1 Registration of your charity with the Charity Commission – why bother?
Charities ask us whether they must register as a charity with the Charity Commission. Following very recent changes in tax law, it is now essential that charities that are not registered as charities do so immediately, if the law states that they must be registered. If your charity should register with the Charity Commission (“the CC”) but has not done so the charity’s entitlement to Gift Aid may be in jeopardy. You may also lose out on other tax advantages offered to charities.
2 Entitlement to Gift Aid as a Charity
The rules as to the requirements for a Charity to qualify as a Charity for Gift Aid have recently changed as result of the Finance Act 2010 Schedule 6. With effect from April 2010 a new definition for tax purposes of charity has been introduced. The new provision says that a Charity must:-
1. be established for charitable purposes only, and
2. meet the jurisdiction condition, and
3. meet the registration condition, and
4. meet the management condition.
This guide will focus primarily on the registration condition (3) but it is useful to explain a little of the other conditions (1) (2) and (4) also.
2.1 Charitable purposes
Condition (1) requiring exclusively charitable purposes is not new and means that the organisation must be established for one or more of the purposes set out in section 3 of the Charities Act 2011 now as being charitable. These purposes include numerous categories ranging from the long standing categories of relief of poverty and advancing education and religion to the newer ones such as the advancement of citizenship or community development, amateur sport and environmental protection. All of these will be charitable but it has to be remembered always that, no matter what the purposes, the Charity must also satisfy the public benefit requirement: See separate briefing note
2.2 Jurisdiction condition
Condition (2) “the jurisdiction requirement” means simply that the Charity must be subject to the control of the High Court in England and Wales, or the Court of Session in Scotland or the High Court in Northern Ireland. In general, charities situated in England or Wales will be subject to the control of the High Court in England and Wales.
2.3 Management condition
Condition (4) “the management condition” is a new requirement and means that those who are managers of the Charity must be “fit and proper persons to be managers” of the Charity. There is detailed guidance in HMRC’s website as to what they regard as a “fit and proper person”. HMRC say “HMRC assumes that all people appointed by charities are fit and proper persons unless they hold information to show otherwise. Provided charities take appropriate steps on appointing personnel then they may assume that they meet the management condition at all times unless, exceptionally, they are challenged by HMRC”.
HMRC go on to indicate factors which may lead to HMRC deciding that a manager is not a fit and proper person including individuals:-
• with a history of tax fraud, or
• with a history of other fraudulent behaviour, or
• known by HMRC to be involved in attacks against or abuse of tax repayment systems, or
• who are barred from acting as a charity trustee by the CC or who are disqualified from acting as a director of a company.
Even if an individual is regarded by HMRC as not being a fit and proper person the Charity will not necessarily lose tax relief if the manager concerned has no ability to influence the charitable purposes of the Charity or the application of its funds or for other reasons it is just and reasonable to treat the Charity as having met the management condition during the particular manager’s period of office.
It does appear that it will be fairly rare for HMRC to treat the management condition as not complied with.
As to who is to be classed as a “manager” the term is defined as “the persons having the general control and management” of the charity. It includes the trustees and directors of charitable companies and “any other persons having general control and management over the running of the charity or the application of it’s assets.” It could include the Treasurer and Secretary and other members of any management committee who are not actually trustees or directors. In larger charities it could include an employee, such as the Chief Executive, who is able to determine how a significant proportion of the charity’s funds are expended.
2.4 Registration condition
Turning now to Condition (3) “the registration condition” above, the effect is that if the law requires the Charity to be registered with the CC or with the equivalent body in Scotland or Northern Ireland then it must have been registered with them. If it has not been so registered then for the purposes of gift aid it may not be treated as a charity. This requirement will be extended with effect from the beginning of April 2012 (the necessary legislation is going through Parliament now) to other taxes including income tax generally, inheritance tax , capital gains tax, stamp duty, corporation tax and value added tax.
It is therefore important that any charity in England and Wales claiming gift aid should be registered urgently with the CC if it should be registered and has not been. If it fails to do so HMRC would be in a position to refuse gift aid repayments of tax.
3 When should a charity register with the Charity Commission?
This question is important in itself, since charities will want to comply with the law in any event, but it is also critical to decide whether a charity will qualify for gift aid now and it will be important in relation to all the other taxes from April 2012 (see section 5 below). The basic rule under what is now Section 30 of the Charities Act 2011 is that a Charity with an income of more than £5,000 in a year must be registered with the CC. However, the sudden introduction of this basic rule as a universal one would have caused a flood of applications for registration all at once, which the CC would not have been able to cope with and so, the requirement in relation to some charities has been phased in so that in the case of some types of charities larger charities have been due to register before smaller ones. Prior to January 2009 there were many charities known as “excepted charities” which were not required to register with the CC because they were under the umbrella of an associated body. There are broadly three groups of charities which may now have “excepted” status and these are:-
(i) Churches which are members of or associated with a denomination listed in the Appendix
to this guide ;
(ii) Armed Services Charities for promotion of the efficiency of the Armed Services and;
(iii) Scout and Guide groups
These groups of charities are only obliged to register with the Charity Commission if their income in a year exceeds £100,000. So, if a charity within any of these groups has an income in excess of £100,000 it is not excepted and must register with the Charity Commission.
The excepted status is due to end completely at the end of September 2012 but the matter is to be reviewed by the Charity Commission during 2012 and so it will be necessary to keep an eye on the Charity Commission website to know whether the excepted status will continue and to which charities it will apply.
Charities which are not within any of these groups and are not exempt (about which see below) must register with the Charity Commission if their income in a year is in excess of £5,000.
If an excepted charity receives exceptional income such as a legacy which puts its income over the £100,000 limit the Charity Commission may on application to them issue a determination that the charity may retain its excepted status if the charity’s income will continue to be materially below the threshold apart from the exceptional legacy.
4 Exempt Charities
Exempt charities are quite distinct from “excepted charities”. Exempt charities are outside the jurisdiction of the Charity Commission altogether and cannot be registered with them. This is because they are subject to principal regulators appointed by the government. They include national museums and galleries, most universities, academy proprietors, foundation schools, sixth form colleges and the Royal Botanic Gardens at Kew.
5 What if a charity is not liable to register with the CC and is claiming Gift Aid repayments or other reliefs?
If a charity is not obliged to register with the CC because it is excepted and has an income of less than £100,000 or is not excepted but has an income of less than £5,000 then in order to be recognised by HMRC for gift aid repayments and other tax reliefs it must apply to HMRC for recognition using form ChA1. This form can be downloaded from the HMRC’s website Charities section: http://www.hmrc.gov.uk/charities/cha1.pdf. If the charity is not required to be registered with the CC but is already registered with HMRC for Gift Aid, they will not need to complete ChA1. However, if any of the ‘officials’ or bank account changes, they would then need to complete ChV1 (Variations form): http://www.hmrc.gov.uk/charities/chv1.pdf.
6 Other tax advantages
There are a large number of tax reliefs that are available to charities and those who give to charities. These are covered by the new law which will come into effect in April 2012:
6.1 Income tax
This affects gifts to charity under gift aid, including repayment of basic rate tax to the charity, and repayment of any higher and additional rate tax to the donor; donations under the Payroll Giving Scheme and donor reliefs for gifts of qualifying shares, securities and property to the charity.
6.2 Capital gains tax
It will affect donor exemption for gifts of any asset chargeable to capital gains tax to the charity.
6.3 Corporation tax
This would affect qualifying charitable donations made by a company and corporation tax exemption for gifts of assets chargeable to corporation tax to the charity.
6.4 Inheritance tax
Gifts during a church’s lifetime and gifts made by a person on their death are exempt from inheritance tax so a charity must register if it is obliged to do so in order to achieve the exemption.
This includes the new reduced rate of inheritance tax applying to estates where 10% or more of the ‘net estate’ is left to ‘charity’.
6.5 Stamp Duty Taxes
Charities would lose their exemption from stamp duty on purchase of a property.
7 The Registered Place of Worship exception
Some churches may have refrained from registration with the CC because of one particular exception which provides that church premises registered with the appropriate local authority as a Place of Worship need not register with the CC. This exception is commonly not fully understood and is thought of as much wider than it actually is. It applies only to the Place of Worship itself. It does not apply to the charitable funds held in connection with the Place of Worship. Thus if the church has an income in excess of £5,000 in a year and further is not associated with any of the umbrella bodies listed in the Appendix below, it should register with the CC even if the building is also registered with the local authority as a Place of Worship.
8 Registration with the Charity Commission
A charity which ought to be registered with the CC will need to formally establish a legal structure which can be registered. An appropriate legal structure can take one of three forms (shortly to become four with the introduction of the Charitable Incorporated Organisation).
8.1 Unincorporated Association
Firstly, there is the unincorporated association which is established by a written constitution and is adopted by the founding members. It would contain rules for the Objects or purposes of the charity and would make provision for governances, administrative powers, trustee remuneration (if required), meetings of the governing body and members, dissolution and amendment of the rules. This form of legal structure is suitable for an organisation whose chief needs are to have a mechanism for decision making and a membership as well as a group who lead. It is not so suitable for holding property such as the office premises nor for undertaking significant liabilities. The trustees will have personal liability for the charity’s debts.
The second form of legal structure which is available is a trust which is established by trustees executing a deed. The deed would set out objects in the same way as a constitution and it would provide for the appointment and retirement of trustees, administrative powers and so forth, but would not commonly provide for a membership and meetings of members as the concept of membership does not sit easily in a trust of this kind. The trustees normally have responsibility for all the assets of the trust and so it is not appropriate for their authority to be shared or even overridden by other parties (i.e. the members of the charity), in relation to the assets for which they are responsible. Again the trustees have personal liability for the debts of the charity.
8.3 Charitable Company
The third form of legal structure available is the charitable company limited by guarantee which would have articles of association. These would provide for the same matters as a constitution but the main advantage would be that the members of the company and the directors (having the same responsibility as trustees in a trust) would have the protection of limited liability as far as the claims of creditors of the company are concerned. This form of structure not only has provision for membership and decision making in the same way as a constitution but also can own property in its own name and protects the directors and members where significant liabilities are undertaken by the charity such as building works or the employment of staff.
8.4 Charitable Incorporated Organisation
The fourth legal structure is already operating in Scotland with the hope of introducing in England and Wales in May 2012. This is the charitable incorporated organisation or CIO for short, which has the limited liability advantage of the company mentioned above but will be registered only with the CC and, unlike a company will not be registered with the Registrar of Companies so it will not be subject to company legislation.
8.5 What if your charity already has a legal structure?
It may well be that your charity already has some form of constitution which could well be suitable for registration with the CC but it would be advisable to make sure that it contains all the provisions which should be covered before applying.
Your charity may also already have a Trust Deed which could be registered with the CC, but again it would be advisable to check first that it contains all that is needed from a legal and CC point of view. It is often the case, for example, that an older form of trust deed relates only to the buildings and so it is necessary to establish a trust deed or charitable company for the charity’s other funds and other assets. We would be happy to advise further on such matters.
9 Model Documents
The CC has model documents for these structures on their website. Some of the umbrella bodies referred to in the Appendix such as the Baptist Union and the Fellowship of Independent Evangelical Churches have model documents for some of these structures which they make available. The Church of England, the Church in Wales, the Methodist Conference and the United Reformed Church have statutory forms of model documents for registration purposes and the other umbrella bodies shown in the Appendix may have model documents which they recommend for use for registration purposes.
Although this article is not intended to provide any detailed guidance on the formation and registration with the Charity Commission of charities we will be happy to give further help on this upon request. Our main concern in this guide is to alert charities so that they do not miss out on gift aid and other tax reliefs for want of registration with the CC.
Appendix – List of Excepted Church Bodies
Church in Wales
Church of England
Evangelical Fellowship of Congregational Churches
Fellowship of Independent Evangelical Churches
General Assembly of Unitarian and Free Christian Churches
Grace Baptist Trust Corporation
Presbyterian Church in Wales (Calvinistic Methodist Church)
Religious Society of Friends
Strict and Particular Baptists
Union of Welsh Independents
United Reformed Church
We are able to offer specialist advice
Call 01323 720142 now for a consultation with a specialist Solicitor or a Lawyer at Lawson Lewis Blakers.
Lucy Robinson (Eastbourne) (01323) 720142 - E-mail