Setting up and Registering as a Charity Business Information Factsheet BIF469 May 2016 Introduction A charity is a non-profit organisation that is established for charitable, benevolent or philanthropic purposes. An organisation cannot describe itself as a charity unless it is registered with a charity regulator (except where it has an annual income of less than 5,000). A registered charity must meet specific legal requirements and pass an inspection and review by the relevant regulator. The UK charity regulators are the Charity Commission for England and Wales, the Charity Commission for Northern Ireland, and the Office of the Scottish Charity Regulator (OSCR). Charity registration is governed by the Charities Act 2011 and the Charities (Protection and Social Investment) Act 2016 in England and Wales, by the Charities and Trustee Investment (Scotland) Act 2005 in Scotland, and by the Charities Act (Northern Ireland) 2008 and the Charities (Accounts and Reports) Regulations (Northern Ireland) 2015 in Northern Ireland (known together as the Regulations). Registered charities can benefit from reduced business rates, tax reliefs, and certain types of grants and funding. However, charities are required to operate within specific regulations and restrictions, and setting up as a charity may not always be the best option for an organisation to take. Alternatives include setting up as a community interest company (CIC) or a community amateur sports club (CASC), both of which can benefit from similar reliefs under less restrictive regulations. This factsheet explains how to register and manage a charity. It outlines how a charity should define its purpose and legal structure, and sets out the requirements for governance documents and the appointment of trustees. What is the charity's purpose? In order to be registered as a charity, an organisation must operate for charitable purposes and for public benefit. The Regulations list 13 'descriptions of purpose', which set out how an organisation may be recognised as a charity. The 13 descriptions of purpose are: 1. The prevention or relief of poverty. 2. The advancement of education. 3. The advancement of religion. 4. The advancement of health or the saving of lives. 5. The advancement of citizenship or community development. 6. The advancement of the arts, culture, heritage or science. BIF469 Setting up and Registering as a Charity Page 1 of 7
7. The advancement of amateur sport. 8. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity. 9. The advancement of environmental protection or improvement. 10. The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage. 11. The advancement of animal welfare. 12. The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services. 13. Any other purposes currently recognised as charitable, such as recreational and other trusts (excluding registered sports clubs). The organisation's charitable purpose must be for public benefit. This means it must benefit the public in general, or a sufficient proportion of the public in general, and the benefits must outweigh any detriment. The charity test and purpose statement In order to be registered as a charity, an organisation must demonstrate to its regulator that it operates exclusively for charitable purposes, or pass the 'charity test'. Any organisation that operates for any non-charitable purpose will fail the charity test. Similarly, any organisation that is a political party, or allows government ministers to control its activities, will fail the test. An organisation's charitable purpose must be set out in its governing document/constitution, in what is known as the 'objects' clause. The regulator will use the purpose statement supplied in the objects clause to determine whether or not the organisation can be registered as a charity. The statement will also be used by trustees, supporters and beneficiaries, so must make clear the organisation's aims, how they will be achieved, who will benefit, and where they will benefit. The purpose statement should include the following: What is the purpose of the organisation? Does it match one of the 13 descriptions of purpose? How will the organisation achieve its aims? For example, by raising awareness or by providing grants. Who will benefit from the organisation's actions? Provide demographics and other characteristics. Where will the benefits be felt? For example, a specific part of the UK, or abroad. In addition, if the purpose statement includes any particular terms (medical, jargon, etc) that might not be generally understood, they should be explained. BIF469 Setting up and Registering as a Charity Page 2 of 7
Legal structure of a charity The legal structure of a charity determines how it operates, including who will run it, who it can enter into contracts with, and how much liability trustees have. A charity's structure is defined in its governing document/constitution. It is important to choose the right structure for a charity to determine, for example, whether it will have a corporate structure or a wider membership. A charity with a corporate structure has the legal capacity to enter into commercial contracts in its own name, own land and property, and employ paid staff. A charity with an 'unincorporated' structure can't enter into contracts in its own name, and its trustees are personally liable for what it does. With wider membership, members can vote on important decisions. Without a wider membership, the trustees are responsible for making decisions. There are four main types of charity structure: Charitable incorporated organisation (CIO). There are two types of CIOs - association CIOs and foundation CIOs. An association CIO is typically a corporate body with a wider membership. A foundation CIO is a corporate body without a wider membership, where the only members are trustees. In Scotland, charities can take the structure of a Scottish Charitable Incorporated Organisation (SCIO). Charitable company (limited by guarantee). A corporate body with or without a wider membership. This is similar to a limited company, except it cannot be limited by shares, cannot distribute profits to members, and can only operate for its charitable purposes. Unincorporated association. Without a corporate structure, but with a wider membership. This structure is generally only suitable for organisations with relatively small assets. Trust. Without a corporate structure or a wider membership. Suitable for organisations that don't need to enter into contracts or employ staff. Organisations with this type of structure must submit a trust deed specifying money, land or other assets that the charity will start with. Governing documents A charity's governing document or constitution is the legal document that creates the charity and sets out how it operates. It is used by regulators to determine whether or not an organisation meets the requirements of a charity, by HM Revenue & Customs (HMRC) to determine whether an organisation can benefit from tax reliefs, and by trustees to explain how they should run the charity. Charity regulators provide model documents and templates for creating governing documents. It is important to choose the correct document for the type of structure the charity will operate under. In general, the governing document or constitution should contain the following information: The name of the charity. Its charitable purpose ('objects' clause). What powers it has to carry out its purpose, for example taking out loans. How many trustees it will have and how they will be appointed. BIF469 Setting up and Registering as a Charity Page 3 of 7
How meetings will be held and how votes will be made. Who can be a member where applicable for charities with wider memberships. How its financial requirements will be met, for example with regard to accounting. Rules regarding trustee benefits, for example from investments. Amendment provisions setting out how the governing document can be changed. Dissolution provisions setting out how the charity can be closed down. For a CIO, the governing document or constitution comes into effect once the charity is registered with the regulator. For other structures, the governing document or constitution comes into effect once it has been signed and dated by all trustees. In addition, a charitable company must register its articles of association with Companies House. Appointing trustees A charity's trustees (who may also be known as directors, governors, committee members or board members) are responsible for managing the charity and making decisions about its operation. They must make sure that the charity is well run and serves its purpose, so they require a range of relevant skills such as financial management or fundraising. They may also require specific knowledge of the purpose and aims of the charity. The charity's governing document must set out the number of trustees it will appoint. There is no set requirement for the number of trustees, but the Charity Commission for England and Wales recommends that a charity should have a minimum of three, with a good range of skills. In addition, the Charity Commission recommends that trustees should be unconnected and unrelated. Some trustees will have 'officer' roles, such as a chairman, who will arrange and chair meetings, or a treasurer, who will keep the accounts. However, although they may have specific tasks, these officers do not have any extra powers or responsibilities. All trustees have equal power and responsibility. All trustees are legally bound to follow the requirements of the charity's governing document or constitution and of relevant legislation, and to act responsibly and with reasonable care and skill in the best interests of the charity. Under the Charities (Protection and Social Investment) Act 2016, trustees in England and Wales have a general power to make social investments as long as they have taken advice and are satisfied that it is in the interests of their charity. Registering as a charity Once an organisation has determined its purpose, decided on a legal structure, drawn up its governing document and appointed its trustees, it can register as a charity. The registration process differs slightly in England and Wales, Scotland, and Northern Ireland: In England and Wales, organisations can apply to register as a charity via the Charity Commission for England and Wales using an online application form (www.gov.uk/ guidance/how-to-register-your-charity-cc21b). Supporting documents such as trustee declaration forms and proof of income can be uploaded as PDF files. BIF469 Setting up and Registering as a Charity Page 4 of 7
In Scotland, organisations must complete an application form, which can be downloaded from the OSCR website (www.oscr.org.uk/about-scottish-charities/becoming-a-charity/howto-apply), and submit it, with supporting documents, via post. In Northern Ireland, organisations must complete an expression of interest form before being invited to register as a charity. This can be completed online via the Charity Commission for Northern Ireland website (www.charitycommissionni.org.uk/start-up-acharity/). Although the requirements are slightly different for each regulator, in general, applications submitted to charity regulators must provide the following information: The charity's name and contact details. The charity's bank or building society account details. A copy of the charity's governing document. Details about how the charity's purpose will benefit the public. A list of trustees, with contact details and a signed declaration stating they are willing to act as trustees. A copy of the certificate of incorporation and memorandum of association if the charity is a company. Proof that the charity's annual income is over 5,000, unless it is set up as a CIO. Charities also need to register with HMRC to be recognised as a charity for tax relief. This can be done online. Go to www.gov.uk/charity-recognition-hmrc for more information. A charity with an annual income of less than 5,000 that is not set up as a CIO is not required to register with the regulator, but can still register with HMRC for tax relief. Managing a charity Managing a charity involves several specific requirements. In England and Wales, a charity with an annual income of over 10,000 is required to submit an annual return within ten months of the end of each financial year. Charities with lower annual incomes may also complete returns in order to keep their records up to date. In Scotland, all charities are required to submit an annual return within nine months of the end of each financial year. Annual returns are made publicly available to potential donors, beneficiaries and other interested parties. The annual return needs to include: The charity's contact details. Names and contact details of each trustee. Contact details will not be made publicly available. Start and end dates for the accounting period. Total income and expenditure. A summary of the charity's activities during the accounting period. BIF469 Setting up and Registering as a Charity Page 5 of 7
In addition, charities must submit a trustee's annual report (Supplementary Monitoring Return in Scotland) summarising the charity's work, its funding and its expenditure. However, charities with an annual income of less than 25,000 can submit a simplified trustee's annual report. The trustee's report must also contain a statement on public benefit, explaining what the charitable purposes were during the reporting period and how the charity has carried out those purposes. Charities with annual incomes of 10,000 or less must provide details of trustees in the relevant sections of the annual return form. The Charity Commission for Northern Ireland requires only registered charities to submit financial reports (www.charitycommissionni.org.uk/manage-your-charity/annual-reporting/). The responsibility for managing the charity and submitting returns and reports is jointly held by all trustees. In addition, all trustees are legally required to ensure that the charity's registered details are kept up to date. In England and Wales, the Charity Commission has the power under the Charities (Protection and Social Investment) Act 2016 to issue a statutory public warning to, or wind up, a charity where there is deemed to be mismanagement, misconduct or breach of trust or duty. The Commission can also automatically disqualify someone from becoming a trustee if they have any criminal convictions, including those for serious terrorism offences, money laundering, bribery or sexual offences, and can also automatically disqualify senior managers, such as the chief executive or chief finance officer, if necessary. Hints and tips A registered charity must operate for charitable purposes and for the public benefit. Before setting up, registered charity lists should be checked for established charities covering similar aims and purposes. An organisation must be set up under a formal legal structure before it can be registered as a charity. The correct structure for the charity should be chosen based on how it will operate. If an organisation's annual income is less than 5,000 and it is not a CIO, it is not required to register with a charity regulator. Further information To access hundreds of practical factsheets, market reports and small business guides, go to: Website: www.scavenger.net BIF 66 A Guide to Setting up a Co-operative Business BIF 167 A Guide to Setting up a Private Company Limited by Shares BIF 349 An Introduction to Legal Structures for 'Not-for-Profit' Organisations BIF 445 A Guide to Setting Up a Community Interest Company BIF 501 An Introduction to Community Amateur Sports Clubs (CASCs) Legal publications Charities (Protection and Social Investment) Act 2016 BIF469 Setting up and Registering as a Charity Page 6 of 7
Website: www.legislation.gov.uk/ukpga/2016/4/contents/enacted/data.htm Useful contacts Charity Commission for England and Wales Website: www.gov.uk/government/organisations/charity-commission Office of the Scottish Charity Regulator (OSCR) Website: www.oscr.org.uk Charity Commission for Northern Ireland Website: www.charitycommissionni.org.uk HMRC - charities and tax guidance Website: www.gov.uk/charities-and-tax/overview Small Charities Coalition Website: www.smallcharities.org.uk DISCLAIMER While all reasonable efforts have been made, the publisher makes no warranties that this information is accurate and up-to-date and will not be responsible for any errors or omissions in the information nor any consequences of any errors or omissions. Professional advice should be sought where appropriate. Cobweb Information Ltd, Unit 9 Bankside, The Watermark, Gateshead, NE11 9SY. Tel: 0191 461 8000 Website: www.cobwebinfo.com BIF469 Setting up and Registering as a Charity Page 7 of 7