What is a charity?
To be a charity in England and Wales, an organisation must satisfy the definition of a charity in the Charities Act (most recently amended in 2011). The Charities Act says that a ‘charity’ must have ‘charitable purposes’ that help the public (known as being ‘for public benefit’).
There are 13 charitable purposes defined in the Charity Act and they include activities that contribute to:
• relieving poverty
• saving lives
• citizenship or community development
• the arts
• amateur sport
• human rights
• religious or racial harmony
• the protection of the environment
An organisation’s purpose cannot be a charitable purpose if it does not fall within the descriptions of purposes and is not for the public benefit, including if it is:
• a political purpose
• unlawful or against public policy
• intended to serve a non-charitable purpose
The charity’s ‘purpose’ is what it is set up to achieve. For an organisation to be a charity, each of its purposes must be for the public benefit. The Charities Act 2011 calls this the ‘public benefit requirement’.
The public benefit requirement has two aspects:
• The ‘benefit aspect’
To satisfy this aspect:
o a purpose must be beneficial - this must be in a way that is identifiable and capable of being proved by evidence where necessary and which is not based on personal views
o any detriment or harm that results from the purpose (to people, property or the environment) must not outweigh the benefit - this is also based on evidence and not on personal views
• The ‘public aspect’
To satisfy this aspect the purpose must:
o benefit the public in general, or a sufficient section of the public - what is a ‘sufficient section of the public’ varies from purpose to purpose
o not give rise to more than incidental personal benefit - personal benefit is ‘incidental’ where (having regard both to its nature and to its amount) it is a necessary result or by-product of carrying out the purpose
An organisation cannot be a charity if it has some purposes that are charitable and some that are not.
Setting up a Charity
There are 6 steps to setting up a charity.
1. Find trustees for the charity – charities usually need at least 3.
2. Make sure the charity has ‘charitable purposes for the public benefit’.
3. Choose a name for the charity.
4. Choose a structure for the charity.
5. Create a ‘governing document’.
6. Register as a charity if your annual income is over £5,000 or if you set up a charitable incorporated organisation (CIO).
Legal structures for a charity
You register a charitable company with Companies House.
Trustees have limited or no liability for a charitable company’s debts or liabilities.
Charitable incorporated organisation (CIO)
A CIO is an incorporated structure designed for charities. You create a CIO by registering with the Charity Commission. You don’t need to register with Companies House.
Trustees have limited or no liability for CIO debts or liabilities.
A ‘charitable trust’ is a way for a group of people (‘trustees’) to manage assets such as money, investments, land or buildings.
Unincorporated charitable association
An ‘unincorporated charitable association’ is a simple way for a group of volunteers to run a charity for a common purpose.
Unincorporated charitable associations can’t employ staff or own premises.
Register your charity
You must apply to register your charity if:
• its income is at least £5,000 per year or it’s a charitable incorporated organisation (CIO)
• it’s based in England or Wales (the rules are different in Scotland and Northern Ireland)
When you apply you’ll be asked:
• about your charity’s charitable purposes
• how you run your charity for public benefit
• for proof that your charity’s annual income is above £5,000, unless you’re a CIO
You’ll also need to give your charity’s:
• bank or building society details
• most recent accounts
• contact details, including a postal address
• trustees’ names, dates of birth and contact details
• a copy of your charity’s governing document (in PDF format)
Proof of income
Proof of income, if needed, can be any one of:
• your charity’s latest ‘published’ annual accounts (in PDF format) - they must have been approved as proof of income by an independent examiner or auditor
• a recent bank statement (as a scanned image)
• a formal offer of funding from a recognised funding body (as a scanned image)
Can trustees be paid?
Charities cannot pay salaries to trustees, except in special cases approved by the Charity Commission. In most cases, this means that the person who founded the organisation and is its main driving force cannot be on the board of Trustees.
Charities can pay expenses to trustees for carrying out their duties. In certain circumstances charities can pay trustees for work done for the charity (but not for their work as a trustee).
Charities can get certain tax reliefs. To benefit they must be recognised by HM Revenue and Customs (HMRC).
Charities don’t pay tax on most types of income as long as they use the money for charitable purposes.
They can claim back tax that’s been deducted, eg on bank interest and donations (this is known as Gift Aid).
In England and Wales charities are regulated by the Charity Commission. Charities have to make annual returns, in which they demonstrate how they have delivered their purpose and satisfied the public interest test. They must also submit yearly accounts which must have been audited. There are special rules for the auditing of charity accounts.
What costs are involved in setting up a new charity?
There are costs involved in setting up any new organisation, and charities are no exception. In addition to the usual start-up costs, you may need to factor in the fees for taking legal and tax advice about charitable status, and for assistance in getting the charity registered.
How long is it likely to take to set up a new charity?
It may take some lead-in time to decide exactly what you are trying to achieve, whether there is a need for it, and the best way of going about it. Having done that, a company can be set up quickly – in a day if necessary. Other corporate vehicles, such as industrial and provident societies, take a little longer to register. In either case, time will have to be spent in getting the constitution right for your organisation.
Registration with the Charity Commission takes some time on top of that. Their published aim is to decide on an application for registration in an average of 40 days, but in our experience it can take considerably longer. In particular, if the Charity Commission has questions or concerns about the proposed activities of the charity, there may be a series of questions. It is possible that the Commission will require some redrafting of the charity's constitution. This may be time consuming. But be aware that if you solicit money for an institution on the basis of a representation that it is a registered charity, and it is not a registered charity, you may be committing a criminal offence.
How can charities use their money?
Charitable money can only be used to further their charitable purpose and for public benefit. There are very strict rules around this, set down in comprehensive guidance issued by the Charity Commission
The underpinning rule is the charitable money cannot be used for non-charitable purposes. For charities that issue grants this means that:
• the charity can issue grants to individuals, only if they are included within the groups named as intended beneficiaries of the charity
• the charity can give grants to other charities
In addition as the CIC structure has become accepted
• the charity can give grants to CICs, as long as they are legally constituted as a CIC and regulated by the CIC regulator