INTRODUCTION
On 16 July 2003 the Government gave its long awaited response to the Strategy Unit Report (released in September 2002) which made 61 recommendations for change or development in the framework within which charities and other not-for-profit organisations operate and are regulated.

Nearly 1100 people and organisations contributed views during the consultation period following the release of the Report. The Strategy Unit Report was generally well received, although a number of issues excited some controversy.

Having listened to views expressed during the consultation, the Government intends to accept nearly all the recommendations. Focus naturally shifts to the few proposals not endorsed at all or endorsed only in part but none of these amendments seriously impinges on the main thrust of the Report.

KEY MODIFICATIONS TO THE REPORT

1 Charitable "Heads"
The four traditional heads of charity, although forming a basis for categorising charities, no longer reflect clearly the modern list of charitable purposes. The fourth head is merely a convenient "basket" to cover an extremely diverse range of charitable purposes. The recommendation to extract key purposes from this "basket" and exhibit them overtly in a more realistic and comprehensible list expressed in more modern language has been well received -even though (apart from language) none of the six additional "stand alone" purposes proposed by the Report break any substantive new ground. The Government now adds the promotion of animal welfare; the provision of social housing and the advancement of science to the list, which will now contain thirteen purposes (including a "catch all" purpose to allow new purposes to continue to be recognised).

Such clarification is to be welcomed, although, strictly speaking, unnecessary as the Charity Commission has, by analogy to the four existing heads, recognised several new purposes. The new list itself is not and should not be exhaustive, and still needs a "catch-all" at the end.

So far as the public benefit test is concerned the Government has adopted the recommendation which removes the rebuttable "presumption" of public benefit for charities relieving poverty, advancing religion and advancing education. Public benefit has always been a cornerstone test, but those charities will now have to be able to demonstrate it. The Government has sought to reassure religious organisations which carry out missionary and evangelistic work that this change will not affect their charitable status. However there is some concern among independent schools and other fee-paying institutions about how the test will be applied in practice.

2 "Activities" Test
The Government does not consider that it is necessary or desirable to clarify by statute the circumstances in which an activities test can be used as an aid to interpreting whether purposes are charitable. The Charity Commission argues that activities may help to clarify what the purposes mean in the real world and also with the initial assessment as to whether the organisation meets the "public benefit" test. However, it is also argued by many lawyers that the Charity Commission is not entitled to apply an activities test: if an organisation has exclusively charitable purposes and is not exempt or excepted under the legislation, the Charity Commission must register it as a charity.

3 Payment of Trustees
The Government accepts the proposal that trustees should have a statutory power to pay a trustee for the provision of a service but not for performing the ordinary duties of a trustee. The Government intends to add statutory safeguards against abuse - which might include limits on the number or proportion of trustees who may be paid or a limit on amounts of payment. It should be noted that the Commission has recently revised its publication CC 11 which sharpens its approach. In particular where authority from the Commission is currently needed to allow a trustee to be paid for the provision of a service the Commission will need to be satisfied that "paying a trustee will result in a clear benefit to the charity that will outweigh any disadvantages". Clearly a statutory provision will in due course render this procedure redundant.

4 Trading
The Government has not accepted the proposal that charities should be able to carry out all trading (distinct from "primary purpose" trading) at charity level without the need to establish a separate trading company. Although concerns were expressed during the consultation about the potential of risk to the general assets of a charity if trading activities ceased to be "ring fenced", the Government's primary concern was that the proposal offended the principle of a level playing field with private sector businesses. As the Government points out, a business owned by a charity should be in a comparable position to any other business - including having a choice whether to pay away profits under Gift Aid. The Government considers the statutory exemptions for "small trades" coupled with the concession in relation to minor trading activities such as jumble sales lifts the administrative burden sufficiently from small charities. Conceptually it would be more satisfactory if incoming resources from investment, fund raising and trading were all regarded in much the same way reflecting that each can be a proper component of an income generation strategy and many view the current need to establish a trading company as artificial and one which creates an unnecessary financial and administrative burden. In practice, however, even if the rules had changed, it would have remained necessary both to protect the integrity of the charity and to minimise the risk to assets. Although there was a proposal to impose on trustees a special duty of care to achieve this, it is likely that in order for the trustees to fulfil such duty, any trading involving risk would have had to be carried out through a subsidiary company. However, many will be disappointed that the Government has not taken an opportunity to encourage charity trading and simplify the way in which it is carried out.

5 Small Charities
The Report contained the proposal that small charities - charities with an income or expenditure of less than £10,000 per annum - would not be able to register. Instead they would be categorised as "Small Charities" outside the purview of the Commission but subject to acceptance by the Inland Review as charitable if tax repayments fell to be claimed. 95% of small charities responding opposed these recommendations, as did an overall majority of the respondents: many feel that their credibility with funders, the public, local authorities, banks and other organisations is derived from their registration as a charity. Few of those commenting on the Report thought that a system involving the Revenue represented an acceptable alternative to
registration with the Commission. The Government concluded that the proposals might impinge on the principles of accountability and public confidence in a significant (numerically) pool of charities. Instead the Government proposes that the threshold for registration should be lifted to £5,000, with charities below this threshold being able to register voluntarily. It may be desirable for the legislation to make it clear that this is an option for the charity alone. Whilst small charities between the new threshold for registration and the Commission's monitoring threshold of £10,000 will be registered but unmonitored, this represents a reasonable balance between avoidance of the "bureaucratic net" and the fact that the Commission's regulatory powers will apply.

6 Audit
On audit the Government "intends to pursue" modifications under which the threshold should be £500,000 rather than £1million, an asset threshold should be introduced alongside the income and expenditure thresholds, and a professional qualification should be required of independent examiners of larger non-audited charities. This addresses in part some concerns that there might not be sufficient competent
independent examiners willing and able to take on the extra work.

7 The Charity Commission
The proposed change of name to the "Charity Regulation Authority" has been dropped in part because the Commission would be seen purely as a "watchdog" whereas it has legal and advisory as well as regulatory functions. This would also have been a costly exercise (and was widely seen to be unnecessary). Interestingly, respondents to the consultation opposed the proposal by a ratio of three to one. The Government partially accepts the recommendation that Board meetings of the Commission should be open to the general public. But the Government recognises that there may be good reasons associated with the capacity of the Commission to govern itself or in the discharge of its statutory functions why particular discussions or meetings should not be open.

8 Independent Tribunal
Not surprisingly large charities and professional advisers were keen on the idea that it should be easier and cheaper to challenge Commission decisions. Any tribunal to be established will need to fit in to the framework of
tribunals to be established in the light of the Leggatt review of the whole tribunal system.

9 Excepted Charities
The recommendation that excepted charities should register has been accepted but the initial registration threshold is to be set at £100,000.

CHARITIES BILL

Out of the sixty-one recommendations the Strategy Unit envisaged that 35 of them would require legislation. Of these:

This still leaves a substantial number of proposals to be implemented via a Charities Bill. It was announced in the Queen's speech on 26the November 2003 that a draft Charities Bill will be included in the next parliamentary session. The Bill will require a great deal of detailed work - and to some extent the devil of the proposals will be in the detail. The question arises as to whether after a period for comment on the draft Bill, and no doubt revision, there will be sufficient time for the Bill to become law in this parliament. Time will tell.

WORK FOR THE CHARITY COMMISSION

In the meantime the recommendations accepted by the Government which do not require legislation can be pushed forward. The Commission has welcomed the Government's response to this "excellent reforming package" which the Commission states fits well with the approach it has been developing over the last few years. For example, amongst other things, the Commission has been more willing to push the boundaries of charitability for some time (e.g. recognising the promotion of human rights, promoting equality and diversity, the provision of healthy community sport and many others as charitable purposes).

Important areas on which the Commission will no doubt now focus include the development of a Standard Information Return for the largest charities, arrangements for undertaking ongoing checks on the public
character of charities, the production of more "benign" guidance on campaigning, the provision of useful services for stakeholders (e.g. donors) as well
as the regulated constituency, the establishment of a "cross border" umbrella committee to include all UK charity regulators, and paving
the way for the new style Commission with expanded membership and with the separation of Chair and Chief Executive.

Contact Us
If you have any queries or require clarification on any of the points mentioned below please contact any member of the Charles Russell Charities Group:

Mike Scott
Tel: 020 7203 5069
mike.scott@charlesrussell.co.uk

Simon Wethered
Tel: 020 7203 5334
simon.wethered@charlesrussell.co.uk

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