The International Journal
of Not-for-Profit Law

Volume 2, Issue 2, December 1999

A quarterly publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Articles

Should the Rules Governing Foundations be Placed in a Civil Code?
By Ulrich Drobnig

Strategic Options for Building the Chinese NGO Sector in an Open World
By Li-Qing Zhao

The Regulation by Public Bodies of Charities in Scotland and Northern Ireland
By Dr. Christine R. Barker and Dr. Kerry J. O’Halloran

Legislation for Non-Profit Organizations in the Republic of Moldova [Russian]
By Ilya Trombytsky

Endowments of Foundations Receive Contributions from the State Privatization Fund of the Czech Republic
By Petr Pajas

A Canadian Charity Tribunal: A Proposal for Implementation
By Arthur B.C. Drache, Q.C. with W. Laird Hunter

Case Notes

Asia Pacific:
the Philippines

European Court Cases:
European Court of Human Rights (Turkey)
| European Court of Justice (Belgium)

Newly Independent States: Belarus

South Asia:
India

Western Europe:
Ireland

Country Reports

Asia Pacific:
Australia
| China | Japan | Korea | New Zealand | the Philippines | Taiwan | Vietnam

Central and Eastern Europe: Regional | Bosnia and Herzegovina | Croatia | Czech Republic | Kosovo | Montenegro | Slovakia

Latin America:
Argentina
| Chile | Colombia | Uruguay | Venezuela

Middle East and North Africa: Iran | Israel | Palestine

Newly Independent States: Azerbaijan | Belarus | Kazakhstan | Moldova | Turkmenistan | Ukraine | Uzbekistan

North America:
Canada/ the United States

South Asia:
India

Sub-Saharan Africa:
Cameroon
| South Africa

Western Europe:
France | Germany | the Netherlands | Portugal | Turkey | the United Kingdom

International Developments

Recognition and Protection of NGOs in International Law
By Frits Hondius

NGOs for Transparency and Against Corruption
By The Europhil Trust

International Grantmaking

Grantmaking and Embargoed Countries: An Overview Using Kosovo as a Case Study
By Timothy S. Burgett and Timothy R. Lyman

Dissolution Dos and Don'ts
By Karla W. Simon

- - - - - - - - - -

Editorial Board

Subscription Information

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The Regulation by Public Bodies of Charities in Scotland and Northern Ireland

By Dr. Christine R. Barker and Dr. Kerry J. O’Halloran

This article is based on a paper given at an international congress on “The Right Conditions for the Development of Non-Profit Organisations,” 18-19 February 1999, University of Parma, Italy. The authors gratefully acknowledge the valuable advice provided by Denis Cathcart, Director of the Charities Branch of the Voluntary Activity Unit, DHSS (Northern Ireland) and Brid McKernon, Charities Officer at the Northern Ireland Council for Voluntary Action (NICVA), in respect of the regulation of charities in Northern Ireland.

I. Background

The role of “charities” in all parts of the UK has developed considerably since they were first the subject of legal definition in England in the Statute of Elizabeth (the Preamble to the Charitable Uses Act 1601). In Scotland and Northern Ireland - as might perhaps be expected - the way in which charities are regulated has followed a very different path from the jurisdiction of England and Wales. To some extent this has been due to a structural legacy of jurisdictional difference. Scotland, being a separate kingdom until the seventeenth century, has its own legal system and a tradition of legislative independence. The island of Ireland, forming one jurisdiction until the second decade of the twentieth century, though ruled from Westminster, has its own court system and has acquired its own distinct body of legislation. The division of the island into two jurisdictions left the North of Ireland with residual ties to the south; case law precedents and statutory principles continued to have some bearing on judicial determination in the courts of Northern Ireland, perhaps particularly in matters of chancery and probate. Northern Ireland continued to have a degree of legislative independence until the abrogation of Stormont, after which it was ruled directly from Westminster by way of legislation which, broadly speaking, extended to the province, after an interval of a few years, statutory provisions created for England and Wales. This article, however, deals with the effects rather than the causes of jurisdictional difference. It outlines the salient features of charity regulation in Scotland and in Northern Ireland, drawing relevant comparisons with the regime in England and Wales, and considers the role of public bodies as regulators of the charitable sector.

English law first addressed the issue of regulation of charitable purposes in the Charitable Uses Act 1601 (43 Eliz. 1 c.4), although effective regulatory provisions of a general nature had to await the enactment of nineteenth-century statutes. The regulation of charities was substantially overhauled by the Charities Act 1960. Following further reforms, primarily the Charities Act 1992, much of the regulatory law governing charities in England and Wales is now contained within the consolidating Charities Act 1993.

In Northern Ireland, a heritage of pre-partition statute law provided an initial foundation. This consisted mainly of the following: the Charities Procedures Act 1812; the Charitable Donations and Bequests (Ireland) Act 1844; the Charitable Donations and Bequests (Ireland) Act 1867; the Charitable Funds Investment Act 1870; the Charitable Donations and Bequests (Ireland) Act 1871; and the Charitable Trustees (Incorporation) Act (Northern Ireland) 1961. The first indigenous regional charity law statute was introduced in the province some years after its English counterpart, which it replicated in all major respects. This was the Charities Act (Northern Ireland) 1964, amended in due course by the Charities (Northern Ireland) Order 1987. These statutes are not principally regulatory, providing no powers for the inspection, monitoring, nor even for the registration of charities.

In Scotland, in contrast, the specific regulation of charities is of substantially more recent origin. The first piece of legislation regulating “Scottish charities” as such and the use of that term within Scotland was implemented in 1992, when Part I of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 (“the 1990 Act”) came into force.

The concept of “charitable for tax purposes” and consequent tax privileges, have, however, been part of the law in Scotland and Northern Ireland since the House of Lords in Inland Revenue Special Commissioners v. Pemsel [1891] A.C. 531 decided that the English definition of “charity,” derived from the Preamble to the 1601 Act, was to be applied throughout all UK jurisdictions when determining any right to charitable tax exemption. The common application of rules for tax exemption has since provided the one unifying theme underpinning charity law in the different jurisdictions of the UK.

A) The Four “Heads” of Charity

The English definition of “charitable,” which originates from the Preamble to the Charitable Uses Act 1601 (also known as the Statute of Elizabeth), may be summarised as incorporating four main “heads” of charity: the relief of poverty, the advancement of education, the advancement of religion, and purposes beneficial to the community not falling under the first three heads. This definition and the general principles connected with it were imported equally into the law of Scotland and Northern Ireland, via tax law, in the Pemsel case per Lord Macnaghten (at 583).

Importantly, the definition also includes an overriding requirement of public benefit applicable to all four “heads” of charity and it is this concept which has been the focus of calls for reform of the “four heads” definition, which is felt by many to be inappropriate for today’s society. For example, Knight (1993) writes: 

“Charity is a medieval concept that has no place in the modern world. It can reinforce the boundaries between ‘haves’ and ‘have-nots’ finding itself on the cusp between greed and guilt.” (301)

It has been suggested that “public benefit” should be the sole criterion used to determine charitable status. Deakin (1996) and Kemp (1997) are among those to suggest that there should be a re-definition of charity based on the concept of “public benefit.” Deakin recommends that “the existing four ‘heads’ of charity should be abolished and a single overarching charitable category be established, formulated in terms of benefit to the community” (at 82, para. 3.2.6). Kemp proposes that a new definition “should entrench, on a UK basis, the concept of public interest already central to the approach of both jurisdictions but should not be narrowly codified.” (at 173, para. 7.16.3)

In Scotland the concept of bodies established in the public interest has long existed under the common law concept of a “public” trust, which is a trust formed for the benefit of either the public at large or a section of the public. The term is not synonymous with the term “charitable trust,” which prevails equally in English law and in the law of Northern Ireland, and the technical meaning attached to “charitable trust” in those jurisdictions does not exist in Scots law. This is because not all public trusts in Scotland fall within the tax-based definition of charity, although their purposes are to benefit the public. It has been firmly established that in Scotland trusts established for charitable purposes form only part of the wider class of “public trusts.” It may well be that this concept is one which could form the basis of any new definition of “charity.” This is a matter which is being addressed by our comparative research and one which has been considered in a Scottish context by our colleague Patrick Ford in his recent article “Scottish Charity Law Reform: an Agenda for Coherence.”

In the meantime, however, both Scotland and Northern Ireland have to live with the importation into their respective legal systems of the English definition of charity for tax and regulatory purposes.

B) Charity Commissioners

In England and Wales both the registration and regulation of charities is the province of the Charity Commissioners. The Charity Commissioners for England and Wales were set up under the Charitable Trusts Act 1853 and had their powers extended by the Charities Act 1960 and further by the Charities Acts 1992 and 1993. The overall statutory duty of the Commissioners under section 1(3) of the Charities Act 1993 is “promoting the effective use of charitable resources by encouraging the development of better methods of administration, by giving charity trustees information or advice on any matter affecting the charity and by investigating and checking abuses."

The Commission’s role is a complex one, involving registration, monitoring, preventative, remedial and investigative work, and its annual expenditure, as recorded in its most recent annual report, amounts to some £21 million, £12 million of which is spent on its 570 staff.

The Charity Commissioners seek to fulfill their remit in various ways: they are responsible for registering charities and for maintaining a public register of charities which can be examined at any of the Commission’s three offices. Since October 1997 basic information about charities on the register has also been available on the Internet. Copies of extracts from the register and a registered charity’s governing documents and accounts can be purchased from the Commission for a small fee. All charities in England and Wales not specifically exempted or excepted from registration are required to register with the Commission and registered charities with an income over £10,000 are also required to send a set of their latest accounts and the trustees’ annual report.

The Commission produces a wide range of guidance leaflets, the most popular of which are now also available on the Internet, and the Commissioners give specific legal advice to charities. They also publish, on a regular basis, Decisions of the Charity Commissioners, which give details of judicial decisions in a variety of cases in which the Commissioners are involved.

The Commission regards its support role as its main function. The Chief Charity Commissioner said in evidence to the Committee of Public Accounts (1998): “Our fundamental role as set out in the Charities Acts certainly from 1960 has been to enable charities to operate, to use their resources more effectively. In that sense, it is a promotional and support role first and foremost” (at 10). He also refers to the Commission’s original function of replacing the Chancery Court in providing legal services to charities (at 11).

The Public Accounts Committee (PAC), however, expressed concern “that the Commission is failing to strike an appropriate balance between its responsibility for regulating charities and its role in advising them,” noting that only 8% of the Commission’s staff are dedicated to investigation work. The PAC refers to “the strong expectation in Parliament and among those who make charitable donations that it will maintain an effective scrutiny of registered charities” (at v) and to the “public perception that this work is one of the main purposes for which the Charity Commission exists” (at xviii).

In its response, recorded in the Treasury Minute on the PAC report, the Commission rejects the Public Accounts Committee’s judgment about the proportion of resources devoted to investigation, pointing out that investigation by its Investigation Division using formal inquiry powers is only part of the Commission’s remedial function, to which it estimates that about a third of the Commission’s resources are directly devoted (at 8). The Commission also expects its new Charity Database and integrated monitoring system greatly to improve its regulatory role, and also points to the fact that the reporting requirements of the Charities Acts 1992 and 1993 only began to take effect in 1998. The Commission also points to the need to ensure that the level of intervention in the operation of charities is commensurate with the scale of the identified problem.

While the Charity Commission sees no contradiction between working with charities on a co-operative basis and taking action on a preventative, remedial basis, the writers take the view that there may be an inherent difficulty when one body, even one with the resources of the Charity Commission, attempts to fulfill the role of both policing and befriending charities.

The absence of a Charity Commission in Scotland and Northern Ireland is the principal difference in the way in which charities are regulated. Some of the tasks carried out by the Commissioners are allocated to a number of different institutions in Scotland and Northern Ireland, others are not undertaken.

II. Charity Recognition in Scotland and Northern Ireland: The Inland Revenue

In Scotland and in Northern Ireland the Inland Revenue is the body to which applications for charitable status are made. Application is made under section 505 of the Income and Corporation Taxes Act 1988 (ICTA 1988). The reason for this is the tax-driven definition of charitable purposes as outlined above.

A) Scotland

In Scotland applications are handled by the Financial Intermediaries and Claims Office (FICO) of the Inland Revenue in Edinburgh. Bodies applying for charitable status must supply FICO with a copy of their founding document in order that an assessment can be made as to whether the purposes are exclusively charitable in terms of sections 505 and 506 of ICTA 1988. Applicants are advised to submit draft documents in the first instance and FICO will then give an informal view on eligibility for recognition.

Approval of an application for charitable status is communicated by FICO in a formal charity recognition letter, which allocates to each Scottish charity a SC (Scottish Charity) number which is its identifying number on the Scottish Charity Index maintained by FICO. The 1990 Act enables FICO to disclose to members of the public whether or not a body is recognised as a Scottish charity, the name and address of its contact for the charity and date of last contact. The Inland Revenue Index was compiled in order to fulfill this provision. In practice the SC number (if existent) is also given. It is important to emphasise that the FICO Index contains only limited public information and is not comparable with the Charity Commission’s register of English and Welsh charities.

Charities in Scotland undergo a process of “recognition” - as opposed to “registration.” Section 1(7) of the 1990 Act defines a “recognised body.” Bodies are “recognised” if the Inland Revenue has recognised them as being charitable for tax purposes and they are either established under Scots law or are managed or controlled wholly or mainly in or from Scotland. Only organisations which fulfill these criteria are entitled to describe themselves as “Scottish charities.” Since the implementation of the 1990 Act, therefore, recognition is necessary in order to have the legal right to call oneself a “Scottish charity.”

Section 2 of the 1990 Act states that only recognised Scottish charities or bodies registered - or not required to register - as charities in England and Wales are entitled to represent themselves as charities in Scotland. Northern Irish charities are therefore “non-recognised bodies” in Scotland and would not be entitled to hold themselves out as charities in this jurisdiction. As it is up to the Lord Advocate to apply to the court to interdict a non-recognised body from representing itself as a charity, it would be possible to exercise discretion in favour of a Northern Irish charity by declining to make such an application, but the fact remains that there is no provision made for Northern Irish charities in the 1990 Act.

Public charitable collections in Scotland, however, are regulated under a quite separate piece of legislation, namely, section 119 of the Civic Government (Scotland) Act 1982, whereby application for street and door-to-door collections is made to local authorities or in certain circumstances to the Secretary of State for Scotland. The definition of “charitable purposes” under this piece of legislation is broader than the technical legal definition of “charity” and extends to “any charitable, benevolent or philanthropic purposes whether or not they are charitable within the meaning of any rule of law” (subsection (16)). It would, therefore, be open to a Northern Irish charity to seek a licence to fundraise in this way in Scotland, provided that it does not hold itself out to be a charity, albeit that it is legally recognised as such in Northern Ireland.

B) Northern Ireland

Under section 35 of the Charities Act (Northern Ireland) 1964, an organisation is a charity if it is established for purposes which “are exclusively charitable according to the law of Northern Ireland.” Charities in Northern Ireland are not required to register with the Charity Commissioners for England and Wales and the Charities Acts 1992 and 1993 do not extend to Northern Ireland. So, as in Scotland, a charitable organisation in Northern Ireland will apply to the Inland Revenue seeking recognition as such, rather than registration, in order to claim tax exemptions and other financial benefits. The application will provide details of the organisation’s governing instrument and an account of its activities.

Northern Ireland applications are handled by the Inland Revenue (Claims Branch) in Bootle, Merseyside, the same body which deals with claims for repayment of tax from charities in England and Wales. The Inland Revenue will give a successful applicant a reference number (the only official number a Northern Irish charity will possess) and a letter granting charitable status. This letter, for all practical purposes, provides the proof that the organisation is a charity and will:

In Northern Ireland, an organisation can apply under section 5 of the Police, Factories, Etc. (Miscellaneous Provisions) Act 1916 to the Royal Ulster Constabulary for permission to carry out street collections for “charitable or other purposes” or - under section 8 of the House-to-House Charitable Collections Act (Northern Ireland) 1952 - to conduct house-to-house collections for “any charitable, benevolent or philanthropic purpose.” As in Scotland, therefore, permission can be, and from time to time is, granted to organisations that are not charities.

As well as having responsibility for granting or refusing charitable status, the Inland Revenue in Scotland and Northern Ireland also plays a limited regulatory role in that it checks whether income has, in fact, been applied exclusively for charitable purposes (or indeed applied at all rather than left to accumulate) and that claims for repayment of tax are properly substantiated. The Inland Revenue can also withdraw recognition where it appears that purposes are no longer exclusively charitable, for example where there has been an inappropriate alteration to a founding document or where the body’s actual activities do not correspond to those in the founding document upon which charitable status was based.

FICO (Scotland) provides non-statutory assistance in the form of a charity help-line, a “tax-doctor” service whereby a charity may request a visit from an Inland Revenue auditor (for example, when a new treasurer takes over), and a series of booklets and seminars on tax-related matters. Under the terms of the 1990 Act FICO (Scotland) may inform the Lord Advocate (Scotland’s chief law officer and broadly speaking equivalent of the Attorney-General in England and Northern Ireland) of abuses such as engaging in non-charitable activities or applying funds for non-charitable purposes.

When referring to Scottish or Northern Irish charities it is inappropriate to use the term “registered charity,” which is the term used in England and Wales for charities registered with the Charity Commission. Scottish and Northern Irish charities do not undergo a “registration” process as such, since there is no statutory register of charities in either jurisdiction, and to avoid confusion the term is best avoided, particularly since section 63 of the Charities Act 1992 (applicable in England and Wales) makes it a criminal offence for an individual to solicit money or property for the benefit of an institution claiming that it is a registered charity when it is not.

While neither Scotland nor Northern Ireland would necessarily wish to adopt the Charity Commission format in totality - largely on the grounds of cost - there are features of the English system which could usefully be incorporated in any reform of the regulation of charities in both jurisdictions, in particular the establishment of a statutory register.

III. Registration of Charities

A) Register of Charities

Arguably, a register, of the kind maintained by the Charity Commission, would fundamentally improve both systems. The Index of Scottish charities maintained by FICO the Charities Register in Scotland (CRIS) database maintained by the Scottish Council for Voluntary Organisations (SCVO) and the database of voluntary organisations, including charities in Northern Ireland, maintained by the Northern Ireland Council for Voluntary Activity (NICVA) are not comparable to the Charity Commission register in that they are not statutory registers. This is not to underestimate their value as a source of information, particularly to those of us involved in researching the sector, as they contain far more detailed information than is currently publicly available elsewhere. CRIS is based on the Inland Revenue (Scotland) Index but contains additional and updated information obtained from an on-going survey by SCVO of the Scottish charities listed and includes information on income size, level of grant expenditure, beneficiaries, field of work, geographical scope, local council area and some data on legal form. Organisations listed on the NICVA database, known as “SectorNet,” are encouraged to make annual returns to update the database in relation to matters such as accounts, activities and other details. This information provides the basis for “The State of the Sector,” an annual NICVA report.

NICVA and SCVO are non-statutory bodies and have no regulatory powers. They promote good practice among voluntary organisations in Northern Ireland and Scotland, facilitate good governance and assist organisations to become formally established within an appropriate legal framework. NICVA provides a Charity Advice Service which makes available information on matters such as drawing up a constitution and claiming tax exemption, and SCVO is similarly the main source of general advice to charities and other voluntary organisations in Scotland.

In Scotland and Northern Ireland there is no obligation for charities routinely to file annual reports and accounts with a central statutory body or to supply up-to-date information such as change of contact person or address or to notify any authority that a charity is to be wound up. The consequence is that entries on the existing databases in Northern Ireland and Scotland are often incomplete and out-of date, particularly in respect of contact details.

On the other hand, the cost to the taxpayer of establishing and maintaining a register needs to be borne in mind, and careful consideration would also need to be given to the kind of public information which the register would contain. For example, a register which provides information about the activities of a charity is perhaps less useful than one which gives verified quantitative information about the specific benefits conferred by a charity upon its beneficiaries. A register which is not backed up by fairly rigorous formal procedures for inspection and verification may not prove to be any more effective than existing administrative indexes in reducing fraud or inefficiency and providing reassurance to the general public.

It is also worth noting that some 70% of the 159,000 “main” charities registered in England and Wales have an income below the £10,000 limit and are therefore not required routinely to submit annual accounts and statutory annual returns to the Charity Commission, although they all are obliged to make accounts available to the Commission or members of the public on request. While this means that the charities in this income level band are subject to less scrutiny, it should be pointed out that they account for less than 2% of the registered charitable sector’s total income. The latest report of the Charity Commissioners for England and Wales records that of the £19.7 billion total income of the main registered charities in England and Wales, some £15 billion is accounted for by the 2% of registered charities with an income of over £1 million. The total number of (main and subsidiary) charities on the Charity Commission Register at the end of 1998 was 186,248.

Data collected on the charitable sectors in Northern Ireland and Scotland indicates that the percentages are comparable and that the income of the sector resides predominantly with the largest charities, that is, those with incomes of over £1 million. According to the 1998 SCVO Research Unit report, charities in Scotland in this income bracket receive 67% of total voluntary sector income while comprising just 1% of the sector. The voluntary sector as a whole is predominantly concerned with providing services to individuals (85% of all organisations). The number of Scottish charities on the Inland Revenue (Scotland) Index as of 31 December 1998 was 26,850, although some of these are no longer active. Twelve percent of charities responding to SCVO surveys reported that they are no longer operating. In Northern Ireland the NICVA report The State of the Sector II (1998) provides a statistical picture of the size and shape of the voluntary sector. The report does not meaningfully differentiate between the income of charities and other voluntary organisations, and does not attempt to do so between charities of differing sizes. However, it does note that of an estimated total of £42 million donated by the general public to the voluntary and community sector in 1996/97 some £21.9 million was concentrated in the social care sector, which is where the larger charities are based.

While acknowledging that the charitable sector forms only a proportion of the voluntary sector as a whole, the existence of a legal definition of this part of the sector does at least mean that organisations falling within this definition could be listed on a statutory register and information about them made available to the public.

In England and Wales there are large numbers of exempted and excepted charities, which are not required to register with the Charity Commission. Exempted by section 3 and Schedule 2 of the Charities Act 1993 are: major universities; grant maintained schools; higher and further education corporations; major museums and galleries; any institution administered by the Church Commissioners; and any Industrial and Provident or Friendly Society. The following are also exempted under section 3 of the Charities Act 1993: charities with neither permanent endowments, land nor income over £1,000; some voluntary schools; places of worship; and charities for the religious purposes of the major churches.

This is a policy which Scotland and Northern Ireland would not necessarily wish to follow. There is, however, no doubt that the Charity Commission’s register is an invaluable central source from which information about English and Welsh charities can be readily and inexpensively obtained, whereas in Scotland and Northern Ireland it can be difficult, expensive and time-consuming to obtain information about charities.

B) Registrar of Charities

In Scotland the 1990 Act provides that charities must supply (within a month) copies of their founding document and latest accounts to anyone requesting them. They may make a “reasonable charge” for photocopying and postage. In practice it has often proved difficult both to trace the current contact address for the charity and to persuade charities to supply the relevant information - frequently for the rather worrying reason that founding documents cannot be found. In addition, charges levied have sometimes been prohibitive. It is also expensive and time-consuming for solicitors who act for large numbers of charities (mainly trusts) to supply enquirers with information. A central source of information would clearly be far preferable.

The Kemp report recommends the creation of the office of a Scottish Charities Registrar in preference to a Charity Commission. It suggests (at paras. 1.7.3 and 7.16.4) that the Registrar, to be appointed by the Secretary of State for Scotland, would (a) maintain a register of Scottish charities and (b) provide advice. Registration would replace the process of recognition by the Inland Revenue and would be presumptive proof of charitable status for tax purposes:

“The Register of Scottish Charities should be made available to the public by various methods, including the Internet. The Registrar should collaborate closely with the Charity Commission to allow rapid and easy public access to both registers.” (at para. 7.16.7)

In Northern Ireland, most charities are currently not obliged to supply copies of their constitutions or accounts to the public. Some charities are required to do so by their constitutions and all must supply copies to the Department of Health and Social Services (DHSS) in certain circumstances (see below).

The creation of the office of a charities Registrar seems to the authors to be a sensible alternative to creating an organisation with the wide remit of the Charity Commission, particularly as some of the functions of the Commission are already carried by existing bodies.

III. Existing Regulatory Framework in Scotland and Northern Ireland

A) The Lord Advocate and Scottish Charities Office

The 1990 Act gives the Lord Advocate wide powers to investigate “misconduct or mismanagement” in Scottish charities and to apply to the Court of Session (Scotland’s principal civil law court) to prevent or remedy abuse. He may suspend (for a maximum of 28 days) any person concerned in the management or control of the following:

The 1990 Act also makes it an offence for an undischarged bankrupt or anyone who has an unspent conviction for an offence involving dishonesty to be concerned in the management or control of a Scottish charity. The Lord Advocate may consider applications for waiver of the disqualification.

In practice the Lord Advocate’s powers are exercised through the Scottish Charities Office (SCO), newly established as a division of the Crown Office in 1992 in order to implement the provisions of the 1990 Act relating to the regulation of charities in Scotland. The SCO fulfils some of the functions of the Charity Commissioners in England and Wales in exercising its regulatory role, but has nothing like the same resources. The SCO has two full-time legal staff (the Director and Principal Deputy), two full-time investigators, and a full-time administrative support officer. Two accountants are utilised on a consultancy basis. The SCO has brought court proceedings (in the Lord Advocate’s name) in a number of cases, leading to the suspension or removal of those “concerned in the management or control” of the body (a term broadly equivalent to the term “charity trustees” employed in the Charities Act 1993). In several of the court cases a judicial factor has been appointed (broadly equivalent to a receiver in England and Wales and in Northern Ireland).

B) The Court of Session in Scotland

While the Lord Advocate has wide investigative powers and a limited power of suspension, the main powers for regulating Scottish charities lie with the Court of Session. Section 7 of the 1990 Act extended the Court’s existing common law powers to intervene in the management of public trusts to cover the following bodies (whether constituted as trusts or not):

The Court of Session may employ a range of interim and permanent powers including interdict, suspension or removal of persons concerned in management or control, appointment of a judicial factor, a “freezing order” on money or securities, restrictions on transactions and payments, the transfer of assets, and the appointment of a trustee.

C) DHSS in Northern Ireland

The Department of Health and Social Services is the charity authority for Northern Ireland. Its responsibilities as such are largely governed by sections 2, 3 and 29 of the Charities Act (Northern Ireland) 1964 and are undertaken by the Charities Branch of its Voluntary Activity Unit. Like the Scottish Charities Office it has no statutory role in connection with the setting up of new charities. The DHSS has the following regulatory powers:

The main business of the Charities Branch of the Voluntary Activity Unit is centred on two areas of activity. It is concerned with the giving of consent to the disposal of property by charity trustees who cannot usually sell of otherwise dispose of property without specific consent. It is also concerned with the making of cy-près schemes to change the objects of charities whose original functions can no longer be carried out effectively. Another major part of the work of the Charities Branch is to provide advice to trustees, their lawyers and members of the public interested in charity matters.

C) Royal Ulster Constabulary (RUC)

In Northern Ireland the detection of fraud or of irregularities in fundraising activity is left entirely to the RUC and is governed by the general criminal law. In particular, fundraising remains subject to the House to House Charitable Collections Act (Northern Ireland) 1952. This fails to address the issues arising from the use of professional fundraisers, telethons and the transfer of funds across jurisdictions.

The allocation of specific functions in Northern Ireland and in Scotland to different statutory bodies rather than charging one body with the overall regulation of the charitable sector has in many ways been beneficial in that each regulatory authority has a clearly defined role and avoids the potential confusion of a regulator which also provides support. General advice and support are provided by non-statutory bodies such as NICVA, SCVO and other national bodies as well as by local umbrella organisations, and charities in both jurisdictions are expected to consult a professional advisor if they require specific legal or financial advice. There have been complaints that Scotland and Northern Ireland lack the advantage of free, authoritative legal advice such as is provided by the Charity Commissioners, but it would be difficult for either jurisdiction to justify the costs involved in funding a public body to provide specific legal advice of this kind to such a diverse sector, particularly as the availability of free advice from the Charity Commissioners appears to have done nothing to diminish the proliferation of legal firms specialising in charity law in England and Wales.

IV. Financial Regulation by Public Bodies

A) Statutory Regulation

All UK jurisdictions impose upon charities certain statutory accounting requirements. Incorporated charities are governed by the UK-wide Companies Acts legislation. This requires an examination by a registered auditor if income exceeds £250,000, with the option of a reporting accountant available to charitable companies with an income of between £90,000 and £250,000. Incorporated charities with an income below £90,000 are not required to submit their accounts for external examination. These levels were introduced in The Companies Act 1985 (Audit Exemption) Regulations 1994. Interestingly, charitable companies were not included in the further deregulatory measures more recently introduced by the Companies Act 1985 (Audit Exemption) (Amendment) Regulations 1997, which provide that companies other than those with charitable status do not require an annual audit if their income is under £350,000.

i) Charitable Companies

The accounts of incorporated charities are available for public inspection on the Companies Registers. However, the Companies Registries in Scotland and Northern Ireland do not record whether or not a company is also a charity, so it is not easy to identify charitable companies. The Companies Act 1985 does, however, provide (in section 30) exemption for certain companies from the requirement relating to the use of the term “limited” as part of the company name, and as the objects of companies eligible for such an exemption include “the promotion of commerce, art, science, education, religion, charity or any profession,” charitable companies are likely to be “section 30” companies. This is particularly so as other requirements for exemption are that: income is to be applied in promoting the company’s objects; no dividends are to be paid to members; and, should the company be wound up, all the assets must be transferred either to another body with similar objects or “to another body the objects of which are the promotion of charity and anything incidental or conducive thereto” (section 30(3)). Such companies are also exempted from the requirements of the 1985 Act relating to the publication of their company name and the sending of lists of members to the Registrar of Companies - but not from the obligation to file accounts with Companies House. It would, therefore, be possible to examine the accounts of many charitable companies by searching the Companies Registers for those companies exempted under section 30 of the 1985 Act. This is, however, far from ideal. (In England and Wales charitable companies file accounts both with Companies House and with the Charity Commission.) The regulatory function of the Registrars of Companies is confined to ensuring that accounts are filed both timely and in accordance with the appropriate Companies legislation.

While the accounting requirements for incorporated charities are uniform throughout the UK since they are governed by the UK-wide Companies Acts, there are significant differences in the accounting thresholds for unincorporated charities.

ii) Unincorporated Charities

In England and Wales, under the terms of The Charities (Accounts and Reports) Regulations 1995 (SI 1995 No. 2724), unincorporated charities require an independent examination for those with an income between £10,000 and £250,000, and a professional audit is only required where income exceeds £250,000, on a par with incorporated charities, while in Scotland (under the terms of the Charities Accounts (Scotland) Regulations 1992) the accounts of all unincorporated charities must be submitted to external review, either by an “independent examiner” or by an “auditor” as defined in section 24(2) of the Companies Act 1989. The latter is required where gross income or expenditure exceeds £100,000 or where either the founding document or the “trustees” (defined in regulation 2 of the accounting regulations as “the persons in management or control”) so stipulate. Where there is no such requirement for an audit, regulation 8 stipulates that the accounts of charities with an income under £100,000 may be reviewed by an “independent examiner,” that is “an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts.” A simpler form of accounts (receipts and payments and a statement of balances) may be prepared by charities with an income of less than £25,000. Thereafter income and expenditure accounts and a balance sheet are required.

In Northern Ireland, unincorporated charities must keep proper accounts, must preserve these for seven years and must make them available to the Charities Branch if requested. Section 27 of the Charities Act (Northern Ireland) 1964 stipulates that unless they are subject to any other relevant legislation they must also prepare annual receipts and payments or income and expenditure accounts. In practice, many charities audit their accounts and make them available through the NICVA database “SectorNet.”

B) Non-statutory Financial Regulation

In addition to the above statutory provisions for the financial regulation of charities, public bodies also exercise controls in their capacity as funders of the charitable sector. A great deal of charity funding comes from national or local government, particularly in the health and social care sector, and the contracts for this service provision impose their own form of regulation which is frequently additional to, or even in conflict with, the statutory provisions. Charities have become increasingly involved in the provision of welfare services which were previously provided by central government, and this has led to an increase in the number of service contracts entered into by charities with central and local government bodies - the so-called “contract culture.” The recent report of the Comptroller and Auditor General on the regulation and support of charities in England and Wales states that a third of charity income arises from contracts with government, government grants and tax reliefs (at para. 1).

One of the reasons for offering service contracts to charities in preference to public sector bodies providing them themselves is because charities are perceived to have innovative ideas about how to run the services, and greater enthusiasm in their practical operation because of their commitment to the particular cause or causes involved. Charities can also provide greater flexibility in service provision. They may also be less costly. However, the increase in funding by public bodies of services provided by charities and the wider voluntary sector has led to greater control being exercised by central and local government in terms of contractual arrangements. Evidence presented to the Scottish and English Commissions on the Future of the Voluntary Sector voiced a number of concerns on this issue, particularly given the trend away from grants for core funding to contracts for specified services. The relationship between these contracts and the overall statutory regime for charities is not the principal theme of this article but clearly has a practical effect on the operation of the law in this area, and will therefore be considered briefly.

In practice, whatever the legislation, funders often require an audit regardless of the charity’s size or conditions imposed by the founding document. Funders also insist upon audited accounts being produced quarterly rather than annually. Their requirements in terms of financial accountability are, therefore, often more exacting than those required by legislation. We have even come across funders who insist on a form of accounts which is in conflict with that required by legislation. Funders may also seek to influence the legal form adopted by the charity by expressing a preference for funding incorporated charities.

All of the above impose additional and, it could be argued, unnecessary administrative and financial burdens on charities at a cost in terms of time and money which could better be spent on charitable purposes. On the other hand, the requirement by funding bodies for regular filing of accounts in forms prescribed by them - whether or not compatible with those required by law - does at least mean that there is an opportunity for scrutiny by those funding bodies of some of the public sponsoring of charitable bodies. The point often made in favour of greater scrutiny of charity accounts is that charities receive much of their income from public money, as well as enjoying favourable tax treatment. Charities argue, however, that the accounting cost involved in the review process places them at an unfair disadvantage when competing for service contracts with other, non-charitable organisations.

V. Ideological Controls

Concerns have also been expressed that in addition to the statutory and financial regulation, funders may also be exercising controls in relation to the advocacy role of charities which impact upon the autonomy of charities.

Charities are constrained in the extent to which they may engage in advocacy (the issue of “political” campaigning remains a hotly debated subject). Since most charities need to raise money in order to continue to fulfill their objectives, the fear is that in order to obtain the necessary funding they may sometimes be too willing to accept contracts which further restrict their advocacy role. Knight argues that the roles of service provision and user representation are so different that they should be separated out under different tax and legal frameworks:

Organisations that follow the state into new contracting arrangements can no longer think of themselves as sufficiently independent to warrant the adjective ‘voluntary’. They could call themselves ‘non-profits’, ‘third sector’, ‘contractors’, or part of the ‘third force’ repeatedly described by senior civil servants and ministers as forming an important partner with state and private organisations in regeneration arrangements. ‘True’ or ‘authentic’ voluntary bodies, on the other hand, will remain independent, will eschew contracting arrangements, and will remain unfettered to be ‘democracy seekers’ in ways of their own choosing. This will be a ‘first force’ of voluntary action ... policy driven, rather than resource-led. (47, para. 6.5.5)

The danger is that the distinctive nature of an organisation’s “charitable purposes” will be compromised if its original objectives are re-defined by the role assigned by its funding body. An additional factor is the short-term nature of many contracts which may lead to a further loss of independence by constraining the organisation’s ability to speak out or campaign.

The recent trend has been towards “partnerships,” implying a more equal relationship whereby the sector is involved in policy decisions and the methods employed in implementing a particular project. Empirical research will examine how partnerships operate in practice, but clearly charities need to consider how well any proposed partnership fits in with their own objectives and how much actual influence they are likely to have on its implementation. Partnerships, especially multi-level ones, can be difficult to administer, and there is a danger that the administrative requirements of the government partner, such as form-filling, may detract from the organisation’s day-to-day operations and may entail duties over and above those required by law.

The reports of the English and Scottish Commissions on the Future of the Voluntary Sector in the UK both recognised that central government and the sector have many common interests but also raised specific concerns regarding the relationship between the two. Deakin (1996) recommended that there should be a “concordat” between central government and the voluntary sector (at 50, para. 2.2.21) and this recommendation was enacted in 1998 by the Labour government (in accordance with the Labour Party’s General Election commitment) by the establishment of four “Compacts” (for England, Scotland, Wales and Northern Ireland). The Compacts seek to clarify the respective roles of central government and the voluntary sector in the context of the shared values and principles underpinning partnerships between the two, with a task force of ministers overseeing their implementation. In his foreword to the Scottish Compact Donald Dewar acknowledges the importance of recognising the independence of the voluntary sector as well as the accountability of government to its electorate. The Compacts describe agreed principles for working together effectively for the betterment of society, recognising that government and the voluntary sector have distinct but complementary roles in the development and delivery of public services and the promotion of active citizenship in a democratic, socially inclusive society.

The Compacts, of course, relate to the wider voluntary and community sector and not only to charities, which are the principal subject of this paper, and it remains to be seen how they will develop, in particular with recent political developments in Scotland and Northern Ireland (the new Scottish Parliament and the Northern Ireland Assembly).

VII. Concluding Remarks

In many respects charity law in the two jurisdictions is in a state of transition. In Scotland the 1990 Act has recently been the subject of a review by Dundee University’s Charity Law Research Unit (commissioned by The Scottish Office and due to be published in the latter part of 1999). In Northern Ireland, the Department of Health and Social Services embarked on a consultation exercise with the voluntary sector in 1996 with a view to undertaking a full scale review of charity law; an initiative which met with such resistance that it was withdrawn. Currently, the Centre for Voluntary Action Studies at the University of Ulster is conducting research to establish the extent to which the charity law framework facilitates or impedes charitable activity. The Charity Commissioners for England and Wales have been reviewing their register of charities, and in March 1999 HM Treasury published its consultation document on its review of charity taxation.

There is also on-going research into the question of the definition of charity and the viability of the concept of one or more legal forms specifically designed for charities. In the expectation that issues such as the definition of charity and new legal form will be considered on a UK-wide basis and will not be the subject of revised legislation in the immediate future, the authors are of the view that there are, nonetheless, immediate measures which could be undertaken to reform existing charity legislation in Northern Ireland and Scotland. We are not advocating a radical transformation of the current system, but take the view that there are omissions in the regulatory frameworks in Northern Ireland and Scotland, which could be addressed by introducing additional provisions.

Foremost among such additions is the need for statutory registers of charities to be established in both jurisdictions. Such registers would serve several basic functions. They would aid transparency and promote the public accountability of the charitable sector - the recipient of millions of pounds of “public” money in the form of freely offered donations from the general public and government-led funding in the form of service contracts and tax concessions. They would list those charities which are currently active and would provide the information necessary for on-going monitoring and inspection. Registers would also greatly assist the sector itself by providing a reliable yardstick of its activities.

Dr. Christine R. Barke
Director, Charity Law Research Unit University of Dundee

and

Dr. Kerry J. O’Halloran
Assistant Director, Centre for Voluntary Action Studies
University of Ulster

Bibliography

Acheson, N., and Williamson, A. (eds), Voluntary Action and Social Policy in Northern Ireland, Avebury, Aldershot, 1995.

Barker, C.R., Ford, P.J, Moody, S.R., Elliot, R.C. (eds) Charity Law in Scotland, W. Green/Sweet & Maxwell, Edinburgh, 1996. (See especially Chapter 3 “Charitable Trusts” and Chapter 5 “Regulatory Powers under the 1990 Act”.)

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Copyright 2008 The International Center for Not-for-Profit Law (ICNL)
ISSN: 1556-5157