How are Charities Regulated?

Charities are generally understood to be forces of good that help the less fortunate and champion causes that benefit society. However, such organisations are still run by humans that make mistakes or even have unscrupulous intentions. The closure of Kids Company in 2015 and the 2018 Oxfam scandal highlight the need for robust regulations in the field.

To understand how charities are regulated, it is important to determine what constitutes a charity.

What Makes a Charity

The Charities Act 2011 is the main legislation for charities. It states that a charity is an organisation established for charitable purposes only and exists for public benefit.

The 13 goals that are recognised as “charitable purposes” include:

  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
  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 because 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 that are analogous or within the spirit of the aforementioned purposes

These goals are considered charitable purposes whether or not the actions taken to achieve them are done within the UK or abroad.

The Public Benefit Requirement

For a charity to meet the “public benefit requirement,” it has to satisfy both the “public” and “benefit” aspects.

An outcome is a “benefit” if it is identifiable, can be proven with evidence, and is not based on personal views.

Meanwhile, “public” is understood to mean the general public or a sufficient section of the public, which varies from purpose to purpose. Whatever personal benefits that charity members get should be incidental or happen as a natural result.

A charity must be beneficial to the public. The only exception is if the charitable purpose is for the prevention or relief of poverty, which only needs to be beneficial.

Governing Document

The charitable purpose must be laid out clearly in a charity’s governing document. This document has different names depending on the structure of the charity.

In general, a charity’s governing document states:

  • Its charitable purpose
  • How it plans on accomplishing this purpose
  • Who is in charge
  • How it operates
  • The process for administrative changes
  • How it should be closed

Trustees

The people responsible for carrying out a charity’s duties are the trustees. They are bound by law to follow their charity’s governing document.

The minimum age for trustees in a charitable company or a charitable incorporated organisation (CIO) is 16 years old. It then goes up to 18 years old for any other type of charity.

Under the Charities Act, a person is disqualified from being a trustee if they:

  • Are a company director.
  • Have an unspent conviction for an offence involving dishonesty or deception (e.g. fraud).
  • Are an undischarged bankrupt (or subject to sequestration in Scotland), or have a current composition or arrangement including an individual voluntary arrangement (IVA) with their creditors.
  • Have been removed as a trustee of any charity by the Commission (or the court) because of misconduct or mismanagement.
  • Are on the sex offenders’ register.

The Charities (Accounts and Reports) Regulations 2008 states that trustees are legally required to prepare documents that show how they have carried out their charity’s purpose for public benefit. These documents are accounts and annual reports.

All charities must prepare accounts that comply with the relevant Charities Statements of Recommended Practice (SORP). All registered charities must have a trustees’ annual report.

Registered charities with a gross income of equal to or less than £500,000 are considered “smaller charities.” They only need a summary of the main activities in their annual report and a statement that the trustees have done the duties laid out in their governing document.

On the other hand, “larger charities” (registered charities with over £500,000 in gross income) have to provide a much more detailed annual report.

The Charity Commission

The governing body of charities in England and Wales is the Charity Commission—an independent, non-ministerial government department accountable to Parliament.

The Charity Commission’s roles include:

  • Determining the status of a charity and whether it should be registered
  • Maintaining the charity register
  • Ensuring charities meet legal requirements
  • Intervening when charities commit serious mismanagement or misconduct
  • Providing guidance and online services to charities

All charities established in England and Wales must register with the Charity Commission except for the following:

  • Charities with less than £5,000 in annual income, unless they are a CIO
  • Churches, chapels, and funds of some Christian denominations
  • Charitable funds for the armed forces
  • Scout and Guide groups
  • Local branches of a larger charity
  • Most universities in England
  • Many national museums and galleries
  • Some school governing bodies or academy trusts

Filing Annual Returns

Registered charities and CIOs must prepare an annual return. The requirements differ depending on their annual income.

For those with an annual income of up to £10,000, they need to prepare an annual return with updates to trustees. Those with more than £10,000 annual income, meanwhile, must prepare and file an annual return form.

If the charity’s income is between £25,000 and £1,000,000, they are mandated to prepare and file an annual return form, as well as copies of their trustees’ annual report and accounts. An independent examination is required.

For those that go above £1,000,000, they need to prepare and file an annual return form and copies of their trustees’ annual report and accounts. An audit is also required.

Registered charities with over £250,000 in gross income and total assets before liabilities exceeding £3,260,000 also require an audit.

All registered charities are required by law to submit accounts and relevant documents to the Charity Commission. Failure to do so is a criminal offence and is considered mismanagement or misconduct by the Commission.

Charity Commission Enforcement

If a charity fails to meet its legal requirements, the Charity Commission directs trustees to take action for compliance.

If the trustees fail to take such action, they might likely endanger the charity’s beneficiaries and assets, as well as erode public trust in the voluntary sector. To prevent or mitigate any more serious damage, the Commission may open a statutory inquiry. During the inquiry, the Commission can gather and assess evidence and use its powers of protection. These powers include:

  • Restricting the transactions that a charity may enter into
  • Appointing additional trustees
  • ‘Freezing’ a charity’s bank account
  • Suspending or removing a trustee
  • Appointing an interim manager

In cases where funds have been misappropriated or lost, the Commission seeks restitution or recovery. The Commission also publishes reports and alerts on such inquiries for the public interest. The Charity Commission, under limited circumstances, can also direct a charity to wind up.

If you want to make sure that your charity complies with these regulations, please feel free to get in touch with us, so we can help you through our accounting services for Not for Profit organisations.