The first charities were established over 400 years ago and becoming a charity is still the most widely recognised way for an organisation with a social mission to be established. It has very generous tax benefits associated with it and is recognised by all funders. Although charitable status is not suitable for all organisations it should always be one of the options considered by founders and social entrepreneurs.
Charity is a status, not a legal form. It can apply to any organisation which has exclusively charitable purposes under English law and exists to pursue public benefit. The only exception to this is a community interest company. A community interest company cannot also be a charity.
The Charities Act 2006 includes descriptions of the main purposes/objects which are charitable:
- the prevention or relief of poverty
- the advancement of education
- the advancement of religion
- the advancement of health or the saving of lives
- the advancement of citizenship or community development
- the advancement of the arts, culture, heritage or science
- the advancement of amateur sport
- the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- the advancement of environmental protection or improvement
- the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
- the advancement of animal welfare
- the promotion of the efficiency of the armed forces of the Crown; or the efficiency of the police, fire and rescue services or ambulance services, and;
- any other purposes charitable in law
All organisations with charitable status must exist for the public benefit. The Charity Commission has published guidance on what this means and is conducting a review of charities currently registered to ensure they meet this requirement. It has been particularly controversial in relation to fee charging charities like private schools.
More information about charitable purposes and registering as a charity can be found on the Charity Commission website.
All activities carried out by charities must be in furtherance of their objects and must be for the public benefit. This does not mean that charities cannot trade. Find out more about charities and trading.
Categories of charity
There are three categories of charity: registered charities (which are registered with the Charity Commission), exempt charities and excepted charities.
Until recently exempt charities were not allowed to register with the Charity Commission because it was thought they were adequately overseen by other public bodies, such as the Financial Services Authority or the Tenant Services Authority. Exempt charities have always been obliged to comply with charity law and following the Charities Act 2006, those that do not have a regulator that is able to regulate them as charities will be obliged to become registered charities.
Some organisations have been excepted from registering as charities. These include some religious charities, Boy Scout and Girl Guide charities and some armed forces charities. Some of these organisations are now obliged to register as charities.
Charitable status has the following advantages:
Public recognition & trust
Charities are widely recognised as existing for social good. This can assist with fundraising.
A lock on assets
Organisations with charitable status are prevented from using their assets for any purpose other than to pursue their charitable objects. This means that the assets of a charity can never be used for other purposes or for private benefit.
Charities benefit from a variety of tax reliefs including:
- no corporation tax on profits made from trading in the course of delivering their charitable aims (primary purpose trading)
- 80% mandatory and 20% discretionary relief from business rates (rate relief)
- Gift aid on cash donations from individuals
- Stamp duty land tax relief on acquisitions of freehold property or entering into leases
Certain sources of grant funding are only open to organisations with charitable status.
The disadvantages of charitable status are:
Restrictions & requirements
Charities may face restrictions on the type of work that can be carried out or funded by them. For example, political activities and trading are both types of work which are subject to particular restrictions. Charitable status also means that the organisation must comply with administrative regulatory requirements including those relating to the preparation of annual accounts and returns.
The Charity Commission’s information on registration provides further information on the restrictions and requirements.
Individuals on the board of a charity (often called trustees) must be unpaid unless the constitution of that charity or the Charity Commission permits payment. In general, payment of directors for particular services (e.g. the payment of a counsellor who happened to be a director to provide counselling services) is not a problem but the Charity Commission will want a detailed explanation before it will allow a charity to include in its constitution a provision allowing payment of trustees for being trustees.
This feature of charitable status can mean that it does not appeal to founders of organisations who need to receive a salary for the work they do but want to retain control. A founder who becomes a charity chief executive will receive a salary as an employee of the charity but can be dismissed by its board. A founder who sits on a board of charity is usually unpaid and, in any event shares control and responsibility equally with all the other members of the board.
For more information about payment of trustees see the Charity Commission’s publication CC11 Trustee Expenses and Payments.
No equity investment
Charities cannot raise equity investment. But it should be remembered that, for many organisations these ‘disadvantages’ are seen as advantages
This information was provided by NCVO.