29: Government response to Law Commission’s charity law report, Technical Issues in Charity Law

On 22 March 2021, the government published its response to the Law Commission’s 2017 Report, Technical Issues in Charity Law, which made a number of recommendations aimed at maximising the efficient use of charitable funds whilst ensuring proper safeguards for the public or, as Lord Hodgson has expressed it, to remove ‘unnecessary burdens on trustees [which] act like barnacles on a boat, causing a drag when all should be plain sailing’. The government has accepted the vast majority of the recommendations.

The government’s response

As we reported last year, the government response was long-awaited after the Law Commission’s Report was published in September 2017. As noted above, however, it is a positive response. Of the Report’s 43 recommendations, the government has rejected only five, the rest being accepted (three in part) or being for other bodies (eg the Charity Commission).

The response is divided into 13 sections, reflecting areas identified for review by the Law Commission.

1. Financial thresholds

It was identified that various financial thresholds in charity legislation can get out of date without being reviewed, meaning that smaller charities can be caught up in a level of administration and stricter requirements than was originally intended by Parliament. The government has, therefore, accepted a recommendation that the financial thresholds should be subject to regular review, at least every 10 years, with a view to increasing them in line with inflation by secondary legislation (rather than primary legislation).

The government aims for the first review in 2022. This is important because it suggests that the government aims that the legislative framework to enable such a review should be in place by then.

2. Changing purposes and amending governing documents

Charity law is often made more complicated because charities can take different legal forms (eg company, CIO, trust or unincorporated association). The Law Commission’s recommendations here aim to simplify the processes for amending governing documents and changing charitable purposes and, so far as possible, align them across the most common legal forms used by charities. The government has accepted all the Law Commission’s recommendations in this respect.

A significant change here would be to introduce a much wider statutory power for unincorporated charities to change their constitutions. The new power would be modelled on that in place for companies and CIOs, which allows the charity to amend the constitution save for ‘regulated alterations’ (eg changing the charitable purposes) where the amendment is ineffective without the prior written consent of the Charity Commission. In the charitable company and CIO regime, there are 3 classes of regulated alterations, but there would be more in the new unincorporated charities regime because of the need to have sufficient safeguards to take account of third party rights.

3. Charities governed by statute or Royal Charter: changing purposes and amending governing documents

The main recommendation accepted here is for a new express power for Royal Charter charities to amend their Royal Charter, subject to Privy Council approval, where the charter body lacks an express power. Although modern Royal Charters tend to include an express power of amendment, older ones may not do so, so this would be a welcome development in those cases.

Other recommendations here were aimed at providing greater clarity around the processes for changing constitutions of charities governed by statute or Royal Charter, but most of these were not accepted, or only accepted in part. That is disappointing, although the government response stated that the Privy Council Office ‘encourages feedback from its users’, so this may be a spur to encourage more feedback to be generated.

4. Cy-près schemes and the proceeds of fundraising appeals

The Law Commission recommended changes to simplify and make more proportionate the complex rules which apply where a fundraising appeal does not achieve its target. The recommendations aim to respect donors’ wishes without imposing undue administrative costs on charities. The government has accepted all the recommendation here.

5. Acquisitions, disposals and mortgages of charity land

This was one of the more contentious areas during the consultation process which led to the Law Commission’s Report. As a result, the recommendations in this area retained the current process on land disposals and mortgages, requiring suitable advice and statements in the documentation, but proposed sensible tweaks to some of the known ‘barnacles’ in the process.

The government has accepted most of the recommendations here, including to allow for more flexibility over the advisers and advice provided. It has also accepted that there should be clarification about when the regime should not apply, such as where the land is held for several beneficiaries (not just the charity) and where the disposal is by a liquidator, administrator, receiver or mortgagee (rather than solely to further the charity’s purposes).

The government has not accepted a recommendation to exclude a charity’s wholly-owned trading subsidiary from the ‘connected persons’ regime here, meaning that a Charity Commission order will continue to be required for such disposals. The rejection was in response to concerns raised by the Charity Commission that removing trading subsidiaries from the connected person regime would lead to an increase in disposals to the subsidiary that would not be in the charity’s best interests.

The government also rejected a recommendation to do away with the requirements to give public notice in relation to disposals of designated land. Again, the Charity Commission was concerned that abolishing the opportunity for stakeholders to make representations would risk trustees disposing of charitable community assets without a complete understanding of the implications.

6. Permanent Endowment

The government has accepted all the Law Commission recommendations regarding permanent endowment. These include clarifying the statutory definition of ‘permanent endowment’, so that it aligns more closely with the usual understanding of the phrase, simplifying the criteria for use of some of the powers to release permanent endowment restrictions and introducing a new power to borrow against permanent endowment (subject to conditions).

7. Remuneration for the supply of goods and the power to award equitable allowances

The current statutory power allowing charity trustees to be paid for services to the charity does not extend also to payment for goods (only for goods supplied in the course of providing services). The government has accepted a recommendation to correct that anomaly.

The government also accepted a recommendation to give power to the Charity Commission to authorise payment to a charity trustee, where the trustee has done work for their charity but is not authorised to be paid for it.

However, the government rejected a recommendation to review the various rights of appeal against Charity Commission decisions, set out in Schedule 6 of the Charities Act 2011, saying it has no plans to review these.

8. Ex gratia payments out of charity funds

Where charity trustees feel a moral obligation to make a payment, but have no legal power to do so, they may apply to the Charity Commission for authority to make an ex gratia payment. The Law Commission recommended some tweaks to the ex gratia payments regime to allow smaller payments to be made without Charity Commission authority and to allow suitable delegation by the trustees of decisions to make ex gratia payments. It also recommended that the regime should be extended in some respects to statutory charities.

The government has accepted these recommendations.

9. Incorporations, mergers and trust corporation status

A major change accepted here is for trust corporation status to be conferred automatically on existing and future corporate charities in respect of any charitable trust of which the corporation is (or, in the future, becomes) a trustee. Trust corporation status is necessary in some situations, such as where there is a single corporate trustee of land or in order to relieve outgoing charity trustees of their obligations. However, the rules are complex and it can be easy for the point to be missed. Implementing this provision should remove that particular ‘barnacle’ and is to be welcomed.

10. Charity and Trustee Insolvency

The Charity Commission has accepted a recommendation to revise its guidance CC12 Managing a charity’s finances to clarify in a number of respects how the law applies to a charity’s assets where it becomes insolvent.

11. Charity Names

The government has accepted a number of recommendations aimed at extending the Charity Commission’s power to direct a charity to change its name. These would extend the power to encompass charities which are not registered (including exempt charities) and, controversially, would extend to ‘working names’, a point which was not consulted upon.

The extension of powers would also enable the Commission to delay registration of a change of name and registration of an institution as a charity where the proposed name would be the same as or too similar to the name of an existing charity. It is acknowledged that this recommendation amounts to a compromise, but the government considers ‘it will create a better process for the resolution of disagreements about a charity’s name’.

11. The identity of a charity’s trustees

A potentially useful power here, accepted by the government, would enable the Commission to ratify a trustee’s appointment or election where there is doubt over the validity of the trustee’s appointment. Sometimes, where doubts are raised over an appointment process, the trustees, and in particular the trustee whose appointment is questioned, can be left in limbo and it can be costly to sort out the situation. The proposed power could provide a cost-effective means of addressing such situations.

12. The Charity Tribunal and the courts

The government has accepted a recommendation to allow the Tribunal to make ‘authorised costs orders’ in respect of proceedings before it, enabling charity trustees to seek advance assurance that they can pay the reasonable costs of the proceedings out of charity funds.

The government rejected a proposal that the Charity Commission be able to make a reference to the Tribunal without the Attorney General’s consent. The government noted that the Attorney General’s consent is ‘an important element’ in helping the Attorney General fulfil the duty, on behalf of the Crown, to protect charitable interests in England and Wales.

What happens next?

As can be seen above, the Report’s recommendations are very technical in nature and a number will involve some compromises to reflect different interests and views across the sector. However, in total the proposals should work to ease some annoyances which can cause administrative and legal problems, leading to cost and delay – the barnacles causing drag on the boat’s progress in Lord Hodgson’s vivid analogy. But they can offer no assistance at all unless and until they are implemented.

In the announcement on 22 March 2021, the Minister for Civil Society, Baroness Barran, stated that the government will ‘look to implement [the recommendations] when Parliamentary time allows’. The recommendations are already set out in a draft Bill, and explanatory notes, annexed to the Report – importantly, a Law Commission Bill can go through a special process which requires less Parliamentary time. The Law Commission’s website states that the government has asked the Law Commission to assist with updating that draft Bill.

The Minister’s statement also noted that the ‘government will steward the sector, unlock new types of resources, from encouraging philanthropy to leveraging finance, empowering volunteers to keep supporting their communities, and build a compelling picture of the enormous value that charities contribute to our economy and society’ – so it is hoped that the time will be found to introduce and implement the Bill sooner rather than later.