Demystifying the sector:
1) Charity

by James Ketchell | Posted on 16 March 2016

This month we’re starting at the beginning with charities. More specifically their status, legal forms and what you, as a Donor, need to know about them.

A key first thing to realise is the definitions below are not mutually exclusive. Some organisations can easily fit in two or three of the descriptions below.

Neither are there accepted international standards, terminology changes as borders are crossed. As we are often told that charity begins at home, we thought we would start with the UK. 

Over the coming months members of our network will look to take us through their own terminology around the world. If particular geographic areas are of interest, please do let us know.

What is a charity?

In the UK charities have to be seen as having “charitable purpose”. Not a new idea – these take root in laws from 1601 – at its heart charitable purpose are areas that the State believes are of general benefit to Society, and which it should encourage private donations to.

Since 2011 charitable purposes have been split into 13 categories (advancement of education or health, for example) with the flexibility of an “other charitable purposes” category. However having a stated aim of fitting into one of these categories is only the first step, organisations also have to show that it exists for the wider public benefit.

To encourage donations conferring charitable status enables organisations to benefit from a number of advantages – most prominently tax relief. Once an organisation feels it can justify this, it can look to be registered within the UK.

How charities are registered…

Charities are regulated by either the Charity Commission in England and Wales, a separate Commission for Northern Ireland or lastly the Scottish Charity Regulator in - you guessed it - Scotland.

In England and Wales charities need to meet a minimum threshold of £5,000 income a year before being able to register (and receive their charity number). Registered charities also need to file an annual return.

Not all charities need to register with them, however.

Excepted Charity – A charity is excepted from registering with the Charity Commission if its income is £100,000 or less and falls into the following groups:

  • Churches and chapels belonging to some Christian denominations
  • Charities that provide premises for some types of schools
  • Scout and Guide groups
  • Charitable service funds of the armed forces

Exempt Charity – A number of charities do not need to register. These include further and higher education institutions, universities, industrial and provident societies, friendly societies national museums, that were established by Act of Parliament or by Royal Charter.

Charities also need to register with HM Revenues and Customs (HMRC) if they are planning on claiming Gift Aid on donations or to enable a reduction in taxes such as Council tax. However, there is no minimum threshold for this, which means theoretically an organisation of any size providing societal benefit can boost a potential donation. Hence many local sports groups find themselves benefitting from registration with HMRC as Community Associations and Sports Clubs.

How charities are formed…

Before registering charitable organisations need to decide upon the form that would work best for them. Somewhat confusingly, charitable organisations can take on a number of different forms, depending on where they are based, their history, and the areas they work in.

  • Charity company limited by guarantee (CLG) – The most popular legal form for a charities in the UK which ensures they can work, pay bills, enter contracts, and limits the risk of liability with trustees usually liable for a nominal amount (usually £1). Charity CLGs have to register with Companies House (and if they meet the criteria, can also be registered with the relevant charity regulator).
  • Charitable Incorporated Organisation (CIO) – A new legal form for charities introduced in 2011 in Scotland and 2013 in England and Wales. These offer a similar status to a Charity Company Limited by Guarantee, but the charity only needs to register with their charity regulator, thus reducing their administrative burden.
  • Community Interest Company (CIC) – Introduced in 2005 to give social enterprises and charities an easy way to form a legal entity within which to operate. An organisation which is driven by social objectives, as opposed to pure maximisation of profit. Companies need to pass a “community interest test” to the satisfaction of (yet another) independent CIC regulator
  • Charitable Trust – A more historic form of charity where a property or fund was donated to be managed by Trustees in order to meet charitable objectives. A “trust deed” guides how they function.
  • Unincorporated Association – Made up of a group of individuals, who have decided to come together for a particular charitable purpose, they have no legal form. This might be suitable for a community group for example. As they have no formal structure the members are personally liable for any contract entered into.

OK… but what are these?

The following terms are also used to describe charities.

  • Foundation – It’s sometimes used in the title of a charity (as in “British Heart Foundation”) but in the UK it has no legal status (as opposed to in the USA, for example). Often used to describe grantmaking institutions.
  • Voluntary Organisation – a ‘catch all’ term to describe any organisation working in the charity space, large or small.

These are not charities though…

The following, although created for a wider purpose than profit, are not charities.

  • Friendly Society – A mutual for insurance, pensions, savings or cooperative banking.
  • Industrial or Provident Society – No longer used in Great Britain, it is still used in Northern Ireland to describe co-operatives or community benefit organisations.
  • Co-operatives – A democratically controlled business which aspires to mutual social, economic or cultural benefits.