The Charities Act 2022 (the 2022 Act) received Royal Assent on 24 February 2022, following the Law Commission’s report on Technical Issues In Charity Law, which was published in September 2017. The Charity Commission, on implementation of the first wave of changes, explained that the 2022 Act is designed to “make a positive, practical different to charities”, with the aim of supporting charities by removing unnecessary bureaucracy, making the legal framework governing charities easier for trustees to comply with and avoiding unnecessary expense.
The changes introduced by the 2022 Act are intended to address a number of problem areas highlighted by the Law Commission’s report. The 2022 Act is being implemented in phases between Autumn 2022 and Autumn 2023. At the time of writing, the first of the legal changes had taken effect on 31 October 2022 and we address this further below, after an overview of key changes still to be implemented.
Charities disposing of land
Under the Charities Act 2011, a charity’s ability to dispose of land is restricted to ensure that charities obtain the best terms reasonably available. A charity cannot dispose of a freehold interest or a leasehold interest (for a term of more than seven years) in its land without first obtaining the consent of the Charity Commission (or the Court) unless the charity takes and acts on advice in the form of a report from a suitably qualified surveyor – currently a member of the Royal Institution of Chartered Surveyors (RICS).
Expected to be implemented in spring 2023, the changes proposed in the 2022 Act provide greater flexibility and simplify this regime. The category of professionals who can advise charity trustees on land disposals will be broadened to include specified designated advisers, including fellows of professional bodies for estate agents and agricultural valuers. This will be determined by regulations which are yet to be made and are expected to reflect the Law Commission’s proposals.
As a result, for some transactions, a report will be easier and more cost effective to obtain. The 2022 Act also simplifies the requirements for the advice which needs to be provided, replacing the current regulations and, among other things, removing the requirement for the report to advise on how a property should be advertised.
Changes to charities’ governing documents
Expected to be implemented in autumn 2023, changes are proposed to streamline the process for unincorporated charities to amend their governing documents, aligning the rules with those for companies and charitable incorporated organisations (CIOs). The current rules are confusing, as different rules apply depending on whether a charity’s governing document contains an express power of amendment, the size of the charity and the changes that are proposed to be made.
The 2022 Act will simplify the process for trustees making certain amendments, as alterations to the charitable company’s objects that do not alter the substance of the charitable purposes will no longer be considered a regulated alteration requiring the Charity Commission’s consent. This will bring the regime for companies closer to the regime for CIOs.
The 2022 Act also introduces a simpler regime for unincorporated charities without an express power to amend in their governing document, giving a new statutory power for trustees to amend their governing document by resolution, subject to Charity Commission consent for certain changes. The thresholds are higher under this new power, requiring approval by at least 75% of the trustees, or a majority of the trustees and, if there is a separate membership, 75% of those members.
Where substantial changes are made and the Commission must consider whether to consent to a change to the purposes of a charity using the new statutory power, the Commission must follow the new statutory test. The Commission must have regard to the original purposes of the charity, ensuring that the purposes are as far as reasonably practicable similar to the purposes being altered, and the need for suitable and effective purposes for the charity. It is not yet clear whether this new test will also apply to unincorporated charities amending their governing document by way of an express power.
Although this change may potentially make it easier to introduce changes to charitable purposes for those unincorporated associations currently without an express power to amend in their governing document, for example where a charity holds a range of endowment and other assets on trust, the actual implication of the changes will depend on the way the Commission construes the new provisions. Further clarity on this will hopefully be attained when the relevant guidance is published by the Commission on implementation of the changes.
Permanent endowment
Under the changes brought about by the 2022 Act, expected in spring 2023, trustees of permanently endowed charities will be given more flexibility when dealing with their charity’s funds.
The changes include a new power to borrow up to 25% of the value of the permanent endowment repayable within 20 years without an obligation to pay any interest, potentially giving access to long-term funding on preferential terms. Larger permanent endowment funds with a market value of up to £25,000 will be brought within the scope of trustees’ existing powers to spend capital, whereas currently the threshold is £10,000. Trustees operating a total return approach to investment will have wider discretion to use their permanent endowment to make social investments.
The 2022 Act also removes existing criteria affecting the use of these powers and clarifies the availability of the current powers to corporate charities which hold permanent endowment funds on trust.
Charity mergers
The 2022 Act aims to resolve historical issues faced by charities as a result of changes from the Companies Act 2006, causing practical barriers to charity mergers and incorporations. The amendments, expected in autumn 2023, should simplify the process for some transactions by removing the need to retain shell charities to catch legacies left to a charity which ceases to exist post-merger, thereby reducing ongoing administration costs.
Ex gratia payments
Initially this change was due to come into force in autumn 2022, but it appears that the Charity Commission will undergo further consideration prior to implementation of the changes and so the time frame for implementation of these particular changes remains unclear.
Under the proposed changes, charities will be provided with the power to make small ex gratia payments (payments to discharge moral obligations which neither further their charitable purposes nor settle claims) of up to £20,000 (depending on the charity’s income), without Charity Commission authorisation. Payments above the thresholds will still require Charity Commission authority but there is no limit on the total amount of ex gratia payments that can be made in a year.
In addition, trustees will be able to delegate the decision-making for ex gratia payments to other individuals or groups within the charity, reducing the burden on charity trustees, as currently a decision to make an ex gratia payment must be made by the trustees themselves.
Changes implemented in autumn 2022
The remainder of this article focuses on some of the key provisions implemented as part of the first wave of changes to the law on 31 October 2022. The Charity Commission has also published its updated guidance on each of these areas to assist charities in navigating these changes.
Section 4: Power to amend Royal Charters
For charities established by Royal Charter, there is a new statutory power to amend provisions in their Charter which they could not previously change, subject to Privy Council consent. Following these changes, trustees of Royal Charter charities without an express power in their governing documents have the power to make amendments to any provision within their Charter by way of passing a resolution, subject to the approval of the Privy Council, and that approved resolution will be sufficient to modify the Royal Charter. This refines the process for Royal Charter charities amending their Charter, which is known to be arduous.
Section 5: Orders under section 73 of the Charities Act 2011
Previously, where a charity is established by a public act of parliament and wishes to make changes to its governing document, a resolution approving the change is required from both houses of parliament, which can be difficult process in practice. Under the changes brought about by the 2022 Act, all schemes made under section 73 are subject to a lighter touch procedure in parliament, regardless of whether the charity’s governing document is contained in a private or a public act of parliament. This will reduce waiting times and costs. An order under the new Section 73 means that, once a scheme has been approved, further amendments can be made without parliamentary approval, enabling the amendment to be implemented by a scheme of the Charity Commission rather than requiring full parliamentary approval.
Sections 6 and 7: Cy-près powers
The 2022 Act introduces more flexible rules for dealing with donations from a failed appeal, ie fundraising appeals that do not reach, or exceed, fundraising targets, allowing monies to be applied cy-pres for other similar charitable purposes where certain conditions are satisfied. This simplifies the process and make it less time consuming for trustees of charities which regularly deal with appeals for funds.
There are certain conditions to be met for the new rules to apply, which are that:
- it would be unreasonable to incur expense to return the donation or unreasonable to expect it to be returned;
- the donation is £120 or less; or
- the donors cannot be identified or found.
Section 8: Power of the court and the Commission to make schemes
The Charity Commission currently already had the power to make schemes in respect of charitable trusts. This power has been extended by the 2022 Act to charitable companies, CIOs and any other charity structure. This broadens the scope of the Commission’s power and is aimed at harmonising the procedures available for amendments and schemes. In reality, this is likely to be a last resort power, as the Commission stepping in to make a scheme could infringe the constitutional powers of the trustees and members of the charity to make such changes.
Section 30: Remuneration of charity trustees in providing goods or services to the charity
Previously, remuneration of charity trustees was only possible in relation to services provided to the charity or goods provided in connection with a service (eg building materials linked to building services provided by a trustee) but not for a trustee or connected person to be paid for providing goods only to the charity. This power is now extended to the provision of goods to the charity, which does not be have to be connected to any service provided.
Section 32: Trust corporation status
Following the 2022 Act, trust corporation status will now automatically be conferred where a charitable corporate body is a trustee of a charity. This is often important where an unincorporated charity wishes to dispose of land and give a valid receipt to the purchaser of the land. This change is anticipated to widen application of trust corporation status and streamline the process as the status will now be automatically granted, whereas at present an application to the Charity Commission must be made. However, the new law will only apply to those corporate trustees which are charities, so non-charitable company trustees will still need to apply to the Charity Commission for consent.
Section 36: Costs incurred in relation to tribunal proceedings etc
The Charity Tribunal is given the power to make authorised costs orders, meaning trustees will be permitted to pay costs incurred in relation to tribunal proceedings out of charity funds. An order would cover the charity’s own legal costs as well as any other costs the Tribunal might order the charity to pay. This change will better enable trustees to obtain costs protection in relation to legal costs incurred in Charity Tribunal proceedings and provide a direct route to the Charity Commission rather than trustees being required to go through a court processes to obtain costs protection.
Part of Section 37: Public notice as regards Commission orders etc
The Charity Commission now has a discretionary power to give public notice of an amendment to a charity governing document where consent to the amendment is sought. It is not currently stated how long such a notice period might last, and there is potential for this change to prolong the process of receiving consent where Charity Commission consent is required for an amendment.
Summary
In conclusion, the changes to be implemented following the 2022 Act will no doubt provide greater flexibility in some aspects of charity law and make the certain processes more efficient. The real impact of the changes in practice is yet to be seen, but we anticipate that the guidance made available upon implementation of each stage of the Act will most likely help charity trustees understand the changes.
Shivaji Shiva is a charities partner at VWV
Charity Finance wishes to thank VWV for its support with this article
