The Charity Law Update 2013

Maclay Murray & Spens LLPThe GatheringFebruary 2013

Some legal and governance issues

• some key governance issues• successful commercial activities- legal issues• some current employment law issues

– voluntary workers– equality

• recent improvements in charity law– new reorganisation provisions– SCIOs

• key tax issues• grant giving foundations

OSCR, “Protecting Charitable Status”

• “However, our review programme shows that while we have primarily focused on whether charities meet the charity test, these detailed assessments of charities may also highlight other issues of regulatory concern, such as governance or concerns about long term financial sustainability. It is important, in maintaining public confidence in charities and achieving a flourishing charity sector, that we address all these issues in designing our programme of future reviews.”

Let’s get physics-cal• Quarks

– what’s really inside the apparently fundamental• The Heisenberg uncertainty principle

– look and you shall see?• Schrödinger’s cat

– thinking about the inside of the box while thinking outside of the box

• Higgs Boson– energy well spent?

Quarks

• an elementary particle• the innards of atomic nuclei• found within a proton or neutron• a quark was discovered by looking beyond

what we thought was fundamental – redefining what we thought was the core of the

matter

Reorganisation provisions• an OSCR based route to altering a charity where no

power to do so in constitution• legislation needs a “spruce”• excellent, even transformational, in practice• rules extended

– the Charities Restricted Fund (Scotland) Regulations 2012• restricted funds where donor’s view unascertainable

– “desirable to introduce a provision (other than a provision setting out a new purpose) to a charity's constitution”

• encourages positive reorganisation applications

Reorganisation provisions

C + O + S = R

Conditions Outcome Scheme Reorganisation

Reorganisation

• looking beyond what appeared fundamental

• searching for the core• searching for a true meaning• discovering something new• the need for a Large Hadron Collider

Large Hadron Collider… charity law style

40+ charities

and a plethora of purposes

“LHC”

Reorganisationprovisions

Single charity

Sub-fund

Sub-fund

Sub-fund

The Heisenberg uncertainty principle

• the idea that when seeking to observe a thing, the act of observation itself impacts on the thing

• is that good or bad?• the process of review, monitoring and

observation is crucial (e.g. One Plus) • wood and trees- missing the big picture

Schrödinger’s cat• involves hypothetical situation of cat in sealed box

with vial of cyanide gas capped by radioactive atom, which would release poison once decayed

• in theoretical quantum physics, the atom could be in both states - decayed and non-decayed

• only by looking in box would you know cat’s fate • if you did not look, you would have to consider cat

both dead and alive

Schrödinger’s cat

• again, this is about observation• however, in some ways about the impact

of not looking• the effect we can have by not observing

– legal, financial, HR, strategy, macro-issues

• Schrödinger’s ostrich?

Schrödinger’s cat• what could be the box?

– constitution– contract– funding arrangements

• what could be the cat?– overall purposes– constitutional “power”

• trustee/member dynamic- matter/anti-matter result– a project– a team member

Schrödinger’s cat

• the effect of not looking in the box– uncertainty

• all is ok… or it is not!

• don’t close (and lock) a box• should you put the cat in the box in the

first place?

Commercial ventures• why do it?• is this an “investment”? is it a sound investment?

– use of charitable funds, risk and investment rules– the role of social investment and return

• parent charity controls– “who’s in charge” and how? tail wagging dog?– authority and accountability / risk and strategic direction

• trading company board composition• can a trading subsidiary also be a charity?

– yes, but unusual• charitable trusts and unincorporated associations

– risky, (anti-Bartlett), trustee, office-bearer and member personal liability

Commercial ventures- why do it?

• Higgs Boson– sounded right in theory– significant experimentation/ due diligence– high level of analysis (“sigmas”)– lots of energy (literally) expended– what is the result/benefit?

• was it a good idea to place the cat in the box?

A commercial structureCHARITY- community development- employment-citizenship-arts and culture

TRADING COMPANY(NON-CHARITABLE)

Public Sector Partnershipeg SE, Europe, Council, Scottish Government

Gift Aid

privateinvestment and impact on structure? tax, legal and ethics?

governance

engagement

consultation

social outcomes

purposes

public benefit

loan, investment etc?

e.g. shop,service,renewables

Board composition• role of the “Trustee” directors

– “our man”– oversight– communication channel

• regular written and face-to-face communication• roles/ skills set of “executive” directors

– operational skills– other necessary/ desirable skills– remuneration

• alignment of interests• “incentivisation”

– continuity– appropriate (“ethical hardwire”) commercial direction

• What can be invested in? What is a return?– understand the overall picture- the charity’s purposes

• the place for “non-trustee non-execs”?

A little on self-directed support

• Social Care (Self-directed Support) (Scotland) Act 2012– contract issues– incapacity law– employment law– data protection

Current Employment Law Issues

• Volunteers

• Equality Act reminders

VolunteersBeware the worker!

• Personal service• Mutuality of

obligation• No customer

relationship

Rights:• holidays & holiday pay • rest breaks • wages: unlawful deduction• accompanied at

disciplinaries & grievances• discrimination• NMW........

Volunteers: Workers?Yes: Expenses actually wages:• Migrant Advisory Service v Chaudri

Yes: Volunteer agreement was binding contract:• Murray v Newham CAB

No: Expectation are not “obligations”: an “if” contract• South East Sheffield CAB v Grayson

No: “standards” don’t of themselves create mutuality• Melhuish v Redbridge CAB

Volunteers: Voluntary Workers?Conditions:• work for charities, voluntary organisations, associated

fund-raising bodies or statutory bodies• no payment other than expenses actually incurred or

reasonably estimated as likely to have been incurred in the performance of their duties

• no benefit in kind other than reasonable subsistence or accommodation

Result = no entitlement to NMW

Volunteers: Mitigating Risks

• Avoid payments that look like wages

• Reduce /minimise perks

• Reduce obligations on volunteers

Equality Act 2010

Do you:• employ people or have volunteers? • provide services.......(goods, facilities)?• carry out public functions?

Are you an association with > 25 members?

Protected Characteristics

• Age• Disability• Gender reassignment• Marriage & civil partnership

• Pregnancy & maternity• Race• Religion or belief• Sex• Sexual orientation

Types of discrimination

• Direct• Indirect• Discrimination arising from disability

• By association• Perception• Victimisation• Harassment

What’s different for charities?You can restrict the people who benefit.........

• Is the restriction specified in your constitution?• If no, speak to Alan!

• If yes, is it either:– to prevent/compensate for a disadvantage? or– a proportionate means of achieving a legitimate aim?

• Fundraising: can restrict to one gender

What’s different for charities?

but.....:

• must not discriminate on the basis of skin colour

• if perform a public function public sector equality duty may apply

Other exceptions........

There are a number of other exceptions which are not charity specific relating to:

• religious or belief organisations• associations• schools• further & higher education• positive action

Equality Act 2010:

St Margaret’s Children and Family Care Society

Catholic Care (Diocese of Leeds)

Architecture• Osc(a)r Niemeyer• Brazilian modernist architect• “I am not attracted to straight angles or to the straight

line, hard and inflexible, created by man. I am attracted to free-flowing… curves. The curves that I find in the mountains of my country, in the sinuousness of its rivers, in the waves of the ocean… curves make up the entire Universe, the curved Universe of Einstein”

Scottish Charitable Incorporated Organisations• SCIO

– The Regulations• The Scottish Charitable Incorporated Organisations Regulations 2011

– regulate creation and life• Separate Dissolution Regulations

– When?• UA/ trusts conversion and new charities

– 1 April 2011• Company/ I&PS conversion

– 1 January 2012– What?

• Limited liability corporate charity vehicle

Scottish Charitable Incorporated Organisations• Key characteristics (mandatory in regulations)

– SCIO to meet the Scottish charity test – SCIO’s constitution to set out important governance mechanisms

such as:• the SCIO’s powers • the SCIO’s "structure" (which is a slightly nebulous requirement)• the composition of "the board" • rules for meetings of the board and members • the process for appointment and removal of charity trustees and

members • conflict of interest provisions• the maintenance of a register of charity trustees • the maintenance of a register of members

Scottish Charitable Incorporated Organisations• Who will (or from MMS experience has) use(d) it?

– a large number of unincorporated associations – new grant giving foundations which would have previously been set up as a

trust might prefer the limited liability environment of the SCIO- and avoids quirks of trust law

– organisations that do not want a "two tier" members/ trustees governance structure (simplicity/ reduce scope for contention)

– existing companies who do not “need” or wish to be companies – existing companies and trusts seeking to simplify administration– Limited liability as an attractive feature for quality trustees– organisations that are attracted to a SCIO providing more of a "blank

canvass" for structure and governance arrangements than traditional vehicles

– trusts that have passed or approaching 21st anniversary

Scottish Charitable Incorporated Organisations• any down sides?

– “unknown quantity” / familiarity– technical issues

• member duties/ winding up/ charitable status is existential– getting the constitution “wrong”

• drafting more important than ever• little underlying law to fill any “gaps”

– for existing charities:-• unlikely to offer clear advantages for existing charitable companies

– still worth considering for “one off” streamlining, administrative simplification or part of wider governance improvements

• the process of transfer of assets and liabilities on conversion can be difficult – lenders/funders/creditors etc

• education process• understanding the risk profile of the SCIO• overseas parties being “comfortable” with a SCIO

the Brasilia issue

• great concept• the need to maintain the original• is it fit for purpose:

– over time?– circumstances change?

• reflective of current aims and activities?

grant giving foundations

• Issues affecting “grant giving” charities– increased numbers of applications– scrutiny of applications– monitoring and evaluation– 2005 Act investment duties became “real”

• take advice as appropriate and consider it• consider suitability of investment• consider diversification

tax update

• HMRC– U-Turn on changes to charity income tax relief– remember basics- e.g. Deeds of Variation– new Inheritance Tax relief- if 10% of estate passes

to charity 36% IHT not 40%• interaction between Wills and Death Benefits/Policy

Trusts

– reduction in additional rate tax to 45%• encourage pre-6 April 2013 donations

time

Get in touch

Alan EcclesPartner, Head of Charities0141 271 5375alan.eccles@mms.co.uk

Alison WeatherheadAssociate, Employment0141 271 5725alison.weatherhead@mms.co.uk

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