How to recognise the legal status of UK charities.
How is a charity defined legally?
Charities are organisations that are set up to address a cause for the public good. The documentation of schools, hospitals, religious institutions and some museums show examples of the legal status of UK charities.
The Charities Act  provides a definition of a charity as one that…
- Is established for charitable purposes only.
- Falls under the control of the High Court in the exercise of its jurisdiction with respect to charities….”
The Charities Act, 2011, governs how charities operate, i.e. the rules and regulations for the legal status of UK charities. On behalf of the Government, the Charity Commission monitors and regulates most charities in the UK. Some charities are exempt from regulation by the Charity Commission because they are regulated by their own professional bodies.
What are these charitable purposes?
The charitable purposes recognised by the UK government Charities Act are recognised in Schedule of the Charities Act 2011. These are…
- The prevention or relief of poverty
- The advancement of education
- The advancement of religion
- The advancement of health or the saving of lives
- The advancement of citizenship or community development
- The advancement of the arts, culture, heritage or science
- The advancement of amateur sport
- The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- The advancement of environmental protection or improvement
- The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or another disadvantage
- The advancement of animal welfare
- 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
- Any other purposes recognised as a charitable purpose…
In essence, charities should be established for the specified charitable purposes only. In particular, any non-charitable benefit is incidental to the purpose of the charity.
Charities and tax benefits
Some charities can claim beneficial tax treatment and those who donate to a charity may claim a benefit in tax if applicable. First, the charity needs to apply to HMRC get recognition as a charity. In order to qualify for gift aid and tax relief, the charity must first register online or form ChA1. Of course, your accountant should help you with the application.
What are the main types of charity?
We shall consider the key features of the four main types of the legal status of charities in the UK regulated by Charities Act 2011
- Unincorporated Charities
- Incorporated Charities
- Charitable Trusts
- Charities limited by guarantee
These charities are formed under a constitution agreement between the members, managed by a committee. Each member of the committee is personally liable for the operations of the charity unlike an incorporated charity organisation. Since the charity is not corporate, it cannot enter into legal contracts in the name of the charity. The legal status of these unincorporated charities requires them to register with the Charity Commissions if their turnover £5000 or more. None-the-less, the members who manage the accounts need to register with HMRC if they intend to claim tax benefits for the charity.
In an incorporated charity, the founders of the charity appoint directors to manage the company. The board of directors set the objectives of the charity and manage how the charity will achieve its purpose. An incorporated charity may be a private charity or a public charity. Although they are a company, these charities are not obliged to follow Companies Act 2006. The legal status of the charity, as incorporated, requires registration with the Charity Commission and in the Companies House index.
A charitable trust is an unincorporated body where the trustees are appointed by the trust. The trustees manage the assets and tax obligations in a trust in accordance with the trust deed. The trustees have personal liability for the management of the trust assets and tax obligations but do not have obligations to execute board meetings as in incorporations. The legal status of the charity, as a trust, requires it to be registered with HMRC. Sometimes family members manage trusts, however, help from solicitors ensures trusts operates legally and complies with HMRC.
Charitable companies (limited by guarantee)
Most charities operate as charities limited by guarantee. The members guarantee personal money to the charity even though the charity is non-profitable and make constitutional decisions. The members are like directors (usually unpaid) and have limited liability to creditors. Their personal wealth is usually protected from the legal status of the charity and through their articles of association. These are charitable companies; they are regulated by Companies Act 2006 and registered at Companies House. They are also registered with the Charity Commission and regulated under the Charities Act 2011.
The legal status of UK charities should reflect the target market and whether or not the charity will employ and pay employees. Also, what is the level of liability that the trustees will accept? If your charity is incorporated and/or income is £5000 or more, you must join the Charity Commission unless you are exempt by law. If your charity has an income of £5000 or less, then you do not have to join the Charity Commission unless required by law.
If you are considering the set-up of a UK charity, it is best to use an advisory service who have experience in this area. Finest Law.co.uk