Off on the right foot

The much anticipated report on the pilot of the rolling review of charitable status from the Office of the Scottish Charity Regulator (OSCR) was published in July. The report is important reading for charities as it provides key lessons for the rolling review and clearer guidance on core concepts under the Charities and Trustee Investment (Scotland) Act 2005. The report also reveals an issue which could affect many charities established prior to the 2005 Act: a “constitutional crisis” on which OSCR has now produced guidance.

Until the passing of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 there was little that could be coherently described as Scottish charity law. The 2005 Act brought legislation, but left the detail to OSCR. The report provides a much clearer image of what Scottish charity law is.

The test of “the test”

The report is the culmination of an exercise to examine the methodology and application of “the charity test” (s 7 of the 2005 Act). The enlightened idea of a practical and transparent approach to the pilot must be applauded as an example of good regulatory practice.

The pilot involved 16 charities to provide real time examples of charities to which the charity test could be applied. The test has two elements: (1) “charitable purposes”, and (2) “public benefit”. No purpose is presumed to satisfy the public benefit test. Even if there is public benefit, no condition (such as a charge) must unduly restrict public access to the benefit.

High profile cases

The review of an independent school secured many of the headlines. Unsurprisingly, the charging of fees and academic ability selection were considered by OSCR as restrictive conditions. OSCR confirmed that in this case the conditions were not unduly restrictive. Helpfully, OSCR has produced guidance setting out its methodology in examining conditions in general. Fees, for example, can be justifiable: OSCR states that “the profile of beneficiaries of any charity does not need to reflect the profile of the population as a whole, or the profile of the local population”, and “where a fee is charged… we expect some form of facilitated access” (such as policies to widen access). It is however crucial to recognise that the passing of the test by one charity in a sector cannot be seen as the whole sector satisfying the test. Public benefit and conditions will be considered case by case.

The impact of ministerial influence in a further education college was also publicised. This is an area where the 2005 Act and other policy conflict. It is considered appropriate to have ministerial influence in the application of public funds in further education. However, such a policy conflicts with the requirement of a charity to be free of ministerial control (s 7(4) (b)). OSCR made a direction that the college must take steps to ensure that s 7(4) is satisfied or seek the disapplication of s 7(4) to it. The college has two years to do this.

There is a need for a policy decision on whether ministerial influence is relinquished where charitable bodies are concerned. Education is not the only sector affected by this issue. There are other areas where legislation could impact (perhaps unintentionally) on charitable status.

A “constitutional crisis”?

Public benefit has perhaps been the focus of attention since OSCR was established. Unfortunately, less emphasis has been placed on constitutions (trust deeds, incorporation documents etc) and their purposes. Purposes are either charitable or not in terms of the 2005 Act. This can cause a problem, and did in the pilot review, as pre-2005 Act charities’ constitutions will not have had the 2005 Act formulation of “charitable” in contemplation. As the previous gateway to charitable status was HM Revenue & Customs, constitutions often referred to tax law. OSCR concluded in the review case in question that a reference to tax law is unacceptable. Purposes must be reviewed and amended if a tax law definition applies. The effect of this is that many pre-2005 Act constitutions may fail the charity test. There is a potential “constitutional crisis”. OSCR has now produced guidance on this, indicating that action will need to be taken. OSCR hopes that the process should be straightforward, but this may not be the case for every charity.

Lessons of the pilot review

The report is essential reading. There is more to it than can be summarised here. OSCR has, in carrying out the review and publication of the report, shown itself to be proportionate and transparent. The charity sector must also be grateful to those charities that took part. OSCR has issued lessons from the experience. These include keeping constitutions under review in terms consistent with the 2005 Act, and annual reports should demonstrate the activities of the charity providing public benefit. The pilot is welcomed; the full rolling review begins.

Alan Eccles, Private Client Department, Maclay Murray & Spens LLP