Considerable time and effort has gone into the recent Charities Act. But its true effectiveness will only become clear once it is put into action, say Michael King and Ann Phillips


The Charities Act 2006 has been one of the most intensively worked pieces of primary legislation in recent times. It has been widely welcomed in the charity sector, accompanied by a sigh of relief and the hope that its implementation will not be too long delayed.



The root of the modern legal concept of charity is the Preamble to the Statute of Charitable Uses 1601, which listed charitable purposes as varied as the relief of aged, impotent and poor people; the maintenance of schools of learning; and the repair of bridges.



Over the years, the courts and the Charity Commission have developed this list by analogy to the charitable purposes set out in 1601. In 1891, Lord Macnaghten classified charitable purposes into four categories of charity: the relief of poverty, the advancement of religion, the advancement of education, and other purposes beneficial to the community and within the spirit of the preamble.



Successive court decisions gave rise to the presumption that the first three purposes were for the benefit of the public, and that this need not be established in individual cases unless there was some doubt or ambiguity. However, many charities classified under the fourth head considered that they were not operating on a level playing field. There has been growing clamour for all charities to be required to prove that they are established and work for the public benefit and, indeed, a sufficient section of the public.



The new Act requires the Charity Commission to issue guidance on the public benefit issue, having first consulted publicly. The commission has indicated that it will start with charities that charge significant fees for their work. It appears that the commission will try to establish generally accepted standards and encourage such charities to ensure that they reach out beyond those members of the public who benefit merely because they can afford their fees.



The Act lists 13 charitable purposes, of which the first three are broadly unchanged from Lord Macnaghten's list and the 13th, though restated, ensures the survival of 'other charitable purposes within the spirit and intendment of the preamble to the 1601 statute'.



Right until the end of the parliamentary process, there was debate about the criteria for testing public benefit. Despite suggestions that independent schools and private hospitals in particular were not seen to be run for the benefit of the public at large, the government stuck to the concept of leaving the issuing of guidance and monitoring of public benefit to the commission.



The Act creates a new legal vehicle specifically for charities, the charitable incorporated organisation (CIO), designed to allow charities to take on corporate status, with limited liability. The CIO will allow charities to have corporate status, protecting their members/trustees from civil claims and liabilities, without the need to register as companies and report to Companies House as well as the commission. Secondary legislation will be required before it is available for use by existing or new charities.



The Charity Commissioners for England and Wales have been in existence since 1853 and, though they were given considerable teeth in the Charities Acts of 1992 and 1993, there was a concern that their powers should be updated and certain anomalies removed. The commission is now a statutory corporation and has been given a list of general functions, as well as certain clear objectives and duties.



One of the most hotly debated issues was the extent to which the commission should in its actions be proportionate in the way in which it targeted its functions. The Act enshrines the need for proportionality, consistency and transparency in the commission's decision-making and regulatory activities.



The commission's objectives have been restated in the Act and a key point is that it remains a source of advice as well as a regulator. The commission's roles continue to include increasing compliance and accountability, as well as public trust and confidence in charities, but now also include the requirements to promote awareness and understanding of public benefit and the effective use of charitable resources.



There is always concern that governments might wish to influence and set policies for the charity sector to ensure that politically desirable targets are attained without any increase in taxation. The commission has in the past been a champion of the independence of charities and their trustees. Although from time to time charities and their advisers will wish to criticise the commission for a particular decision, or even the lack of one, we believe that as a regulator it remains an important defence against political control by government.



The establishment of a dedicated charity tribunal to consider appeals from determinations of the commission was warmly welcomed by the sector, but the tribunal's jurisdiction in the draft Bill was severely limited in that several important decisions, or non-decisions, of the commission would not have been covered. The tribunal's remit has now been widened to include upholding, quashing, varying or substituting decisions of the commission.



It remains to be seen how the tribunal will work in practice and whether legal advice or advocacy will be essential for charities appearing before it.



In an attempt to be proportionate and not to burden small charities with regulations, while ensuring proper regulation of larger charities, the Act:

l Sets an annual income threshold of £5,000, above which registration is compulsory;

l Phases out the class of charities excepted from registration;

l Ensures that a principal regulator will be in place for those charities that will remain exempt;

l Removes exempt status from those charities which have no principal regulator.



The concept of the unpaid , volunteer trustee remains at the heart of the charity sector, but the Act does attempt to ease the personal burden of regulation and allows the payment of a minority of trustees for services, with appropriate safeguards.



The Act refreshes this long-established legal rule of cy près, which allows the commission to alter a charity's objects that have passed their sell-by date and ensure that charity property can be used effectively. There are also new provisions to deal with failed appeals.



When considering whether a scheme should be made to alter a charity's purposes, the commission will have to take into account not only the spirit of the gift by the original donor, but also the social and economic circumstances



now prevailing. In effect, the commission will have to second-guess what purposes the donor would approve if confronted with the needs of contemporary society.



There are welcome powers for smaller charities to spend permanently endowed capital, including land, while larger charities will also be able to spend such capital if the commission concurs with the rationale for doing so.



The Act contains several measures to facilitate mergers and re-organisations as charities seek to evolve to meet the needs of the communities they serve. Most importantly, future legacies to the original charity can now benefit the new or merged charity if the merger has been registered with the commission.



To the relief of many involved in charity fundraising, the original proposal simply to amend the public charitable collections regime in the 1992 Act has been withdrawn and the Act now replaces those provisions, which in any event were never in force.



Michael King and Ann Phillips are members of the charity and education team at Bath and London law firm Stone King. They are the authors of Charities Act 2006: A Guide to the New Law, to be published in February by Law Society Publishing. Contact Marston Book Services to order the book for £39.95 (plus p&p), tel: 01235 465 656