Chipping off the Barnacles (or Most of Them) - Government Responds to Law Commission Recommendations

The Technical Issues project was not a full review of charity law, but focused on selected technical issues first raised by Lord Hodgson in his 2012 review of the Charities Act 2006. Though technical in their nature, these are issues which we see day in day out as having real practical consequences for charities and we were very proud to have provided legal consultancy to the Law Commission on this important project.

Removing the Regulatory Burden

As we reported when the Law Commission published its recommendations in 2017, Lord Hodgson had likened regulatory burdens on charities to the barnacles that slow down a charity ship. The Government has now accepted the vast majority of the Law Commission's 'barnacle busting' recommendations, aimed at removing unnecessary regulation and bureaucracy and clarifying inconsistencies and complexities in the law which make applying and complying with it more difficult.

The recommendations accepted by the Government are wide ranging and impact on a number of different areas of charity administration, including:

• Levelling the playing field for changing purposes and amending governing documents

A new simpler regime for unincorporated charities to amend their purposes and other provisions in their governing document subject to appropriate Charity Commission oversight, modelled on the regime which applies to charitable companies and CIOs (with some amendments to the regimes for companies and CIOs to reflect the existing rules for unincorporated charities). These were some of the most ambitious of the Law Commission's proposals, which should make it much easier for unincorporated charities and incorporated charities holding assets on trust to adapt and change.

• Using permanent endowment

Increased flexibility for charities to use their permanent endowment, by:

- making the statutory power to spend permanent endowment available for funds up to £25,000 instead of £10,000

- introducing a new statutory power to borrow from permanent endowment

- expanding the powers of trustees operating a total return approach to investment to use their permanent endowment in making social investments.

• Removing legal barriers to charity mergers

Including by:

- resolving some of the historic issues and inconsistencies in the law which make mergers and incorporations more difficult

- addressing uncertainties with the Charity Commission's register of mergers, in order to remove the need for shell charities to be retained following a merger

- conferring automatically on corporate charities which become trustees following a merger or incorporation the status they need to be able to hold land.

• Removing unnecessary administrative burdens on land transactions

Giving charities selling land more flexibility to obtain tailored advice, proportionate to the particular circumstances; resolving gaps in protection for buyers of charity land which can deter buyers or increase sale costs; and simplifying the law in relation to certain sales of charity land.

• Failed fundraising appeals

Enabling trustees to take a proportionate and more straightforward approach to contacting donors to a fundraising appeal which has not met its target and when applying the proceeds of a failed fundraising appeal.

• Ex gratia payments

Giving charities the power to make small ex gratia payments (payments which do not further purposes and which do not settle claims), capable of delegation within a charity, without the need for Charity Commission authorisation.

Where Did the Government Disagree?

It is very encouraging that the Government has accepted the vast majority of the recommendations to remove charity administration from unnecessary regulatory oversight, which must be testament to the well-considered and persuasive case put forward by the Law Commission for reform.

One of the recommendations the Government rejected is interesting less because of its practical impact and more because the Government has upheld the Commission's role as regulatory gatekeeper, in circumstances even where the Commission could have a conflict of interest. Certain litigation involving charities known as 'charity proceedings' (broadly, proceedings concerning internal disputes within a charity) can only be started with the Charity Commission. In the vast majority of cases this causes no issue, but where the Commission is itself involved in the proceedings, can it be expected to make a completely objective judgment? We supported the Law Commission's recommendation that charities shouldn't have to go through the Commission where the Commission is conflicted. However, the Government disagreed, stating that Commission approval provides an important protection of charity assets, preventing charity funds being wasted on unmeritorious litigation.

While the Government accepted some of the Law Commission's recommendations which were aimed at making it easier for Royal Charter and statutory charities to amend their governing documents, it didn't agree to the full package which it says sought to apply a 'one size fits all' approach to Privy Council guidance and engagement with charities. Although we supported the Law Commission's recommendations, we think the very helpful service offered by the Privy Council Office to Royal Charter charities mitigates any significant issues in preserving the status quo.

Finally, the Government also stopped short of accepting all of the Law Commission's recommendations in relation to land transactions. Citing evidence from the Charity Commission that charities often fail to appreciate the need to deal with their wholly owned subsidiaries on "arms' length" terms, the Government thought that the requirement to obtain a Charity Commission order authorising a disposal to a wholly owned subsidiary should be retained. So should the requirement to advertise proposed disposals of 'designated land' (including long-standing community assets such as recreation grounds, local schools and village halls), which the Government says remains important for beneficiaries and other stakeholders.

What's Next?

The removal of unnecessary regulatory red tape is undoubtedly a good thing for the sector, particularly as trustees look forward to address the impact of coronavirus (COVID-19) on their charities. However, the Government's response comes three and a half years after the Law Commission concluded its project and there is still no clarity on when the recommendations will be implemented. The Government has asked the Law Commission to assist with the necessary amendments to the Charities Act 2011, which will be introduced "when Parliamentary time allows".

The reforms will be welcome when they come, but charities shouldn't delay their proposals in anticipation of them. The current regimes are complex and cumbersome, but workable, and any charity considering strategic or constitutional change or looking to make more effective use of its assets needs to act when the time is right.

For further information about any of the Law Commission's recommended reforms or how the current law affects you, please contact Rachel Tonkin in our Charity Law team on 07500 058404 or by completing the form below.