Exploring the definition of a charity in the UK

The work that charities do is essential to communities all over the UK. With such a vast array of charitable organisations operating – and new ones emerging all the time – it’s crucial to understand the intricacies of the legal framework and responsibilities that guide these charities.

The team at SoGood Partners is working on a classification system that will help us focus our efforts by grouping charities into logical segments with shared interests and needs. Before we get into that detail, we wanted to lay out the foundations of the charity sector in the United Kingdom. 

In this article, we cover the governing laws and regulations, the various legal structures available, the registration process, tax benefits and obligations, and the role of charity trustees.

Key takeaways

• The Charities Act and Charity Commission provide the legal framework for UK charities to adhere to in order to maintain their charitable status.

• For a charity to register with the Charity Commission, eligibility criteria must be met. That includes meeting income thresholds and having an aligned purpose with one of the 13 descriptions outlined by law.

• Trustee responsibilities include ensuring compliance with charity law, using resources responsibly, acting beneficially towards the charity’s long-term success, and protecting against potential liabilities through insurance.

Understanding UK charity law

The legal landscape for charities in the United Kingdom is rooted in the Charities Act and the guidance provided by the Charity Commission. These two entities lay the groundwork for the rules and regulations that govern the operations of both private charities and public charities. It’s this that charity trustees need to familiarise themselves with in order to guide their operations and maintain their charitable status.

The Charities Act

The Charities Act 2011 is a cornerstone of UK charity law, providing the legal definition of a charity and its purposes within the UK. The act has a significant impact on the registration and regulation of charitable organisations. It outlines the criteria and requirements for an organisation to be recognised as a charity, including its purpose and activities that are deemed to be charitable. It also regulates how all the money raised by a charity must be used exclusively for its charitable purposes.

The Charity Commission

The Charity Commission is the key regulator and supporter of charities in the UK. As the authority responsible for registering charities, the Commission ensures that organisations fulfil their charitable objectives and operate within the legal structures outlined by the Charities Act. It also offers guidance and resources to help charities navigate the complex world of charity law.

In order to register with the Charity Commission, charities must declare their charitable objectives and demonstrate that they meet the public benefit requirement (more on that below). The Commission ultimately assesses whether an organisation’s purpose is in line with one of the descriptions of purposes outlined in the Charities Act.

Defining a charity in the UK

Charitable purposes

To meet the definition of a charity set by the Charities Act, the organisation has to meet specific criteria. One of the key elements is the organisation’s charitable purposes, which have to meet the description of one of the 13 descriptions outlined by the Charities Act.

These purposes range from the advancement of education or religion, relief of poverty, health, the advancement of the arts, culture, heritage, science, the protection of the environment, human rights, and the relief of those in need due to age, ill-health, disability, financial hardship, or other disadvantage. It’s up to the Charity Commission to decide and then inform organisations whether their purpose meets these criteria.

Any charity that’s set up thus needs to align its objectives with one or more of these descriptions and demonstrate the organisation is working towards the greater good. That enables it to qualify for charitable status and the associated benefits and legal protections.

The public benefit requirement

The public benefit requirement is a vital aspect of UK charity law that ensures organisations serve the public interest and provide tangible benefits to society. This requirement comprises two aspects: the benefit aspect and the public aspect. The benefit aspect relates to the determination of whether the purpose is beneficial, while the public aspect denotes that the purpose must be advantageous to the public as a whole, without any precise criteria or restrictions.

By meeting both aspects of the public benefit requirement, an organisation demonstrates that it’s genuinely working towards improving society and serving the greater good.

The different types of charities in the UK

In the UK, there are various legal structures available for charities, each with its own advantages and drawbacks. The two most common types are Charitable Incorporated Organisations (CIOs) and Charitable Companies Limited by Guarantee.

Charitable Incorporated Organisations (CIOs)

CIOs are a popular legal structure for charities in the UK due to their simplicity and flexibility. As a CIO, an organisation has its own legal identity, allowing it to enter into contracts in its own name and provide limited liability for its members. This can be particularly advantageous for smaller charities that don’t require the more complex structure of a charitable company.

However, there are some disadvantages to forming a CIO. For one thing, members have fewer rights compared to members of a charitable company. Then there are also limitations on the organisation’s ability to engage in certain activities.

Charitable Companies Limited by Guarantee

Charitable Companies Limited by Guarantee are another common legal structure for charities in the UK. They offer limited liability for the guarantors, protecting personal finances and giving organisations the ability to adapt to changing circumstances. This structure is generally used by not-for-profit organisations, social enterprises or charities that require a more complex governance structure.

But there are drawbacks to this structure – such as members being personally liable for the organisation’s debts and a limited ability to generate profit.

Registering a charity with the Charity Commission

For a charity to become legitimate and compliant with UK charity law, it needs to be registered with the Charity Commission. The registration process involves submitting an application, which must include a governing document outlining the charity’s objectives and management structure.

The eligibility criteria

The eligibility criteria for registering a charity with the Charity Commission includes income thresholds and alignment with charitable purposes. Charities with an income of £5,000 or more must register with the Charity Commission; charities with an income below this threshold may register voluntarily.

And, as previously outlined, the organisation’s purpose has to align with one or more of the 13 purpose descriptions described in the Charities Act. By fulfilling these criteria, the charity shows that it operates in the public interest and qualifies for the benefits and protections granted to UK registered charities.

Required documentation

When registering a charity with the Charity Commission, several documents need to be submitted as part of the application process. One of the most important documents is the charity’s governing document, which outlines the objectives and management structure. This document provides the foundation for a charity’s operations and demonstrates its commitment to fulfilling its charitable purposes.

In addition to the governing document, a trustee declaration also needs to be provided which declares the eligibility of the charity’s trustees and their commitment to fulfilling their duties and responsibilities. With these documents in place, a charity can take the first step towards establishing itself as a legally recognised entity in the UK.

Tax benefits and obligations for UK charities

Charities in the UK enjoy various tax benefits, including exemptions on income and gains used for charitable purposes. These tax exemptions can obviously provide significant financial advantages for charities, allowing them to allocate more funds towards their charitable objectives. However, it’s also important to understand the tax obligations and reporting requirements that come with these exemptions.

Tax exemptions for charities

UK charities are generally exempt from taxation on income and gains used for charitable purposes. This includes exemptions from income tax, corporation tax, and VAT. That can clearly provide significant financial advantages for an organisation.

It’s important to note that not all charities may be exempt from taxes and there may be instances where they are required to pay them – such as when engaging in certain types of trading or receiving income from non-charitable sources. Charities thus need to consult the detailed guidance provided by the government for specific conditions and exceptions to the tax-exempt status of UK charities.

Charitable giving and tax relief

Donors who give to UK charities may be eligible for tax relief through Gift Aid and payroll giving. Gift Aid allows a charity to reclaim the basic rate of tax (20%) on the donation, providing additional funds for the charity. Payroll giving, on the other hand, allows individuals to make regular donations to charity directly from their pay, with tax relief on those donations.

Both Gift Aid and payroll giving provide valuable financial support for charities, enabling them to allocate more resources towards their objectives. Promoting these tax relief options to potential donors can foster greater donations and support for a charity’s mission.

The role of charity trustees

Charity’s trustees play a vital role in the governance and oversight of charitable organisations in the UK. They’re responsible for ensuring that the charity operates in compliance with its governing document and charity law, as well as managing the charity’s resources responsibly.

Here we’ll cover the responsibilities and liabilities of charity trustees, and the significance of insurance for risk protection. Understanding the role of trustees and the available protections enables effective charity management and risk mitigation. In addition, the trustees annual report serves as a valuable resource for assessing the charity’s performance and progress.

Trustee responsibilities

A charity trustee has a range of duties and responsibilities to ensure that the organisation operates in compliance with charity law and fulfils its objectives. Some of these responsibilities include:

• Ensuring that the charity is executing its aims for the public benefit

• Adhering to the charity’s governing documents and the law

• Acting in the most beneficial manner for the charity

It also falls on trustees to manage the charity’s resources responsibly, ensuring that funds are used for the intended purposes and that the charity operates efficiently. That’s important for long-term success and sustainability – and also the ability to raise funds in future.

Trustee liability and insurance

Charity trustees may face potential liabilities arising from their role in the organisation, including personal liability for any debts or obligations incurred by the charity. Additionally, trustees can be held vicariously liable for the actions of others associated with the charity.

To protect against these risks, it’s essential to have appropriate insurance coverage in place, such as trustee indemnity insurance or trustee liability insurance. Insurance coverage not only offers protection to trustees, but also safeguards the charity’s assets and resources.

Summary

The definition of a charity and its regulation in the UK is a relatively intricate business. For an organisation to establish itself as a charity, it’s necessary to understand the legal frameworks, the registration process, tax benefits and obligations, and role of trustees. Only then can an organisation set itself up in a sustainable way in the third sector and truly contribute to the greater good.

FAQs

What is the legal definition of charity in the UK?

In England and Wales, the legal definition of charity as defined in the Charities Act 2011 is an institution which is established for charitable purposes only, subject to the control of the High Court in its jurisdiction with respect to charities. Charitable purposes must be for the public benefit as outlined by the Act.

What classifies as a charity?

A charity is an organisation that is established exclusively for public benefit and does not make profits; it has no owners or shareholders, and all money raised must be used to achieve its aims.

What is the Charities Act 2011?

The Charities Act 2011 outlines the legal status of a charity in the UK, as well as specifying the regulations regarding the use of funds raised by the charity for its charitable purposes.

What is the role of the Charity Commission?

The Charity Commission regulates charities in England and Wales, overseeing registration processes and ensuring compliance with relevant legal structures.

How do I register a charity with the Charity Commission?

Registering a charity with the Charity Commission involves submitting an application that includes your charity’s objectives and management structure outlined in a governing document.