorporated organisations (“SCIOs”), and while there is work afoot with regard to some of the technical aspects of SCIOs, which will hopefully be passed by statutory instrument, a larger review would be welcomed. At present the only type of organisation that can convert into a SCIO is a company limited by guarantee, which already benefits from limited liability for the charity trustees. It would be incredibly beneficial to the sector if unincorporated organisations and trusts could also convert into a SCIO, since at present they must set up a new SCIO and wind up the existing charity. Not only does this have cost implications, it also means that contracts, land and/or property, staff etc all need to be transferred to the new organisation, which is far from ideal.
The Scottish Government has advised that under the next review it will not be bound by the principles of the current Act and that it will be a wider review, which is to be welcomed.
Other legal developments
Setting aside the current bill, there are some other more pressing concerns that those advising charities should be aware of. One is the Register of Controlled Interests in Land. As there is no charity exemption, it will have an effect on many unincorporated organisations where the trustees change regularly, for example churches, community halls and others. Unless these organisations are constituted as a SCIO or a company limited by guarantee, each time a charity trustee changes, the charity will have to update the register, which will be cumbersome. Thankfully the period before this comes into force has been extended to 1 April 2024; however care should be taken to speak as soon as possible with clients for whom this is relevant, to ascertain what, if anything, can and should be prepared or set in motion before then.
While not mentioned by Jeremy Hunt in his Budget speech in March 2023, the written report included plans to restrict UK charity tax reliefs to UK registered charities only. There is a one-year grace period for some charities previously recognised for tax purposes, until March 2024. Other than the obvious effect on charities, it is also an important consideration for private client practitioners whose clients are giving legacies or bequests to European charities, in particular which may have qualified pre-Brexit, as they may no longer benefit from inheritance tax relief in the future.
The Trusts and Succession (Scotland) Bill also has a part to play in the charity sector. At the time of writing, s 41 of the bill abolishes the 21-year limit on accumulation of income, but s 41(5) means the change will not apply to public or charitable trusts. We await to see how this particular point evolves as the bill makes its way through the Scottish Parliament.
It is without doubt an interesting time for the sector. It remains to be seen what is eventually passed in terms of this much-anticipated legislation and how it is implemented by the regulator.
- Criminal court: Towards proper control
- Planning: NPF4 – an emerging housing issue
- Insolvency: Court confirms overseas winding up approach
- Tax: R&D relief – welcome changes but outlook uncertain
- Immigration: Family reunions given new rules
- Scottish Solicitors' Discipline Tribunal
- In-house: Support to suit