Small Business, Enterprise and Employment Bill

Written evidence submitted by the Charity Law Association (SB 68)


· This evidence is submitted by the Charity Law Association members of which originally formed a working party for the BIS discussion paper of 2013, Transparency & Trust: Enhancing the transparency in UK company ownership and increasing trust in UK business, which has given rise to the transparency provisions in Part 7 of the Bill.

· The working party raised concerns in response to the BIS discussion paper regarding the potential effect of the proposals for the charity sector.

· The working party wishes to draw those concerns to the attention of the Committee and asks that the Committee, in its scrutiny of Part 7 of the Bill, in particular clauses 70-75 and Schedule 3 and clause 76-77, considers the potential impact on the charity sector.

· In particular, the working party would support the exception of charities from the provisions prohibiting corporate directors and an exception for and/or suitable modifications for charities and their trading companies in respect of the requirement to keep a register of people with significant control.

1 We are grateful to the Committee for the opportunity to submit written evidence on the Small Business, Enterprise and Employment Bill 2014-15 (the Bill).


About the Charity Law Association

2 The Charity Law Association (CLA) has over 900 members, mostly lawyers but also accountants and other charity professionals. We are committed to sharing knowledge and experience for the benefit of the sector. We work together to respond to consultations from Government and regulators and we act together to raise issues where we believe improvements are needed.


3 Often, such actions relate to policy proposals in areas of the law which are not specifically "charity law", but where the impact will be felt in the charity sector. The provisions in the Bill relating to company law, including those in Part 7 of the Bill, are relevant to charities, because, for example, many charities are established as companies and/or maintain a trading company and/or have a corporate charity trustee.


4 In relation to the transparency proposals in the Bill, the CLA formed a working party (the working party) to consider the discussion paper produced by the Department for Business Innovation and Skills (BIS) in July 2013, Transparency & Trust: Enhancing the transparency in UK company ownership and increasing trust in UK business. The working party submitted a response to that discussion paper. [1] The working party wishes to draw those concerns to the attention of the Committee in its consideration of Part 7 of the Bill.


Clause 76-77 – Corporate directors

5 Clause 76-77 would replace the current requirement in the Companies Act 2006 for at least one director of a company to be natural person with a new prohibition on corporate directors of a company. The prohibition would be the default position for all companies, subject to a power to make exceptions by regulations (in which case, the current requirement for at least one natural director is retained).


6 The Government’s response to the BIS consultation [2] indicated, at paragraph 170, that it was considering exemption applying to charities (among others). This view is supported in the Final Impact Assessments covering Transparency and Trust [3] produced in June 2014 (at paragraph 187 on p.189, with further discussion at Annex D on p.228 and Annex E on p.231).


7 We support the view that charities should be exempted from the prohibition on corporate directors. As noted in the Final Impact Assessments document above, charities benefit administratively from the use of corporate directors, while such use represents limited risk, due to existing regulation and transparency requirements.


8 We appreciate that the Bill provides only for the power to provide for exceptions, without any reference to which groups may be excepted. We would suggest, however, that the existence of the power to provide for exceptions is relevant to the discussion of clause 76, as it affects the general default position. We would ask the Committee to give consideration to the importance of the use of the power to provide for exceptions in appropriate cases, one of which, we would say, is that of charities. In particular, if the Committee supports the view indicated in the Government’s response noted above, we believe that it would give comfort to the charity sector if such support was expressed.


Clauses 70-75 and Schedule 3 – Register of people with significant control

9 Clauses 70-75 and Schedule 3 introduce a duty on all companies, other than DTR5 issuers and other companies as may be specified by regulations, to keep a register of people with significant control (PSCs) over the company, as well as a duty on "registrable persons" and "relevant legal entities" in relation to the company to supply certain information to the company.


10 "Significant control" is defined by reference to control via a significant proportion (more than 25%) of the voting rights in general meeting, or through the appointment or removal of a majority of the board of directors of the company. Such control may also extend to trustees of a trust (among others).


11 As for the corporate director provisions above, the default position is that the transparency provisions will apply, save as specified by regulations. However, unlike for the corporate director provisions, it is not clear what consideration has been given to likely exclusions from these provisions and, in particular, exclusion (or other suitable specification) for charities.


12 There is an oblique reference in the Final Impact Assessments document referred to above (at paragraph 6 on p.76), which notes that charities are already regulated elsewhere. To the extent that that reference is intended to indicate that charities will be excluded from the requirement to maintain a register of PSCs, we would support it.


13 The PSC provisions appear to be based upon the money laundering regulations (for similar reasons of transparency). However, the potential impact on companies is not the same, as they will need to identify their PSCs and obtain, and maintain, the relevant information, against potential criminal liability if they get it wrong.


14 For some charities, we consider this would be a serious concern and a significant additional administrative burden, only, it seems, to provide information which is, in most cases, already publicly accessible.


15 The Bill also introduces, in Part 2, a new duty on the Secretary of State to report in each Parliament on the economic impact of (certain) regulatory provisions which come into force, or cease to be in force, in that Parliament on, among other things, activities of charities. The report must also describe actions of Government departments to mitigate any disproportionate economic impact of such provisions on activities carried on by voluntary or community bodies. If the PSC provisions are implemented as they stand with no consideration for charities, we are concerned that the Secretary of State will be in the uncomfortable position of his or her first report on regulatory reform under the Bill reporting on the disproportionate impact on charities of provisions introduced under the same Bill.


16 We suggest that consideration should be given to the potential impact of the PSC provisions on charities, with a view to suitable provision being made for charities in line with the transparency aims of Part 7. However, we consider that the specifications required are not straightforward. We set out in paragraphs 17 to 19 below some examples, and possible solutions, but we do not suggest that these are exhaustive. Rather, we set them out as an illustration as to the problems which could arise from the PSC provisions and the need for a considered solution.


17 As noted in the working party response to the BIS consultation, the provisions would be problematic for charities. Charities are not "owned" in the commercial sense; the charity trustees are obliged to run the charity and apply its assets for the furtherance of its purposes. 


17.1 Those who have the general control and management of the administration of a charity are defined (in s177 Charities Act 2011) to be its "charity trustees". The charity trustees are under a duty to act only in the best interests of the charity, no matter who has the right to appoint or remove charity trustees.

17.2 Under the money laundering regime, often it is sufficient to identify only that the charity is a registered charity. Where further enquiry is needed, it focuses on the control of management, and hence the charity trustees, as there is no "beneficial owner".

17.3 It may be, therefore, that it would be sufficient for charitable companies if their register of directors stands as their register of PSCs .

18 However, the problem extends beyond charitable companies, because charities are structured in many different ways. We are concerned that it will in many cases be time-consuming for charities to identify whether they are bound by the rules and, if so, how to comply.


18.1 For example, because of the risks of personal liability, a charitable trust may have a company as its trustee. Often, the directors of the corporate trustee are also its members. It seems that, if there are 3 directors/members, they would all be "registrable persons" under the rules; but if there are 4 or more directors/members, they would no longer have "significant control". Clarity is required on this point.

18.2 We suggest, therefore, that specification may be needed for a company which acts only as a charity trustee. It may be that the solution suggested in paragraph 17.3 above may also address such a situation.

19 In addition, there is the question of trading companies of charities. Charities often own a (wholly-owned) trading company, which carries out trading activity, the profits of which are paid to the charity. Our understanding is that, under the rules in the Bill, the "registrable persons" for such a company can vary according to the legal form of the charity. For example: 


· If the charity is a charitable company, the charitable company would be the sole member of the trading company. The "registrable" persons of the trading company would then depend upon how the charitable company is treated under the rules. If no dispensation is made for charitable companies, it would seem to depend upon how many members the charitable company has, and how its directors are appointed or removed.

· If the charity is a charitable trust, the members of the trading company would usually be one or more of the charity’s trustees, who hold the membership on trust for the charity and act in accordance with the decisions of the charity trustees. In that case, the charity’s trustees would be "registrable" persons of the trading company.

· If the charity is a charitable incorporated organisation (CIO), a corporate entity which is registrable only with the Charity Commission and not subject to company law, the CIO would be the sole member of the trading company. In that case, the trading company would appear to have no "registrable" persons.

We believe that the PSC requirement should be the same for such a company whatever the legal structure of the charity. We suggest that the information which is important for transparency purposes, and so which should form the PSC information, is that the company is wholly owned and controlled by the charity.

20 As noted above, we do not claim to offer a full analysis of the potential issues for charities at this stage, or to offer a full solution. We hope, however, that we have demonstrated that, without some specification designed for charities, the PSC provisions will impose upon charities, either directly or through their trading companies, an administrative burden. In view of the different forms and structures charities may adopt, and the fact that they are already subject to a regulatory regime based in transparency, we consider that administrative burden would be disproportionate and unnecessary.


21 We suggest that the PSC provisions risk creating a serious problem for charities, which is complex, but which needs a considered solution. Without such a solution, we think it would be wrong to impose the PSC provisions on charities and their trading companies. If the Committee agrees, we believe that an acknowledgement to that effect would alleviate some of the concerns in the sector, albeit without removing the underlying uncertainty.



22 We hope that the Committee will consider the potential impact on the charity sector of the transparency provisions in the Bill if no exception or appropriate specification is provided by way of regulations.


23 We do not believe that the transparency provisions are aimed at charities, which are already subject to a specific regulatory regime and disclosure and accounting requirements.


24 We would support the exception of charities from the prohibition of corporate directors. We would also support an exception for and/or a proper simplified regime for charities and their wholly owned trading companies in respect of the provisions on PSCs.


25 We welcome the discussion paper issued by the Department for Business Innovation and Skills in relation to the "the register of People with Significant Control (PSC register), issued October 2014.


October 2014




Prepared 5th November 2014