1. The Charity Law Association is an association with over 700 members, who are principally solicitors and barristers but also accountants and other, non-professional members. The members of this working party were as follows:

1.1 Judith Hill Farrer & Co (Chairman)

1.2 Alison Paines Withers

1.3 Anne-Marie Piper Farrer & Co

1.4 Malcolm Lynch Wrigleys

1.5 Julian Blake Bates Wells and Braithwaite

1.6 Mark Harvey Bates Wells and Braithwaite

1.7 Linda Kabi Help the Aged

1.8 Richard Fries London School of Economics

1.9 John Claricoat Claricoat Phillips

1.10 Jonathan Burchfield Nabarro Nathanson

1.11 Rachel Holmes Farrer & Co

2. The purpose of this paper is to outline to the Joint Committee our concerns about the Bill. This follows our earlier submission, made in connection with the oral evidence presented by Judith Hill and Stephen Lloyd. Some of the points made in this paper were also included in that earlier submission. As requested by the Committee, our comments on the Charity Commission (and the powers granted to it in Part 2 Chapter 5 of the Bill) and our comments on some of the issues arising in connection with public benefit have been set out in separate reports, copies of which are annexed hereto.

3. First of all, we would like to say that we welcome the Bill and what it is seeking to do. In this (and our other) reports, we are aiming to highlight what we think is missing from the Bill or what is required to make it consistent with charity law generally and with other branches of law. This should not be seen as detracting from our general appreciation of the Bill, its contents and the open consultation process that has led to its publication.

4. We wonder if there is a reason for the difference between the expression used in Clause 1(b) (“falls to be subject to the control of the High Court”) and the wording in Section 96(1) of the 1993 Act (“is subject to the control of the High Court”). Is it intended to mean only direct jurisdiction, rather than the sort of jurisdiction recognised by the judge in the recent case of Manoogian (Armenian Patriarch of Jerusalem) –v– Sonsino, where the Court had jurisdiction as a result of the reciprocal enforcement of judgments between States?

5. A number of the purposes in Clause 2(2) of the Bill have changed from those contained in the Strategy Unit’s initial report. By and large, we consider the changes to be improvements, but are concerned about minor discrepancies between the wording of purposes listed in the Bill and those listed in the Scottish Bill. Notwithstanding questions of devolved legislation, it seems to us that it would be counterproductive for there to be potential for charitable purposes in Scotland and England/Wales to be different.

6. In Clause 2(2)(j), we consider that the comma after ‘need’ should be omitted. Please compare the similar passage in the Scottish Bill.

7. We note that there is no specific reference to the provision of facilities for recreation (as opposed to amateur sport). The explanatory notes to the Bill mention that the Recreational Charities Act is not mentioned because it is suspected of not complying with the Human Rights Act. We appreciate the need for the Bill to be compliant with the Human Rights Act. Nevertheless, we consider that it would be more satisfactory to include a specific mention to recreational purposes, rather than simply allow them to fall into the new ‘sweep up’ category in Clause 2(2)(l).

8. Certain religious bodies are uncomfortable with the idea that, once the presumption of public benefit is removed from religious charities, their doctrines will be subject to (unavoidably subjective) assessments of whether they provide public benefit. We believe that it may be difficult to apply the public benefit test to religious doctrines without falling foul of Human Rights Act principles of equal treatment. Please see the supplementary report, annexed hereto, on religious charities and public benefit.

9. Connected to this difficulty is the current understanding of “religion” for the purposes of charity law. In explaining their refusal to recognise the Church of Scientology as a religious charity, the Charity Commission (“the CC”) concluded that Scientology was not a religion, because it did not involve the worship of a deity. We consider that defining religion by reference to worship of a deity automatically creates a bias against Eastern religions such as Taosim and Buddhism, which exist in both theistic and atheistic forms. Perhaps, in light of Human Rights Act considerations, it would be appropriate for the Bill to redefine religion in a less biased way. For instance, it could be defined as belief in a supernatural being, thing or principle and acceptance and observance of certain canons of conduct to give effect to those beliefs. A definition along these lines could be added to Clause 2(3), which already elaborates on some of the purposes set out in Clause 2(2). In our view, having a definition which explicitly refers to conduct that gives effect to religious beliefs overcomes another problem faced by religious charities, namely that many of their activities in fact fall under other heads of charity (for instance the relief of poverty), even though they also form part of the expression of religious tenets of faith.

10. We are aware that Christopher McCall QC has made two suggestions for the public benefit test, dealt with in Clause 3. He suggests that the following words by added to the end of Clause 3(2): “and in the application of precedent and otherwise in determining whether the requirement of public benefit is satisfied full account shall be taken of changes in social and other relevant circumstances”. He further suggested that a new sub-Clause (5) be added (please note that we have added the words in italics): “It shall be the duty of every charity trustee so to execute the trusts of his charity as to secure the fullest public benefit consistent with the terms of his trust and his discretion as a trustee and furthermore to seek a scheme for the modification of any term which may reasonably be regarded as preventing him from securing that benefit to a material degree”. We support both these suggested additions.

11. In Clause 3(3), does the “law relating to charities in England and Wales” mean the pre-existing law or the law as it develops from time to time? It is unclear from the drafting. Assuming that the latter meaning is intended, we recommend that the phrase be replaced simply by the phrase “charity law” as defined in Clause 2(6), which could readily be extended to cover the use of that term in the whole of Part 1 of the Bill rather than simply to Clause 2.

12. We consider it to be vital that the Bill does not attempt to codify the public benefit test. A statutory public benefit test would unavoidably alter the existing body of law describing what does and does not constitute public benefit, consequently doing away with centuries of legal precedent and altering the parameters of charity. Not only would this create catastrophic uncertainty for all charities, it could also have profound practical repercussions. Where the objects of a general charitable grant-making trust are that the trustees can give to anything that is charitable, this – we submit – must mean anything that is charitable at the time the trust is created. It cannot be taken to mean anything that is charitable from time to time, since this would, in law, be insufficiently certain to constitute a charitable gift at the time it was made (which must be for purposes exclusively charitable at the time of the gift). If the definition of charity is narrowed, then such a gift will no longer be charitable, since – following the narrowing of the definition – it will be dedicated to both charitable and non-charitable purposes. Accordingly, if the Bill were to define public benefit in such a way as to narrow charitable purposes, then all these charities would need to apply for a CC scheme to make it clear that the new definition was intended, otherwise they would lose their tax relief (since they would be established for purposes that were both charitable and non-charitable). Administratively, this would be horrendous to achieve. The obvious solution is for the Bill to provide that a gift for general charitable purposes will mean such purposes as the law from time to time considers charitable.

13. Many of the most important procedural issues are to be covered by Rules to be made by the Lord Chancellor (e.g. re time limits, awarding of costs, evidential and other procedural matters). It is very difficult therefore to draw from the draft Bill any overall conclusions on the way in which the Tribunal will operate. Some issues are, however, already apparent and are set out below.

14. At present, the Tribunal will only be able to hear appeals on specified decisions and, in relation to some decisions, appeals may only be brought on specified grounds. For example, the right to appeal against decisions to institute s.8 inquiries and the investigation of company accounts may only be made on the grounds that the institution concerned is not a charity. We recommend that the Tribunal be able to hear appeals against any decision of the CC (whether or not made pursuant to a specific statutory power and including “non-decisions”, such as a decision not to make a scheme or order), on any point of law, on any basis.

15. It is good to see that the category of persons entitled to bring appeals is widely drawn.

16. There seems to be no provision for the CC to refer matters to the Tribunal for interpretation, which seems unfortunate. Equally, there seems to be no general right of reference to the Tribunal (for example, by representative bodies) which could be useful.

17. There is no specific provision at the moment for the Lord Chancellor to make provision for fees to be charged by the Tribunal. It should be clarified that fees cannot be charged by the Tribunal.

18. In our view, the Bill should provide that the Tribunal cannot make costs awards against applicants. Charities faced with the prospect of meeting the costs of the CC (and, possibly, the Attorney General) may shy away from bringing a case to the Tribunal, thereby defeating the aim of furnishing charities with a forum for challenging CC decisions.

19. In general, charities cannot afford (or are understandably unwilling) to take expensive legal action, as testified by the tiny number of charity cases taken in recent years. Moreover, charities are run by volunteers. Accordingly, a complex system is likely to deter many charities from bringing claims to the Tribunal. We therefore consider it vital that the Tribunal is inexpensive and simple for charities to use.

20. We recommend that the Tribunal be obliged to publish its decisions, to ensure transparency and consistency in developments in charity law.

21. The role of the Attorney General is interesting. There remains the ability for the Attorney General to intervene at any time in proceedings, and to appeal against Tribunal decisions (seemingly still needing the consent of the Tribunal or the Court. Surely this cannot be right?) It should be clear that no costs of such an intervention will fall on the charity.

22. New Section 3(4) of the 1993 Act obliges the CC to remove from the register ‘any institution which it considers is no longer a charity’. The Bill does not say what should happen to the assets of an institution that has purposes that once were valid charitable purposes but which have ceased to be so. At present, according to the Government response to the Strategy Unit report, such institutions lose their assets, which are applied cy-pres under Section 13 of the 1993 Act. The CLA considers this to be unsatisfactory, for a number of reasons.

23. There is considerable room for argument as to the extent to which section 13 of the 1993 Act would be applicable in the case of an institution whose purposes ceased to be charitable as a result of the passing of the Bill. Thus:

24. In any event, there must be many instances in which the making of a scheme under section 13 would pervert donors’ intentions and, hence, be liable to impair the reputation of charity. Take again the case of a gift to a particular church. The donor might be outraged if his money were diverted to a different religious organisation (or any other charity). Or take an institution registered as a charity 40 years ago with the object of carrying on an existing school and which, perhaps, has since raised money for the school from parents and former pupils. If, without the school having changed its method of operation, it were now said to lack the public benefit required by the Bill for charitable status, there would be strong moral arguments against the application of Section 13.

25. Even, however, if an institution escaped Section 13 and “shed” charitable status, it would (if it were an unincorporated charity) face additional problems in the rule against perpetuities and/or the beneficiary principle (i.e. the principle that there must be someone capable of enforcing the obligations of the trustee to administer the trust in accordance with its terms).

26. In all the circumstances, it is our view that the Bill should specifically address the position of institutions now on the register but whose purposes are no longer regarded as exclusively charitable at some point in the future.

27. Perhaps such institutions should be expressly given a right to elect whether to remain charities (if necessary, with a cy-pres scheme) or to leave the register but retain their assets. Another option might be to legislate to allow institutions to divest themselves of charitable status and become CICs (or otherwise be subject to an asset lock).

28. It will also be necessary to give some thought to the tax consequences of removal from the register. We consider that such charities should be allowed to retain the tax benefits they have received during their time on the charity register, but this issue will need to be thought through and clarified.

29. We would further comment that Clause 7 of the Bill is a little unclear in scope. This Clause provides for the replacement of the existing Section 3 of the 1993 Act. Under the new Section 3(4), the CC would be directed to remove from the register: “(a) any institution which it considers is no longer a charity, and (b) any charity which has ceased to exist or does not operate.”

30. Section 3(4) of the Charities Act 1993 is in the following terms: “Any institution which no longer appears to the Commissioners to be a charity shall be removed from the register, with effect, where the removal is due to any change in its purposes or trusts, from the date of that change; and there shall also be removed from the register any charity which ceases to exist or does not operate.”

31. Whereas, therefore, the CC is currently charged with the removal from the register of any institution which no longer appears to be a charity, it will in the future be responsible for removing an institution which is no longer a charity. There is a significant difference between the two.

32. The importance of the change can be illustrated by reference to the removal from the register of gun clubs. The CC proceeded on the basis that gun clubs had never been charitable and, accordingly, that they should never have been entered on the register. The proposed new Section 3(4) would not seem to apply in such circumstances, because gun clubs were not (to paraphrase the new Section) institutions which the CC considered were no longer charitable. They were institutions that the CC considered never to have been charitable in the first place. This problem could be solved by revising the new Section 3(4) to read as follows: “any institution which it no longer considers to be a charity.”

33. Although the Bill contains a process by which the CC may extend the list of charitable purposes (Clause 2(4)), it contains no process for determining, in the future, that purposes have ceased to be charitable. Although any such process would need to be exercised judiciously, we consider that leaving the removal of charitable purposes to be dealt with on a piecemeal basis gives the CC too little authority for moving charity forward and insufficient advance notice to any charity affected.

34. New Section 3(4)(b) carries forward the obligation on the CC, currently in the same Section of the 1993 Act, to remove from the register any charity that does not operate. On occasion, it may be desirable to maintain a dormant charity on the register. We recommend that that new Section 3(4)(b) be amended so that the CC is obliged to remove any charity that has ceased to exist but “may remove from the Register any charity which does not operate”.

35. In new Section 3A(4)(c), the word ‘the’ is missing before ‘appointed day’.

36. In our view, the numbering of Clause 9 is unclear. What is now sub-Clause (1) should be the main provision of the Clause and the rest should be sub-paragraphs under it.

37. Clauses 9(4) and 9(5) (designating higher education corporations and further education corporations as exempt charities) appear to be unnecessary, since both types of charity are exempt under the 1993 Act.

38. Clause 11 obliges the ‘principal regulator’ of an exempt charity to increase compliance with charity law by the trustees of exempt charities under his supervision. Firstly, we find the phrase ‘increase compliance’ a little odd. Perhaps the aim ought to be to ‘monitor and enforce compliance’? Secondly, and rather more importantly, by virtue of sub-Clause (4)(b), there will be no ‘principal regulators’ unless the Secretary of State designates a person/body as such under Regulations and until he does so exempt charities will be no more subject to regulation vis-à-vis charity law compliance than they are at present. To ensure charity law compliance, we consider that:

39. Currently, the CC will generally only make a scheme pursuant to Section 16 of the 1993 Act on the application of the trustees (other circumstances are prescribed, but this is by far the most commonly used). The CC cannot, under normal circumstances, create a scheme of their own volition. New Section 14B of the 1993 Act (inserted by Clause 15) gives the CC this power in relation to cy-près schemes. We do not consider this to be appropriate.

40. New Section 14B(3)(c) of the 1993 Act (which prescribes the matters to which the CC must have regard when deciding to amend a charity’s charitable purposes by means of a cy-près scheme) refers to ‘the need for the charity to make a significant social and economic impact’. We are not sure that significant is the right word. It may not be possible, given the size of the gift or the purposes of the charity. (It is worth pointing out that impact may be significant but negative.) Perhaps the word ‘positive’ could be substituted for ‘significant’?

41. Clause 19 enables CIFs and CDFs to allow Scottish and Northern Irish charities to participate in their schemes. In our opinion, it might be more helpful if the legislation itself could amend all existing CIF and CDF schemes to allow this, to avoid a mass scheme-making exercise. This was done in relation to almshouses contributions in the Charities Act 1992.

42. We welcome the raising of the audit threshold to £500,000. This will assist a number of charities in controlling their costs and £500,000 appears to us to be an appropriate level at present.

43. We are, however, concerned at the inconsistencies between the external review requirements for charitable companies and those applicable to charities that are subject to the 1993 Act. We consider that there should be a single set of requirements based on those contained in the 1993 Act.

44. We also consider that the provision for audit exemption under the 1985 Companies Act is increasingly anomalous. The £90,000 lower threshold at which a charitable company must obtain an audit exemption report is at odds with the £100,000 threshold at which other charities must have an independent examination. The external review arrangements themselves are different both as to the procedures carried out and the qualifications required on the part of the external reviewer. The audit exemption report must be given by a person who is eligible to carry out audits under the Companies Act, whereas the independent examination need not be conducted even by a qualified accountant. We would recommend that smaller charitable companies be enabled (or required) to have their accounts subjected to an independent examination rather than an audit exemption report.

45. We welcome the definition of “regulated alterations” to a charitable company’s Memorandum and Articles, in new Section 64 of the 1993 Act, which is much clearer than the current list of alterations requiring the CC’s consent in that Section.

46. However, we are not convinced that the new provisions represent a ‘relaxation’ of the restrictions on constitutional amendments, particularly as the regulated alteration in new Section 2A(c) (an alteration which would provide authorisation for private benefit to be obtained) is framed to include benefits obtained by those connected with a charity trustee, arguably widening the scope of the restriction beyond the present position.

47. Our comments on the amendments to the provisions for audit and examination are set out under the previous chapter.

48. CIO is stated to be a “body corporate” (new Section 69B (1) of the 1993 Act). It is not expressly stated that limited liability applies (the Companies Act allows for “unlimited companies”). It would also be helpful for it to be expressly stated that the word “company” does not apply to a CIO. For example, the intention is that the 1993 Act accounting provisions will apply to CIOs, whereas they expressly do not apply to “companies” (e.g. Section 41(5) 1993 Act).

49. The CIO should provide a structure for a charity with both limited liability (as with a charitable company) and a single tier of management (as with a charitable trust). On this basis there should not be, as currently, a requirement for, or a necessary assumption that there is, a membership (e.g. new Sections 69B(4), 69C(2) 69G(2)c and Schedule 5A(13) 3 and 14(1)). In a single tier constitution, amendment would be by the board of trustees by a specified special majority.

50. Provisions relating to membership should remain as facilitating provisions and more detail should be provided in this respect with reference to the statutory provisions relating to general meetings, notices etc in the Companies Act 1985 (Sections 366 to 383 and the elective resolution regime). For example, provisions relating to “general meetings” and proxies are assumed in new Section 69J(5)a of the 1993 Act.

51. An equivalent to section 303 of the Companies Act – the members’ right to remove a company director might be included, with a similar provision, for a CIO without a membership, allowing a board of trustees to remove a trustee by specified special majority.

52. The constitution might also include a provision equivalent to Sections 15 and 263 of the Companies Act 1985, stating that the CIO’s constitution binds the CIO and its members to the same extent as if they respectively had been signed by each member and contained covenants on the part of each member to observe all the provisions of the constitution.

53. New Section 69C(1) of the 1993 Act (which, together with Section 69C(2), sets out the matters which a CIO’s constitution must contain) should require constitutional provisions essential in the definition of a charity as follows:

54. The definition of “regulated alterations” (i.e. to the CIO’s constitution) in Schedule 5A paragraph 14(6), requiring CC consent may be related to this list. Currently interpretation is required of a provision “affecting the application of charitable property”.

55. An outline conflict of interest management provision might also be included, whereby any trustee with a potential conflict should withdraw (unless required to provide information), not vote and not be counted to quorum, subject to specific or general contrary resolution of the board.

56. It is standard for the minimum number of charity trustees to be three (or a corporate trustee) and they should not be minors. In our view, new Section 69C(2)b should reflect this. It would also be desirable for a company secretary to be required. This is a familiar position and would emphasise the need for someone to be responsible for administrative operations.

57. We recommend that model constitutions, for differently structured CIOs, be produced and set out in legislation. Something along the lines of the model company constitutions (in the Companies (Tables A to F) Regulations) may be useful for those wishing to use the format, provided that use of the models is optional, not mandatory.

58. We find it disturbing that new Section 69E creates new criminal offences, penalties and trustee liabilities for potentially minor administrative failure. We consider this to be disproportionate and inappropriate and recommend that it be removed.

59. New Section 69 F(2) of the 1993 Act deals with the registration process (as provided for more generally elsewhere). In our opinion, both this Section and the general registration provisions should specify the standard application form and the standard trustee declaration form. Also, allowing the CC to require any other documents or information provides too much discretion and would continue current uncertainty. What the CC may require should be circumscribed by the appropriate purpose. For example, if it is accepted that the CC should police viability that may be a legitimate purpose for requiring further documents. If it is accepted that the CC should judge the suitability of trustees, documents may be asked for in that respect.

60. The Bill contains no specific mechanism allowing unincorporated charities to become CIOs. It is not entirely clear whether new Section 69G(3) (“property vested in the applicants …. on trust ……. for the CIO …. shall by virtue of this subsection become vested in the CIO upon its registration) is intended to provide a mechanism for this or whether an unincorporated charity is intended to use the Bill’s merger provisions to become a CIO. New Section 69G(3) could operate in this way (provided the purposes of the unincorporated charity and CIO were the same), but it might be helpful if this could be clarified.

61. Some large, multi-cellular charities, whose branches are all separately registered charities with model constitutions giving the ‘parent’ enshrined rights, are concerned that conversion would enable the branches to shake off their parent’s enshrined rights.

62. When CIOs, or other charities, amalgamate or their undertakings are transferred the need for proper investigation of the extent of liabilities (due diligence) where they are automatically transferred should be highlighted. See new Sections 69K(3)a, 69L(1), which deal with the vesting of property, rights and liabilities in the transferee CIO on amalgamation and transfer.

63. CC decisions in relation to public notices and acceptance of registration should have time limits attached so ordinary delay does not mean inappropriate lack of progress. CC approval might be assumed without any contrary indication within a prescribed timescale. See new Sections 69L(4), (5) and (6), which says that a resolution by the trustees of a CIO, to transfer the CIO’s property etc to another CIO will only be valid if actively approved by the CC.

64. New Section 69H(4) contrary to the principle of easing reconstitution etc elsewhere in the Bill, requires a conversion to go through a new registration procedure. Statute could, instead, provide for institutional continuity, subject to the adoption of an appropriate new constitution. This is currently the case for Industrial and Provident Societies, which can convert into companies and vice versa.

65. The Bill needs to specify how a CIO will hold permanent endowment property on a transfer/merger etc. It is important that this should continue to be held on trust.

66. To provide flexibility provision might be made for the conversion of a CIO to a company limited by guarantee, charitable trust or Industrial and Provident Society.

67. There must be regulations on winding up, insolvency and dissolution, whereas new Section 69M1 uses the word “may”.

68. Further regulations for administrative arrangements are also desirable, though less critical, given that these may be established by the particular organisation, as is the case with Limited Liability Partnerships. However, in this sector more guidance than that would be desirable. See new Section 69P(1) which gives the Secretary of State the power by regulations to make further provision about the administration of CIOs.

69. Also for the sake of clarity prescription in relation to due execution of deeds following the familiar Companies Act requirements for the signatures of two trustees or one trustee and the company secretary would be desirable. See new Section 69P(2), which mentions this specifically as one of the items that regulations might cover.

70. The general provisions in relation to powers in Schedule 5A(1) and (13) are welcome, though express statements of general powers to delegate and to invest (perhaps with reference to the Trustee Act 2000?) would address issues which constantly arise in practice. Something express might also be set about a general power to charge CIO property.

71. How does the reference to “proceedings” in Schedule 5A(6)1 relate to the provisions relating to charity proceedings in Section 33 of the 1993 Act?

72. We believe that anyone who is barred from being a trustee under section 72 of the 1993 Act should be disqualified for a maximum period of five years unless he or she has been convicted of an offence involving dishonesty. In the latter case it can be in the CC’s discretion to allow someone back to serve as a trustee on application after 5 years. A lifetime disqualification is completely disproportionate, particularly bearing in mind the Rehabilitation of Offenders Act. Perhaps the Bill could amend the 1993 Act accordingly?

73. The provisions of new Section 73A (allowing remuneration of trustees) are to be welcomed, as they allow trustees to take responsibility for payment of trustees with certain safeguards in a similar way to the 1993 Act provisions allowing trustees to dispose of charity land. Considerable care will need to be taken before remunerating a trustee, but that is appropriate. Trustees are likely to need professional advice interpreting these Clauses. In particular, condition D, that ‘the trusts of the charity do not contain any express provision that prohibits the relevant person from receiving the remuneration’ will catch older constitutions, which generally forbid any remuneration of trustees.

74. In new Section 73B(3) of the 1993 Act, a provision in the Trustee Act 2000 (a statute that applies only to trustees) is applied to the charity trustees of not only charitable trusts but also charitable companies. Perhaps this could be spelled out more clearly?

75. Although we understand the need to ensure that the new statutory power of remuneration is not abused, it seems to us that imposing criminal sanctions on a remunerated trustee (or those connected to him) for participating in questions relating to his remuneration (or that of a connected party) is unnecessarily draconian. This type of failure to manage conflicts of interest is quite common among lay trustees, who may simply be unaware of the need for them not to participate in discussions about benefits to them. We therefore consider that criminal sanctions are an inappropriate safeguard in this instance.

76. We also wonder whether it remains appropriate for a trustee automatically to be deemed to have received a benefit if his or her spouse receives a benefit. It seems to us that this may reflect an outmoded view of the way in which married couples hold property.

77. New Section 73D of the 1993 Act, allowing the CC to relieve the honest and reasonable trustee from liability for breach, is also long awaited. We are not sure whether Section 73D(4) is necessary. We understand a personal contractual liability to be of the sort for which payment is authorised in new Section 73A and any breach will not be committed ‘in [his] capacity as a trustee’ but in [his] capacity as a service or goods provider. Section 73D(2)(a) limits the CC’s authority to where the person acted as a charity trustee. If new Section 73D(4) is intended to target something different, we believe that it would be helpful for this to be made clearer.

78. In general, we consider that both this chapter and chapter 11 miss an opportunity: the proposed amendments do not go far enough. Surely it should be made as easy as possible for assets and undertakings of charities to be transferred between one charity and another if the trustees or members, whether of an unincorporated charity or otherwise, believe that it is sensible and the objects of the transferee are similar in character to that of the transferor charity.

79. We consider that the fact that a charity owns designated land should not automatically preclude it from using the provisions of new Section 74. The power of transfer could be safeguarded by providing that the consent of the Charity Commission is required.

80. In our view, the income limit in new Section 74(1)(a) of the 1993 Act may now be too low (and there is some force to the argument that there ought not to be any limit at all). The same applies to the limit in new Section 74B(1)(a).

81. In new Section 74(4)(a) of the 1993 Act, the word “the” is missing before “transferor charity”.

82. The wording of new Section 74(4)(b) requires that, where the property of a single transferor is to be divided between two or more transferees, both or all the transferee charities must have objects which encompass the purposes of the transferor charity. It would not therefore be possible to divide the assets between charities the sum total of whose objects encompassed those purposes. Perhaps the Section could be amended to embrace this possibility?

83. We note that new Section 74C of the 1993 Act (inserted by Clause 32 – power to modify powers or procedures) applies as much to a CC scheme and an Act of Parliament as to any other kind of governing document for an unincorporated charity. Since it is clearly not intended to enable capital to be applied as income, we consider that it would be helpful for the new Section to say so.

84. Is it intentional that, in new Section 74C(6) trustees will be able to exceed their powers and then resolve a constitutional amendment to take effect on a prior date to the ultra vires act so as to exonerate themselves? This appears to be possible.

85. In our view, the income and capital limits, in new Sections 75(3)(a) and (b), are far too low, since many charities with funds above the limits in question will not be required to register: see new Section 3A(2)(d) of the 1993 Act (inserted by Clause 7).

86. New Section 75A of the 1993 Act (power for larger charities to spend capital) goes further than the Strategy Unit report recommendation, which anticipated that the authority of the CC would be required for the conversion of any permanent endowment of more than £10,000. The recommendation that the CC should be satisfied that the conversion is consistent with the spirit of the gift which created the endowment has been lost, save in the circumstances described in new Subsection (4). Although we recognise that the restrictions in Subsection (4) will apply in almost all cases, we think that the process prescribed by Subsections (5) to (10) should be extended to all gifts of permanent endowment, provided that CC consent can be deemed to have been given after a specified period has passed following the request for CC approval. These comments also apply to new Section 75B(4).

87. In our view, new Section 75A should also be amended to take account of the following:

88. We welcome the new merger mechanisms, though we consider that it might be useful for the Committee to look at the provisions of Sections 50 and following of the Industrial and Provident Societies Act 1965. These Sections allow an Industrial and Provident Society (“IPS”) to (a) merge with another body, (b) transfer some or all of its undertakings to another body or (c) ‘mutate’ into a company, all without the need to establish a new organisation or execute any separate transfer documents. Perhaps the Committee could take the best from the Industrial and Provident Societies Act 1965 and incorporate it with the best from the 1993 Act and the Bill, in a separate section on transfers.

89. Under new Section 75C(4) of the 1993 Act (inserted by Clause 34), for a merger to be capable of registration, the transferor charity needs to cease to exist. This will not usually be a problem. The usual reason for (currently) maintaining the transferor charity in existence is to catch post-merger gifts and this problem is what this Section addresses. Occasionally, however, the transferor may be retained if it is the tenant of property and the lease contains an absolute covenant against assignment. It may also be retained if the transferor charity owns permanent endowment property and the transferee is required to hold that property on trust for the transferor.

90. As drafted, the merger mechanism only explicitly transfers the assets of a pre-merger charity into the post-merger charity. This needs to be amended so that it is clear that it vests assets and undertakings, subject to liabilities.

91. The right to use personal data is not an asset, yet the transferee in a charity merger will need to have access to the database of the transferor(s). We recommend that, following merger, the transferee be deemed to have the right to use the personal data held by the transferor in the same way as the transferor had the right to use it.

92. The merger process also needs to specify how permanent endowment property, transferred from an unincorporated charity, will be held by the merged charity, where the merged charity is a company (or a CIO). Presumably, it will continue to be held on trust.

93. We are also concerned that the statutory vesting of assets requires execution only by the transferor charity trustees. We can envisage circumstances in which a charity finding itself with assets subject to damaging liabilities (e.g. expensive contaminated land liabilities) declaring that all its assets vest in another charity. The transferor trustees then notify the CC of the merger. It may be that the CC would make enquiries of the transferee charity before registering the merger, but this is not clear. If it did not, the transferor charity would (though see our comments on transferring undertakings and liabilities in paragraph 90) have passed on the liability with the asset. This problem could be overcome by providing that:

94. Consideration should also be given to the timing of the notification. It may be useful to have notification in advance of the merger, with the entry being updated once the merger has been completed.

95. We consider that the Bill should make it clear that, following merger, the (trustees of the) transferor will not be held liable for liabilities incurred by the transferor prior to the merger date.

96. Whilst we welcome the attempt to deal with the inadequacies of the statements that must presently be made by professional fund-raisers and commercial participators (“CPs”) we believe that the proposed changes will do little to clarify the position.

97. In our view it is appropriate to look at the provisions for professional fundraising organisations (“PFOs”) and CPs separately.

98. There are, in our opinion, two difficulties with the proposed provisions. The first is the nature of the amended statement, which we believe will not clarify matters, principally because of the complexity of calculating fundraising costs. In our opinion greater clarity could be brought to the situation if, instead of introducing the concept of “notifiable amount”, the manner in which the cost of fundraising was explained was issued as guidance after consultation with charities and PFOs.

99. The second difficulty with the provisions is that they will continue to apply only to non-employed professional fundraisers.

100. It is our understanding that the provisions relating to professional fundraisers were introduced to explain to potential donors that charities incur costs in raising funds. However, the reality is that the existing provisions (with or without the proposed modification) mislead donors rather than aid their understanding.

101. There is no doubt that many donors dislike the idea of any part of their donation being used for anything other than the work of the charity. Many appeals, such as Live Aid, have trumpeted the fact that every penny given will go to good causes. However this is not the norm for most charities, which must incur costs to raise funds (and to meet their other ordinary overheads).

102. We believe that it is more important that the public be educated in the realities of charity fundraising rather than be provided, at the point of donation, with complex explanations that they are unable to put in context. For this reason we suggest that at the point of donation all fundraisers should be required to make a statement which contains the first and second of the following points and, in the case of PFOs, also the third:

103. In the simplest situation of a collection for a single, named charity the first and second limbs of the statement made by the three types of fundraiser might be something like this:

“I am a supporter of the charity and I am not being paid for my work today, all of your donation will be passed to XYZ charity for its work.”

Employee fundraiser

“I am a paid employee of XYZ charity and it is my job to raise funds to help to pay for the work of the charity”.

Sub-contracted fundraisers

“I am employed by a company who has a contract with XYZ charity to raise funds for its work.”

104. The additional statements to be made by sub-contracted fundraisers could then be included in a short leaflet prepared by the charity for whom funds are being raised explaining the nature of the contract with the PFO including whether the PFO is paid on a performance or a fixed basis (i.e. irrespective of the results). We suggest that it would not be necessary for the leaflet to provide details of the remuneration of the individual collectors (which is a matter between them and the PFO which employs them). On the other hand, in addition to the basic content about the contract with the PFO, charities could add supplementary material about their work and also, perhaps, explain why they have chosen to sub-contract the fundraising rather than use an employee fundraising team.

105. We believe that the written statement to be used by sub-contracted fundraisers should also be posted on the charity’s web-site, if it has one, and that it could be combined with the notification of the right to cancel in the case of donations made by credit card or direct debit and donations made in response to television and radio fundraising appeals.

106. We are not convinced that the proposed revisions to the statements that CPs are required to make will aid the understanding of the public and we are of the view that general provisions supplemented by guidance agreed with charities would be preferable. For examples, this guidance might allow CPs to express the amount that will pass to charity as a percentage of profits. This would accord with current practice, e.g. in relation to sales of charity Christmas cards.

107. At present, the criminal sanctions applicable to CPs who fail to comply with their obligations when fundraising for charitable purposes (as opposed to fundraising for named charities) are less than the equivalent penalties for PFOs. (Compare Section 60(2) of the Charities Act 1992 with Regulations 7-8 of the Charitable Institutions (Fund-raising) Regulations 1994.) This is an anomaly which, in our view, ought to be rectified.

108. The CC does not have (either at present or under the Bill) power to enforce criminal sanctions against PFOs or CPs in breach of their obligations under the Charities Act 1992. The Crown Prosecution Service appears uninterested in prosecuting on these matters, meaning that this aspect of charity law is not being enforced. This could be remedied by giving the CC (or possibly Trading Standards?) power to prosecute defaulting commercial organisations.

109. The proposed amendment to Section 77 of the Charities Act 1992 requires the Secretary of State to consult before introducing regulations under new clause 64A. It is not clear, however, from the face of the draft Bill (or its accompanying notes) who will be consulted and what form the consultation will take. We recommend that the Bill explicitly oblige the Secretary of State to consult openly with the voluntary sector.

110. We are not sure that the definition of “charity fund-raising”, in Clause 36 (new Section 64A(2) of the 1993 Act) really deals with the bogus fund-raiser who is raising funds for unspecified benevolent/philanthropic purposes or benevolent/philanthropic purposes that are not charitable. We wonder whether there ought to be a Subsection (2)(d): “persons or companies raising funds for general charitable, benevolent or philanthropic purposes”. We think this is important, since the definition of charitable purposes (in new Section 65B of the Act) does not extend to philanthropic and benevolent purposes.

111. It is also unclear how these provisions will sit with the proposed self-regulatory regime now being developed by the Institute of Fundraising.

112. We very much welcome the proposal to introduce a unified scheme for public collections as the current system is complex, illogical and outdated which leads to its application in an inconsistent manner by local authorities. However we are of the view that there are a number of areas in which the new scheme needs further consideration or clarification.

113. The Bill proposes a two-stage process for public charitable collections (“PCCs”) for organisations having charitable, philanthropic and benevolent purposes, the first part of which involves the organisation obtaining a Certificate of Fitness (“COF”) from the local authority in which it has its registered office.

114. We are concerned about the obligation for all charities to have a COF for two reasons. First, registered charities are heavily monitored and regulated by the CC.

115. Secondly, it may be difficult for charities having their registered office in central London to obtain their COFs because central authorities (particularly Camden, Westminster and the City) may be inundated by applications for COFs. The initial application for a COF may cause a huge bureaucratic logjam in local authorities, especially as local authorities must consult with the Chief Officer of Police for the Police Area. This is of particular concern as there is no obligation under the Bill for the local authority to issue the COF within a specific time frame.

116. We urge that all registered charities should be automatically deemed fit to carry out public collections so as to dispense with the need for the COF. This would simplify the law and make the whole operation much cheaper.

117. The CC could note against each charity’s record on its web-site any complaints about fundraising. Local authorities could refer to this and refuse to allow collections by charities that have been so listed:

118. It is not clear in the draft Bill how charities established in Northern Ireland and Scotland will obtain a COF.

119. As drafted, under the Bill a local authority permit is required for a public charitable collection unless the collection is :

120. We have heard and have sympathy with the view that door to door collections of goods should be allowed without a permit because they cause little disturbance to householders (who either leave goods out for collection or not). However we do not believe that the current lack of capacity problems with door to door collections must necessarily continue and we would urge that a permit be needed for collections other than collections of goods as they could represent a real intrusion and/or nuisance for householders if they became as popular as street collections (which may well be the case if they were easier to undertake).

121. In our view it will be important, if the new system is to be an improvement on the current one, that local authorities act in a consistent and fair manner when mapping sites and issuing or declining to issue permits on the grounds of capacity. The draft Charities and Trustee Investment (Scotland) Bill allows for consultation prior to the issuance of guidance on these points and it is very much to be hoped that this will also be the case in England and Wales.

122. In general terms we appreciate the logic of moving responsibility for London collections from the Police to local authorities. However the requirement for a collection permit means that charities will have to negotiate with 32 London Boroughs as opposed to the current regime where they only have to deal with the Metropolitan Police authority. This could have a severe impact on their capacity to fundraise. It will also raise their fundraising costs, which the Government is most anxious that charities should keep down.

123. For collections in public places charities can only book their slots with the local authority up to six months in advance. There is also nothing in the Bill that requires local authorities to give a minimum period of notice if they intend to disallow a collection. The combination of these factors could make planning for national fundraising initiatives such as Red Cross Week very difficult.

124. The proposed exemption for local short-term collections applies only to appeals for a local cause. It does not allow local people to put on small locally based appeals for matters of international or national concern. This appears unnecessarily restrictive.

125. Furthermore, under the draft Bill small local collections require neither a COF nor a permit. We can see arguments (of consistency and capacity) in favour of such collections requiring a permit (but not a COF).

126. The abolition of NEOs is likely to affect adversely the 42 charities which currently hold one.

127. We believe that local authorities (particularly those in London) will be under a much greater burden if the Bill is enacted and Government should recognise this and make provision to support them.

128. At present, (as has been commented on above) in a number of areas there are no deadlines or time limits imposed on local authorities. No doubt the intention is not to over-burden them, but charities would benefit from those time limits and local authorities need funds and support to help them meet them.

129. Some of this support might take the form of funding for computerised systems to assist with, for example, charity notifications.

130. Of importance to local authorities and charities alike will be the quality of the guidance that is to be issued on several aspects of the new regime, and in particular in relation to:

131. The Secretary of State’s power to make Regulations, in Clause 45(3) of the Bill, seems extraordinarily wide – particularly the power to make “supplementary” provisions. As currently drafted, it might well, for example, be possible for the Secretary of State to legislate by regulation for the public benefit which charities must provide or on the consequences of an institution on the register ceasing to be charitable. Matters as important as this should be the subject of primary legislation. We recommend that the Secretary of State’s powers in Clause 45(3) be appropriately restricted.

132. What follows is an assortment of issues that we would like the Committee to consider, including proposed refinements to the text of the Bill (“the philanthropy objective”), issues that have so far been overlooked (relating to property transactions) and rejected Strategy Unit proposals that we would like the Committee to revisit (ie trading).

133. We have already referred, in our report on the CC, to the desirability of the CC having an explicit regulatory objective of encouraging charitable giving (“the philanthropy objective”). We would like to reiterate that here and offer the Committee some wording for this objective, prepared by Christopher McCall QC. This objective might be included with the rest of the CC’s objectives in new Section 1B of the 1993 Act (inserted by Clause 5):

“The philanthropy objective is to foster giving to charities and the furtherance of charitable purposes by private individuals. It includes in particular the encouragement of the establishment of charitable foundations by such individuals, the anticipated operation of which is by way (or principally by way) of the making of grants to other charities or in furtherance of the charitable purposes of others. It also includes the avoidance of disproportionate regulatory burdens or other impositions that might discourage private giving to charity.”

134. Section 36 of the 1993 Act (and the following few sections) set out procedures that must be followed by charity trustees, where it is intended to dispose of an interest in land held by or in trust for a charity. Problems arise from the following questions:

135. It has been argued that there is reasonable case law authority that land is not held in trust for a charity by personal representatives during the course of administration of an estate, even if only a charity or charities benefit. However, this is not clearly stated by statute. The same appears to be the case where a charity itself acts as executor of an estate and sells land during the course of administration of the estate.

136. Where trustees hold land for a single charity, it is unclear (following the Trusts of Land and Appointment of Trustees Act 1996, which gives trustees of land extensive powers in relation to the land vested in them) whether the ‘charity trustees’ (for the purposes of Section 36 of the 1993 Act) are the trustees holding the land or the trustees of the benefiting charity. It is probably the latter, but this is unclear. Conversely, where trustees hold land for more than one charity, the charity trustees are probably the trustees in whom the land is vested. However, different Counsel and solicitors have different views.

137. Adding to this confusion is the fact that Section 36 talks about land being held by or in trust for “a charity” – i.e. one charity alone. It is thus unclear whether the Section is intended also to apply to land held by or in trust for more than one charity.

138. It is also unclear whether land in England held for an English and a Scottish or Northern Irish charity falls within the Section 36(1) test of land held “by or in trust for a charity”.

139. Charities cannot act together in obtaining a report, as required by Section 36 of the 1993 Act, even if there is no conflict of interest, since Section 36(3)(a) requires the report to be prepared by a qualified surveyor acting “exclusively for the charity”.

140. There is a problem in the retained wording of Section 36(1) of the Charities Act 1992 (“the 1992 Act”) and its interaction with Section 36(9)(a) of the 1993 Act. The effect of Section 36(1) of the 1992 Act is to invalidate provisions in the governing documents of charities insofar as those provisions require dealings with land to require the consent of the CC. Prior to the enactment of the 1992 Act, the CC used frequently to include in schemes a power for the trustees to deal with land, subject to obtaining the consent of the CC. Where the scheme was the governing document of the charity in question, this meant that Section 36(1) of the 1992 Act had the effect of removing the requirement to obtain CC consent from the power, in the scheme, to deal with land. Section 36(9) of the 1993 Act provides that the restrictions on charity land dealings contained in that Section do not apply “to any disposition for which general or special authority is expressly given (without the authority being made subject to the sanction of an order of the Court)”. It is arguable that the effect of this provision, on top of the provisions of Section 36(1) of the 1992 Act, is to give charities whose schemes contain the power referred to in this paragraph an unrestricted right to deal with their land. The argument runs as follows: once the restriction on the power has been removed by Section 36(1) of the 1992 Act, the charity possesses the expressly given authority referred to in Section 36(9) of the 1993 Act. The CC, in its Operational Guidance on the subject (available at www.charity-commission.gov.uk/supportingcharities/ogs/g054d002.asp) takes the view that these charities do not have the express authority referred to in Section 36(9) of the 1993 Act and so are subject to the restrictions contained in Section 36 of the 1993 Act. Although we agree that this is the position Parliament probably intended, it is unclear.

141. We consider that it would be useful for the Bill to clear up the ambiguities surrounding the application of Section 36 of the 1993 Act, discussed in the preceding paragraphs.

142. The provisions of Section 38 of the 1993 Act require charities to obtain an order of the CC if they wish to grant a mortgage to secure a grant. Perhaps the Bill could amend Section 38(2) of the 1993 Act, so that the Section 38(3) process is also available where the mortgage relates to such grants as are potentially repayable on breach of conditions (as well as loans).

143. The Committee asked for comments on whether the Bill should revive the Strategy Unit’s proposal that charities should have the power to undertake all types of trading without using subsidiary trading companies, provided that, in using this power, the trustees complied with certain duties.

144. This is an issue that has tended to polarise CLA members. However, on balance, we consider that, if the statutory duties proposed by the Strategy Unit were applied to the power to trade, then the risks associated with giving charities such a power would be reduced to the point where the benefits would outweigh those risks and we would therefore support the revival of the Strategy Unit’s proposal – some of us with considerable enthusiasm!

145. A significant number of charities experience existing requirements in relation to trading activity as an obstacle to activity considered appropriate in the best interests of their charity. Since a charity will anyway take the taxable profits from its trading subsidiary in a tax-free form, charities frequently complain that the existing system is unnecessary.

146. Current charity law requires a charity to treat its trading company at arm’s length, avoiding any charity to trading company subsidy and to treat any financial support of the trading company as an investment. This can give the impression of a legal fiction of distance, contrary to the reality of the charity establishing a tax efficient procedure for undertaking activity indirectly which it is not able to undertake directly. It can also be very difficult to comply with the necessary requirements: there are hoops to be jumped through for no good reason.

147. The obstacle to trading would be removed, but would be replaced by the obligation to apply the proposed duty of care.

148. Charities will be clearly allowed to undertake activity by reference to a duty of care focused on the real issue - benefit to the charity, rather than to structural requirements directed at the same end, but introducing bureaucratic obstacles for no good reason.

149. We recommend that, following the change, all charity activity, including newly permitted trading, should be tax exempt. This would mean that the relevant statutory exemption would need to be extended.

150. The proposal would create a vast new range of activity a charity could undertake, a great deal of which would not be associated in the public mind with charity. However, given that the public does not generally distinguish between charities and their trading subsidiaries, we consider that this proposal would not significantly affect the public’s perception of charity.

151. The effectiveness of the duty of care in replacing the distinction between charitable and non-charitable activity would be absolutely critical. We see no reason, however, why it should not be effective.

152. It would obviously still be open to charities to set up trading companies for the purpose of isolating risk. This should be strongly emphasised and should explicitly form part of the element in the duty of care that involves consideration of risk.

153. The duty of care proposed by the Strategy Unit involved:

154. The Charities Bill could be amended to include a part on trading. This could give charities the power to trade and stipulate that, before exercising the power, charity trustees must undertake the duties set out in paragraphs 153.2 to 153.5 above. It could further provide that, in carrying out those duties, the duty of care in Section 1 of the Trustee Act 2000 would apply to the charity trustees. Because the Trustee Act 2000 does not apply to trustees of charitable companies, it would also need to state that, in this instance, the Trustee Act 2000 duty of care applied to all charity trustees, regardless of how their charity was constituted.

155. A new section could then be inserted into Schedule 1 of the Trustee Act 2000 (which lists the circumstances in which the statutory duty of care applies), specifying that the duty applies to charity trustees discharging the duties associated with the power to trade in the Charities Act 2005. (This should also specify that, in this instance, the term ‘trustees’ includes all charity trustees.)

156. We appreciate that, by applying the statutory duty of care to the other duties to be discharged when considering exercising the power to trade, the statutory duty of care is applied to the power to trade only indirectly (as opposed to directly, as proposed by the Strategy Unit). However, this would still afford the same level of protection, to charitable assets, from ill-conceived trading plans.

Conclusion

157. Ultimately, having reviewed all the arguments for and against, we are strongly in favour of the proposal that charities should be permitted to trade through the charity rather than having to set up a subsidiary trading company, provided there is a duty of care, whose application is rigorously monitored.

158. We understand that there is a concern lest the introduction of such a rule would lead to unfair competition. The belief is that this would create an unfair advantage for charities when competing with commercial entities carrying out business in the same field. We believe that this concern is misplaced. The reality of the situation is that charities currently are trading tax-free, by the use of trading subsidiaries which pass their profits up to charities by gift aid. It is unlikely therefore that the competition will be very different when it is possible for the charity to deal with this directly without the complications inherent in the trading subsidiary system. In fact, if anything, the proposal, if implemented, would lead to a more level playing field. This is because trustees will then have to comply with the duty of care laid down by the statute which may require more circumspection in their trading activities in order to ensure that the charity's other assets are protected from risk.

159. There is currently an illogical distinction between the utilisation of the charity's assets for trading activities and their utilisation for other fundraising purposes. There is nothing to stop charity trustees at present from expending considerable sums on, for example, a mail shot where the returns anticipated can be as low as 1 or 2%. It is difficult to understand why that should be the case when trustees are not allowed to invest similar sums in trading activities. The imposition of a duty of care might usefully be extended to cover other fundraising activities as well as trading.

160. Finally, it seems over-paternalistic to suggest that trustees are somehow not to be trusted with the charity's assets and therefore must not be allowed to carry out trading activities even when the duty of care makes very clear what their responsibilities in this regard are. These trustees, after all, are being trusted to run the charity itself and should therefore be treated as sufficiently responsible to decide what is or is not appropriate when it comes to trading.

161. We hope that the Committee members concur with our conclusions on the trading issue. If, however, they are not persuaded that charities should be allowed to undertake all types of trade, then we recommend that a distinction be drawn between trading of a merchandising/retail nature and other trading, (such as obtaining sponsorship and licensing the charity’s name/logo etc). We urge that charities, at the very least, be allowed to undertake the second type of trade. We refer to the submission of the Charity Finance Directors’ Group on this point.

162. Once the Bill has been passed, charity law (insofar as it is contained in statute) will appear in a number of different pieces of legislation. Given the voluntary nature of charities (particularly charity trusteeship), this is an area of law that needs to be accessible and comprehensible. To this end, we believe that it would be useful for consolidating legislation to be brought forward as soon as possible following enactment of the Bill.