What help?

Scottish charity law took a revolutionary step in 2005 with the passing of the Charities and Trustee Investment (Scotland) Act. The Office of the Scottish Charity Regulator (OSCR) assumed full operations in 2006. 2007 brought the results of the pilot of the rolling review. In 2008, the new reorganisation started to become more regularly used. Last year, 2009, saw a key initial step towards the Scottish Charitable Incorporated Organisation. 2010 has also been a busy year of developments in charity law and regulation. The following are just a few of these.

The ECJ and Finance Act 2010

Ordinarily, Finance Bills tinker with charity law (sometimes with unintended consequences: the substantial donor rules) rather than make fundamental conceptual changes. The Finance Act 2010 appeared to be different, introducing a new definition of "charity". The reason for the change was not a proactive review of the definition as it applies across the UK (which has caused genuine difficulties for some Scottish charities: see Journal, August 2007, 43). Rather, changes were prompted by the European Court of Justice considering the application of tax relief on cross-border European charitable transfers (Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften (ECJ, C-386/04) and Hein Persche v Finanzamt Lüdenscheid (ECJ, C-318/07)).

The effect of FA2010 is that overseas (broadly EU) charities can qualify for UK tax reliefs. In order to accommodate this new found generosity a fresh definition of charity was required, the underpinning policy being that HM Revenue & Customs needed comfort that overseas organisations were similar in nature to a UK-based charity.

The new test has four key elements: (1) the organisation must satisfy the definition of "charitable" under English law (i.e. the Charities Act 2006, which as far as fiscal matters are concerned, has applied to Scotland from the outset); (2) the managers of the charity are fit and proper ("the management condition"); (3) a registration condition, i.e. that the body has complied with any requirement to register with a charity regulator in its home nation; and, less significantly for present purposes, (4) the requirement to be governed by a court.

The requirement to meet the 2006 Act definition of "charitable" is not new. Indeed, OSCR and HMRC issued guidance on dealing with the divergence between English and Scots law in this area, a divergence which in some places is cosmetic, whereas in others is potentially more fundamental. The management condition has not been welcomed by the sector, as it places an unnecessary burden on charities. The registration condition means in most cases that a charity must be registered with the charity regulator in its home nation (e.g. registration with OSCR). HMRC's guidance indicates that those refused registration (and presumably removed from a register) could still qualify for tax relief. The extremely rare body that is not OSCR registered but receives tax reliefs, would still seem possible.

Public Services Reform Act

The Public Services Reform (Scotland) Act 2010 made a number of mostly technical but, on the whole, helpful amendments to the 2005 Act. One of the changes was to give OSCR sensible flexibility in being able to vary directions.

The reorganisation provisions, which work well in practice, but are in need of significant legislative improvement, are extended by the 2010 Act. These provisions can now be used to reorganise a "restricted fund". Helpfully, the sometimes thorny legal and accounting issue of what is such a fund is given a definition: "property (including money) given to a charity for a specific purpose and in respect of which conditions have been imposed as to its use" (2005 Act, new s 43D).

An apparently progressive provision on giving OSCR power to appoint charity trustees perhaps fell short of what could have been hoped for. On the face of it, the new power would transfer jurisdiction for appointing trustees to "lapsed" charitable trusts to OSCR. However, the new power can only be used on the application of a majority of the trustees or, if there are only two trustees, either of them. The update is welcome but will not address the issue of there being no trustees remaining in office. The inclusion of the new power, and its limits, highlight the need to properly assume and document the resignation of trustees - especially where the practice is to record changes in minutes of meetings rather than in, for example, deeds of assumption and minutes of resignation.

The 2010 Act provided more changes to charity law than initially expected. The bill, as introduced, focused on making the long-awaited amendment to remove the unintended consequences of the remuneration rules. The new rules underline that trustees can effect trustee indemnity insurance so long as, broadly, the insurance does not try to cover criminal actions, contravention of regulatory compliance or breaches of charity law.

Private legislation

2010 also saw the relatively rare promotion of private legislation. Even more unusually, two bills dealt with the reorganisation of charities established by Act of Parliament (a not wholly uncommon approach to affording private foundations a particular status in the 19th and early 20th centuries). The Ure Elder Fund Transfer and Dissolution Act 2010 and the William Simpson's Home (Transfer of Property etc) (Scotland) Act 2010 are examples of methods to modernise and rejuvenate long-established charities. However, they also underline the need for a comprehensive and clear update to the reorganisation provisions in the 2005 Act and connected legislation.

OSCR guidance

OSCR has issued a number of pieces of guidance and reports this year. Only the briefest summary of the 2010 publications is possible here.

OSCR has reported on the high-profile case of the Sick Kids Friends Foundation. While OSCR found no misconduct, certain recommendations were made, including the terms of the constitution and the governance structure. Around the same time, OSCR issued a new policy on the undertaking of enquiries and investigations. As OSCR seeks to be a proportionate regulator, if issues arise that could result in a "complaint", trustees should move to engage constructively with OSCR to navigate this sensitive area.

OSCR's annual report summarises the year for OSCR. It also importantly sets out recommendations to Scottish Ministers. These included:

• All uses of the terms "charity" or "charitable" in pre-2005 constitutions to be interpreted to include the meaning of these terms in both the 2005 Act as well as tax law.
• OSCR should be given the power to make positive directions requiring a charity's trustees to undertake specific actions in respect of the charity to protect charitable assets or address misconduct.
• The charity test is expanded to require a charity to have some connection with Scotland.
• Review of the reorganisation provisions to improve the underlying legislation.
• A commitment from Government to a fuller review of the 2005 Act by 2015.

The future

Scottish charity law was underdeveloped until 2005. In the period since then a growing body of practice has evolved from the 2005 revolution. The next "big thing" in 2011 will hopefully be the availability of the Scottish Charitable Incorporated Organisation. It is unlikely to be the only development next year.

Introducing SCIOs

Following a public consultation, the Scottish Government recently published draft regulations, the Scottish Charitable Incorporated Organisations (General) Regulations 2011 and the Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011 (see www.scotland. gov.uk/Topics/People/15300/ charities/SCIOs), and a related discussion paper.

Scottish Charitable Incorporated Organisations (“SCIOs”) were introduced by chapter 7 of the Charities and Trustee Investment Scotland Act 2005. The draft regulations are intended to provide more detailed requirements to supplement the framework in chapter 7, with which they should be read. It is anticipated that chapter 7 will come into force at the same time as the regulations.

What are SCIOs?

A SCIO is an optional legal form which can only be used by charities in Scotland. It is a corporate body, but is not a company. The purpose is to help charities enjoy the benefits of incorporation, including limited liability, without imposing a high burden of regulatory compliance. Having its own legal personality, independent of its trustees or members, a SCIO will be able to undertake activities in its own name, such as taking a lease of property, as opposed to in the names of its trustees.

SCIOs will be regulated by OSCR only, unlike charitable companies which are also regulated by Companies House. SCIOs will be subject to the normal regulatory regime and will have the same public accountability obligations as any other charity, including the preparation and public filing of annual accounts and the trustees’ report.

The draft regulations

The General Regulations deal with a range of general operational matters: the minimum requirements of a SCIO’s constitution (reg 3), a register of charity trustees and members of the SCIO (regs 4 and 6), and obligations on SCIOs to publicise their name and status (reg 10).

SCIOs require to have at least two members and three charity trustees at all times (2005 Act, ss 49(2)(c) and 50(2)(b)). A distinct feature is that their members will be subject to some of the same statutory duties which are applicable to charity trustees (members of charitable companies do not have comparable duties).

Members can make some decisions relating to the SCIO more easily than their counterparts in a charitable company. For example, two-thirds of members of a SCIO can resolve to amend its constitution, whereas members of a charitable company must pass a special resolution, and obtain a 75% majority, to take the same action.

The Removal and Dissolution Regulations provide for the dissolution of both solvent and insolvent SCIOs. In the former case, a two-thirds majority of members is required to approve the dissolution (reg 3(3)(a)). With insolvent SCIOs, either the charity trustees or a creditor may apply to OSCR to have the SCIO dissolved (regs 4 and 6), following which OSCR will refer the application to the Accountant in Bankruptcy (“AiB”), who may award sequestration (reg 7). The AiB is to treat any such award, and will have the same powers and duties, as if it were an award of sequestration in relation to a body corporate following a debtor application.

On completion of the sequestration, the AiB has the power to transfer any surplus assets to another charity (reg 7(4)).

For charities which do not require or wish to be charitable companies, SCIOs offer a practical alternative legal form. Subject to any further substantial amendment, and subject to finding parliamentary time prior to the upcoming elections, the regulations are expected to be finalised shortly and to come into force in April 2011.

Regulator’s eye view

The Office of the Scottish Charity Regulator (OSCR) aims to encourage a flourishing charity sector in which the public have trust and confidence. Through effective regulation, OSCR can ensure that “charity” continues to be a meaningful term in Scotland, all the more important at a time when the relationship between the state, charities and individual citizens is likely to change significantly over the coming years.

Since taking up our powers in 2006, OSCR has systematically ensured that every organisation which successfully applies to become a charity has solely charitable aims and provides public benefit. We also monitor the information that more than 23,000 charities must supply to OSCR every year, including doing preliminary checks on their accounts. Where charities fail to supply key information or, very rarely, where serious wrongdoing is suspected, OSCR investigates and, if necessary, takes further action.

Enabling and effective regulation is not only about routine monitoring – the long term aim is also to embed good practice in charities as a matter of routine, making our work, and that of the charities, far more effective. Indeed, our view is that the kind of information we require is vital for charities themselves: if those running charities don’t have this data, how can they verify successes and spot potential problems?

In future, OSCR aims to introduce online reporting, which should streamline reporting for charities. This will also make charities’ activities more visible to the public. Our website will begin to highlight those charities that fail to submit annual information on time – one of the several signs that might indicate whether a charity is being run responsibly and effectively.

Support and guidance

Despite being a relatively new regulator, we have made significant progress in understanding, and implementing, the kind of support that charities require. We provide guidance to charities and charity trustees to help them with their duties, including their governance responsibilities and their accounts, and we have built up a substantial body of casework so that we can now provide practical illustrations.

Overall, it is pleasing to report that compliance is improving, and we are building on this experience by developing an outreach programme. This will allow us to work with charity umbrella groups and professional advisers to maximise the support and advice available to charities. We have also identified areas where governance failings can cause practical problems and we are aiming to provide new guidance on these areas, such as on how to ensure charity trustees can fulfil their duty to act independently.

In doing all this, we have tested out the current limits of charity law and regulations. As part of our duty to advise Scottish Ministers, we have already made a number of recommendations for improving the legal framework. As a result, amendments to the Charities and Trustee Investment (Scotland) Act 2005, introduced this year, clarified that charities may provide all their trustees with indemnity insurance, and introduced greater flexibility, allowing OSCR to vary or revoke directions to charities.

In our 2009-10 Annual Report we have also recommended a review of the 2005 Act: generally, to re-evaluate it against its policy objectives; and specifically, to make the reorganisation provisions easier to interpret and apply. These proposals are in addition to earlier outstanding recommendations that the charity test requires the organisation to have some connection with Scotland, and asking that organisations making public collections be required to state positively whether or not they are a charity.

Wider developments

Several developments are also under way that Scottish charities and their advisers should be fully aware of and engage with to make sure that all views are taken into account at the design and development stage, and to be clear about the new opportunities and new requirements being introduced.

One of these developments is the current Scottish Government consultation regarding the planned introduction of Scottish Charitable Incorporated Organisations, an alternative legal form that is expected to be less onerous for charities in terms of regulation than being a company, while giving charity trustees benefits such as limited liability. As regulator, our view is that the new legal form must be workable and credible. We encourage charities and their advisers to contribute their views on what is needed in practice to ensure we achieve this.

Also new is the Equality Act, which came into force in October. This should prompt all charities to re-examine their purposes and activities in the light of new, often stricter, requirements to prevent discrimination. The Act not only affects them as charitable organisations, but also as employers and service providers, and they must adapt to the new standards or face potential legal challenges.

Today’s financial challenges and complex political environment are requiring us all to be flexible and innovative. Within OSCR we must draw on all our evolving experience to offer a far-sighted vision that will continue to deliver effective regulation and, in doing so, ensure a flourishing charity sector.