Joint Committee on the Draft Charities Bill

Joint Committee on the Draft Charities Bill First Report

10 Exempt and Excepted Charities

355. Exempt charities are charities which are not registered with the Charity Commission because they are already being supervised by other regulators such as government departments or public authorities. There are about 10,000 exempt charities, including many universities, most housing associations and some schools. A list of exempt charities and their principal regulators appears on pages 202-205 of the draft Bill.[377] They enjoy the status and fiscal benefits accorded to other charities and are required to comply with the key principles of charity law; however, they are not subject to the same accountability and transparency requirements as charities registered with the Commission.

356. The Strategy Unit review found that the regulators of these charities were often unaware of the requirements of charity law regarding governance arrangements and the stewardship of funds.[378] In addition, there is no mechanism for monitoring the compliance of exempt charities with charity law and they do not have to demonstrate that they continue to merit the benefits offered by charitable status.[379] Allowing these organisations and excepted charities (discussed below) to avoid regulation as charities creates anomalies; the Strategy Unit review found this was confusing for the public and threatened the integrity of the status of charities.[380]

Draft Bill changes

357. Clause 11 of the draft Bill enables the Secretary of State to prescribe a principal regulator for an exempt charity. Principal regulators will be required to do all that they reasonably can to ensure that exempt charities comply with charity law. The clause also allows for changes to be made in the statutory powers of principal regulators to enable them to take on this function.

358. Schedule 5 of the draft Bill gives the Charity Commission new powers in relation to exempt charities. For example, the Commission will have the power to investigate these charities at the request of their principal regulator. Clause 7 of the draft Bill (adding section 3A (4) to the 1993 Act) provides that exempt charities without a principal regulator should register with the Charity Commission.

359. The Home Office estimates that 7,800 of the 10,000 estimated exempt charities, would be required to register with the Charity Commission because they do not have an alternative main regulator and their income is above the £100,000 proposed threshold.[381] The vast majority of these are voluntary schools.

Evidence

360. We note four particular issues which were raised by the evidence presented to us on exempt charities.

361. First: the effect of the draft Bill on voluntary and foundation schools. Littlejohn Frazer (chartered accountants) drew our attention to a possible anomaly with respect to voluntary and foundation schools established under the Education Reform Act 1988. These schools are part of the state sector and are exempt charities. Other state schools are not exempt charities. Under the draft Bill, voluntary and foundation schools will have to register with the Charity Commission and will become subject to additional accounting and audit requirements, which, Littlejohn Frazer estimate, will cost them £20 million in total. Meanwhile, other state schools - not being exempt charities - will not have to meet these requirements and will not incur these costs. Littlejohn Frazer asked how it could make sense to treat the two types of schools differently: if more rigorous accounting and audit standards are required, they should apply to all state sector schools; if they are not required, they should apply to none, especially when they involve such heavy cost. [382]

362. Second: the potentially destabilising effect of the Commission's powers, under the draft Bill, on the position of the principal regulator. The Higher Education Funding Council (HEFCE) pointed out that under the draft Bill the principal regulator will be responsible for regulating the exempt charity, but the Commission will retain powers of enforcement and intervention over exempt charities and will be given new powers over them (e.g. to exercise the same powers as the High Court in charity proceedings). This made for greater regulation but it undermined the position of the principal regulator and made for uncertainty about the principal regulator's role. The solution to this problem, HEFCE told us, was that the draft Bill should include a provision requiring the Commission to consult with the principal regulator before exercising their powers over an exempt charity.[383]

363. Third: whether the proposal allowing principal regulators to regulate exempt charities was a good idea. The British Trust for Conservation Volunteers (BTCV) objected to the whole idea of exempt charities and 'principal regulators':

"it is quite wrong that charities should not be independent but be effectively owned by other non-charitable bodies, usually through controlling the appointment of their trustees…

"Determining a 'principal regulator' for such charities is window-dressing. These principal regulators are not knowledgeable of charity law - it's not their job.

"Giving the power to the Commission to investigate exempt charities if requested by the principal regulator is a sop. Why would a principal regulator want to call in the Charity Commission to expose the principal regulator's own failure in regulating? It's hard enough to persuade the Charity Commission to investigate charities which are connected to government or with strong links to the establishment even in the face of outrageous abuse within such a charity. Raising the extra hurdle of needing to be requested by another body which has every incentive not to call in the Commission guarantees that the existence of exempt charities will continue to stain the reputation of charity generally. We recommend that the Joint Committee firmly grasp [the] principle and do away with exempt charities in the interest of the reputation of the charity as a whole."[384]

364. A similar point was made to us by the Wellcome Trust:

"The Trust believes it is desirable for all charities to be subject to the same legal and regulatory framework and that ideally they would fall under the same regulator - the Charity Commission. Having an overarching regulator is important for maintaining public confidence as the public needs to have a clear understanding of where it can access information, who is accountable and how they can make a complaint … If the universities are not subject to the same regulator as the major charities that fund them, charity law, regulation and practice will continue to diverge, leading to confusion and inefficiencies … We would like to see the Charity Commission become the 'main regulator' of exempt charities, so that all charities are subject to the same legal and regulatory framework. We believe that this would drive the development of a more flexible regulatory environment for the sector as a whole."[385]

365. Fourth: the question of how the public benefit of exempt charities would be reviewed. The Association of Medical Research Charities (AMRC) in their written evidence raised the question of whether exempt charities would be subject to the same periodic public benefit reviews as other charities.[386]

366. The RIA attached to the draft Bill provisionally estimates that 7,800 previously exempt charities (mainly voluntary schools) may have to register with the Charity Commission.[387] It estimates that the additional cost to the Charity Commission of initially registering such charities would be between £630,000 and £1,170,000 and that the annual costs of regulation would be between £250,000 and £450,000. Costs to the exempt charities themselves are unquantified and described as modest but the requirement for schools to register with the Charity Commission would, from the evidence of Littlejohn Frazer, be a significant burden.

Conclusion

367. We recommend that the Home Office should consider designating a principal regulator for foundation and voluntary schools so that they can retain exempt charitable status.

368. The Committee also recommends that the Charity Commission should be given a duty in the Bill to consult with principal regulators before using any of its enforcement powers in respect of exempt charities.

Excepted charities

Current position

369. Excepted charities are charities which, in the 1960s, were excused the requirement to register with the Charity Commission because they were already registered with their own umbrella or support groups.[388] They are, however, allowed to register if they want to.[389] They include certain Armed Forces charities, particular religious denominations and Guide and Scout groups. Like exempt charities, they enjoy the status and fiscal benefits accorded to other charities and are required to comply with the key principles of charity law, but are not subject to the same accountability and transparency requirements as charities registered with the Charity Commission.

Draft Bill changes

370. Clause 7 of the Bill (adding section 3A (1) and (2) to the 1993 Act) provides that excepted charities with an annual income of £100,000 or more should be registered with the Charity Commission. The income threshold is designed to make the process of registering a large number of previously excepted charities manageable. The RIA accompanying the draft Bill states that the exact number of excepted charities is not known precisely, but that in 2000 it was estimated to be over 100,000.[390] The Home Office estimates that, of these 100,000 excepted charities, approximately 5,000 will be required to register because their income is above the £100,000 threshold.[391] A breakdown in the explanatory notes accompanying the draft Bill suggests that this figure of 5,000 includes up to 2,000 Armed Forces charities, up to 2,000 Church of England parishes, 650 Methodist churches and up to 300 Baptist Union churches.[392]

371. Clause 7 of the Bill (adding clause 3A (7) and (8) to the 1993 Act) gives the Secretary of State the power to reduce the threshold to bring it closer to the general registration threshold. It is intended that the temporary threshold of £100,000 will be reviewed over a period of time, possibly five years, with a view to lowering it to £5,000, in order to bring it into line with the threshold for other charities.[393]

372. The RIA attached to the draft Bill says that research indicates that "failure to ensure that information about excepted charities is readily available to the public and that those charities are held to account could result in the public having doubts about the probity and effectiveness of charities in general".[394] The draft Bill estimates the costs shown in the following table for the changes introduced in the draft Bill in regard to exempt and excepted charities:

One-off costs Continuing costs

Exempts

Costs to main regulators £19,820-£68,360

Costs to Charity Commission £630,000-£1,170,000 £250,000-£450,000

Costs to charities Modest Modest

Excepted

Costs to Charity Commission £350,000-£650,000 £137,962-£252,214

Costs to charities Modest Modest

Source: Draft Charities Bill, pages 137-138

373. These estimates are based on the number of exempt and excepted charities the Commission would have to register initially and service under the draft Bill. The Commission has used figures of 10,000 and 5,000 respectively but these are subject to great uncertainty. The RIA says of the figure of 10,000 excepted charities: "a round figure of 10,000 was used. This seemed a reasonable figure leaving aside the uncertainties".[395] It admits it "does not have information about the number of charitable Industrial and Provident Societies and Registered Friendly Societies, nor about their annual income [which would partly determine whether they would be registered]".[396] The number of excepted charities subject to registration is set at the maximum of the estimate of those known but there are many unknown categories for which no estimate is made: for example, The Scout Association for which the RIA comments "Unable to estimate (no central figures)".[397] Further costs will emerge when the threshold for registration of excepted charities is reduced below the initial level of £100,000.

Evidence

374. Religions Working Together told us that there are as many as 46,000 places of worship in the country, all of whom would potentially have to register with the Charity Commission when the threshold is eventually lowered.[398] According to the RIA, there are at least 5,000 excepted charities that will need to be registered at the £100,000 threshold. It estimates that the set-up costs for registering these charities will amount to between £350,000 and £650,000. This equates to set-up costs of between £70 and £130 per charity. When the threshold for excepted charities is reduced to coincide with the general registration threshold, the Charity Commission may have to register significantly more excepted charities. If the Commission ultimately has to register the 46,000 places of worship discussed above, this alone would result in additional registration costs of between £3,220,000 and £5,980,000 based upon the estimated set up costs per charity.

375. The Churches Main Committee told us that the initial registration threshold of £100,000 for excepted charities did not present a major difficulty, but that they were concerned about the proposal to lower it:

"....we regard the exception as being appropriate for the small ones [parochial church councils] and we are concerned that the process to equalise the income limits for excepted and non excepted should be quite protracted to give the small parishes time to get used to the idea and because it is a new role for them".[399]

376. They said that churches with charitable incomes below the £100,000 threshold would require a long transition period: they told us a period of thirty years had been suggested. [400] The Methodist Church told us that when applying the £100,000 threshold, a charity's income should be averaged out over a period of three to five years, so that it would not be required to register for an unusual year. For example, if a church was undertaking a short-term project, such as building renovation, its income might exceed the £100,000 threshold and therefore would be required to register with the Charity Commission during this period, and then possibly de-register when the project was completed.[401] Similarly, the Churches Main Committee requested that the definition of 'gross income' be reasonably applied, so that from year to year excepted charities would not fall within and outside the requirement to register.[402]

377. The Independent Services Agency Ltd (which provides management services to Armed Forces charities) told us that currently excepted charities that "increase the efficiency of the Armed Forces" should become exempt charities. We were told that these charities are essentially unit funds, largely raised by servicemen and women gift aiding their pay for one or two days a year. The money is spent on unit social activities, sport and adventure training. The only tax advantage they enjoy is that interest on deposit account is paid gross. These funds are already adequately monitored by the Adjutant General whose "audit procedures and accounting practices are extremely effective and efficient".[403] Major Adler told us:

"Our accounts are all the domestic accounts of units of the Armed Forces. There is absolutely no fund-raising effort to bring money into these accounts. They are domestic accounts dealing with the president of the Regimental Institute, for example, which is the soldiers' club, the sporting activities fund or the sergeants' mess, which is sergeants contributing a bit extra to make their rations a bit more palatable. So within these accounts there is nothing that I can see that is of the remotest interest to the general public."[404]

Conclusion

378. We consider that a case has been made out for excluding small Armed Forces charities from the category of excepted charities which would in future have to be regulated by the Charity Commission. We do not think this issue can be solved by saying that there should be a specific charitable purpose "to increase the efficiency of the Armed Forces". The situation is anomalous - they are described as "non-public" funds which distinguishes them from the taxpayer's money used for the pay, equipment and facilities for the Armed Forces - essentially a way of keeping them separate. We have not received any evidence that these small funds are insufficiently regulated at present. We do not see how including them in regulation by the Charity Commission will contribute to the purposes of the draft Bill.

379. We recommend that, before the real Bill is brought forward, the Home Office and the Ministry of Defence explore ways of ensuring that these funds remain properly accounted for without bringing such a large number of small Armed Froces accounts within the remit of the Charity Commission.

380. We recommend that before any plans are drawn up to lower the threshold for the registration of excepted charities below the initial £100,000 income figure, the Home Office and the Charity Commission monitor and report on the actual costs and benefits of the registration of those charities with an income above that level.

377 Cm. 6199 Back

378 Private Action, Public Benefit, September 2002, p87, para 7.94 Back

379 Draft Charities Bill, p206, para 1.7 Back

380 Private Action, Public Benefit, September 2002, p87, para 7.94 Back

381 See draft Charities Bill, discussion of voluntary and foundation schools, p218. Ev 226 (para 12), from the Charity Commission quotes a figure of 7,500 foundation and voluntary schools which would benefit from online registration. Back

382 Ev 337 Back

383 Ev 461, para 8 Back

384 Ev 433, para 15.3 Back

385 Ev 518, paras 4.3, 4.9 Back

386 Ev 238 Back

387 Draft Charities Bill, p220 Back

388 Draft Charities Bill, p227, para 2.3.3 Back