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The Charities Act 2006 – some key issues for arts charities

February 2007 - Media, Entertainment & Sport. Legal Developments by Harbottle & Lewis LLP.

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The Charities Act 2006 received Royal Assent on Wednesday 8 November. The Act has many important provisions and makes welcome changes, especially of a technical nature. There are a number of areas where its provisions are of particular interest to arts charities, and these are outlined below. Although making welcome changes, the Act does fail to address some important issues at large in the sector and in that respect it is a missed opportunity.

Charitable purposes

Historically, there are four main charitable heads: the alleviation of poverty, the advancement of religion and of education, and the promotion of other purposes beneficial to the community. Typically, arts charities have depended on promotion of education as a charitable purpose and sometimes the arts themselves as a purpose beneficial to the community.

The Act introduces a new list of charitable purposes to codify the existing law. While the list is not in itself an exclusive definition of charitable purposes, it is exclusive in the sense that a purpose not on the list cannot be charitable unless it is recognised as such by immediately pre-existing law, or by analogy to (or within the spirit of) the list or that law, or by analogy to (or within the spirit of) such an analogy.

The list includes a purpose of ‘the advancement of the arts, culture, heritage or science'. As a result, the two most likely charitable objects for an arts charity will remain advancement of education and advancement of the arts, confirming the current position.

Public benefit

Public benefit is perhaps the most controversial issue in the Act. To be charitable an organisation must:

a) have exclusively charitable purposes (above); and

b) be for the benefit of the public, so that any private benefit is incidental.

Historically, in respect of the first three heads of charity - poverty, education and religion - benefit to the public has been presumed. The Act, however, abolishes this presumption so that charities will potentially have to demonstrate public benefit in all cases.

The extent to which this will make any difference is as yet unclear: since the presumption has always been open to challenge through the Charity Commission in appropriate cases. The question has been perhaps most earnestly debated in the context of certain charities that charge, most notably independent schools and private hospitals. Since these organisations charge fees, they may exclude poorer people, which raises the question about whether they should have policies permitting wider access, through, perhaps, bursary schemes and local community access strategies. More confusing still is that interested parties cannot agree about what the law requires in respect of wider access. Arts charities often charge, and that may involve them in this debate.

The Charity Commission has issued guidance entitled ‘Public benefit - the legal principles'. Here the Commission states that it will consider the following factors where high fees are charged for services or facilities:

  • Does the level at which fees are set have the effect of preventing or deterring the less well-off from accessing the services or facilities?
  • If so, can it be shown that the less well-off are not wholly excluded from any possible benefits, direct or indirect?
  • Whether, and how, the less well-off may otherwise access the services, for instance through the existence of accessible insurance or other benefit schemes or the provision of wider access to charitable facilities or services.
  • The nature and extent of the benefit provided and of any indirect public benefit.

The Act obliges the Commission to consult as it considers appropriate and issue guidance to promote awareness and understanding of the public benefit requirement. Trustees will have to have regard to the guidance when exercising any powers or duties to which the guidance is relevant. Lord Phillips, the Liberal Democrat peer, sought, but failed, to include an amendment to the Bill proposing that the Commission must consider the effect on public benefit of the charging policy of any charity in its consultations.

This issue is, of course, of direct relevance to arts charities that charge for facilities or attendance at productions or exhibitions. It is quite possible that arts charities with educational purposes may be required to demonstrate public benefit when they were not required to do so before. Equally, arts charities that charge prices that might be said to be capable of excluding poorer people may find that they have to devise wider access schemes for individuals and local communities in a structured way.

The next stage in development of the public benefit debate will probably be a consultation by the Commission followed by new guidance. At the time of writing the Commission indicated that it would launch a three-month consultation in January 2007 about the principles of public benefit, ways in which charities might demonstrate their public benefit, and how this might be assessed. Arts charities should take advantage of any consultation process to make their voices heard once it commences.

Other useful provisions

Charity Tribunal

A new Charity Tribunal is to be established which will have jurisdiction to hear certain appeals and applications in respect of decisions, orders or directions of the Commission. In the right circumstances, this may provide arts charities with a useful tool in the case of any disputes with the Commission.

Power to determine membership of charity

Companies limited by guarantee (CLGs) (and soon the Charitable Incorporated Organisation (CIO) (below)) have a dual structure of members and directors/trustees. It can often happen that a company, because of numbers or neglect, does not keep up with who its members are. The Act gives the Commission the power to determine that matter, a function previously reserved for the court.

Restrictions on mortgaging

This amends s38 of the Charities Act 1993 which arguably meant that while a mortgage on land to secure a loan can be permitted after obtaining proper advice in accordance with a specified procedure, a mortgage on land for a conditional grant must be cleared through the Commission. The advice procedure will now apply to both loans and grants and also to other proposed obligations.

Charitable Incorporated Organisations

The CIO is a new incorporated charitable vehicle that is under the exclusive regulation of the Commission and unlike CLGs does not have the dual regulation from the Commission and Companies House. There are extensive conversion provisions and a set of draft regulations. It is not yet clear if the CIO will be a substitute for, or an alternative to, the CLG, but the situation will be reviewed in five years. The success of the CIO will probably depend very much on the resources of the Commission properly to regulate it.

One advantage of the CIO will possibly be that (unlike the CLG) it may not be subject to the new series of directors' duties proposed by ss172 to 181 of the new Companies Act 2006, including the duty to promote the success of the company in s173 of that Act.

Remuneration of trustees providing services to charity

The 2006 Act includes a power for charity trustees to be paid for services they provide to the charity if certain conditions are met. As a result, trustees will be able to rely on this statutory power even if there is no analogous power in their constitution. If the constitution confers a wider power, the trustees may rely on that.

Power of commissioners to relieve trustees from liability for breach of trust or duty

To date, the Commission has had no power to relieve trustees from liability for breach of trust or duty, and this has caused frustration, especially where trustees have been open with the Commission and it has not been able to provide them with that comfort. This section permits the Commission to relieve a trustee from a breach of trust or duty where it considers that they have acted honestly and reasonably, and ought fairly to be excused from the breach.

Trustees' Indemnity Insurance (TII)

To date, trustees have needed express power in their constitution or permission from the Commission before they could take out TII. The Act entitles charities to take out TII subject to conditions.

Power to spend capital

The Act permits unincorporated charities to spend capital if certain financial parameters, and other conditions, are met. This might be useful for arts charities established as trusts which find that they cannot effectively carry out their charitable objects because they cannot spend their capital.

A Missed Opportunity?

Many of the provisions in the new Act are to be welcomed. Indeed the Charity Commission has hailed the new Act as ‘a new framework for the sector which keeps charities at the very heart of society'. There are arguments, however, that the Charities Act 2006 is a missed opportunity.

On the one hand, some aspects of the Act could be argued to be window dressing. For instance:

  • The CIO will be an incorporated body with limited liability that will be exclusively regulated by a potentially over-stretched Charity Commission. Many of the proposed regulations around the CIO rely heavily on company law, yet there is already an incorporated form for charities that wish to have limited liability, in the form of the CLG. Those who advocate the CIO stress the problems with dual regulation (both Charity Commission and Companies House) that are said to bedevil the CLG, but there are arguments that these concerns are overstated.

Equally, there are arguments that some of the most important issues facing the sector have not been addressed. For instance:

  • The problem of irrecoverable VAT. It is estimated that charities pay out at least an estimated £460m annually in irrecoverable VAT, undermining the annual benefit of Gift Aid by about 42%.
  • Permitting a minority of trustees to be paid as trustees in certain defined circumstances. With the increasing size and professionalisation of the charity sector, and with the increasing prevalence of public service delivery by charities, there are strong arguments that a wholly non-executive trustee board is inappropriate. Many arts charities have long understood the importance of having executive stakeholders on charity boards in the form of artistic directors who can act as an important interface between production teams and the people responsible for the charity's general management and control. This issue has not been addressed at all in the Act, even though trustees can now be paid for providing non-trustee services to the charity in certain defined circumstances.
  • Ensuring the Charity Commission is properly staffed. The Act will put considerable strain on the Commission, since much initial implementation and ongoing adherence to the Act will require the Commission's involvement. It is unclear whether the Commission is adequately resourced to meet the demands the Act will put on it.

By Robert Porter, senior associate, Harbottle & Lewis LLP.

E-mail: robert.porter@harbottle.com.

For more information please visit www.harbottle.com.