Keith Mack
Charity law is a significant aspect of the legal system in both the US and the UK, with a shared objective of regulating non-profit organisations to ensure transparency and accountability. However, the two countries have distinct approaches and histories when it comes to charity law. The UK's charity law has a long history, dating back to the 16th century, and has evolved through case law and legislation. In contrast, the US system is driven by visible leadership from an elite with resources and commitment. This difference in cultural approach to philanthropy and leadership style plays a role in how charity law has evolved in each country. The UK, with its emphasis on privacy, is seeking to emulate the US in terms of charitable giving, but it is a challenge for UK charities to embrace this different culture.
| Characteristics | Values |
|---|---|
| History of charity law in England | Can be traced back to the reign of King Henry VIII in the 16th century |
| Foundation of modern English charity law | The Charitable Uses Act 1601, also known as the Statute of Elizabeth |
| Legal framework for charities | Registration requirements and the jurisdiction of the Charity Commissioners |
| Charity law evolution | Through both case law and legislation |
| Charity Commission powers | New regulatory powers, control over charitable fundraising, confirmation of power for charities to make social investments |
| Charity trustee duties | Duty to act in the charity's best interests, keeping the governing document up to date, complying with the law |
| Charity governing document | Outlines its purpose, powers, decision-making procedures, and other relevant rules |
| Charity purposes | Religious, charitable, scientific, testing for public safety, literary, educational or other specified purposes |
| Charity structure | Company, charitable incorporated organisation, trust, community interest company |
| Charity law requirements | Reporting requirements to the Commission |
| Charity law compliance | Comply with the charity's governing document and the law |
| Charity fundraising | Tax incentives for donors, favourable treatment of shares with appreciated value |
| Charity leadership | Visible leadership from an elite with commitment and resources |
| Charity accounting | Financial accounting and management to demonstrate responsible use of donors' funds |
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What You'll Learn
UK charity law history
The history of charity law in the UK has evolved over the years, with the introduction of various Acts and legislations that define and regulate the operations of charities.
Prior to the Charities Act 2006, the only statutory definition of a charity in England was outlined in the preamble to a 1601 Statute. The concept of "charitable purposes" was primarily shaped by case law, with reference to this early legislation. The Charities Act of 1960 marked a significant step forward, offering the first truly modern system of oversight for charities.
The Charities Act 2006 (c. 50) was a pivotal piece of legislation, amending the Charities Act 1993 and providing, for the first time, statutory definitions of both a charity and charitable purposes. It also established a Charity Tribunal to hear appeals from decisions of the Charity Commission, previously handled by the High Court. The Act raised the threshold for registration with the Charity Commission, aiming to reduce administrative costs for smaller charities.
The Charities Act 2011 largely superseded the Charities Act 2006, consolidating charity law in the UK. This Act introduced the Charitable Incorporated Organisation (CIO) structure, enabling charities to attain corporate body status without becoming companies. The 2011 Act also imposed conditions on organisations seeking charitable status, requiring them to demonstrate service to the public interest and promotion of specific causes.
In addition to the Charities Acts, other laws and regulations impact the operations of charities in the UK. For example, charitable companies must comply with the Companies Act 2006, and all charities are subject to general laws such as tax, data protection, and health and safety regulations. The Value Added Tax (VAT) is another relevant aspect, with charities whose turnover exceeds £85,000 in a year being required to collect it.
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US charitable status
In the US, charitable organizations are known as IRC 501(c)(3) organizations and are commonly referred to as nonprofits or not-for-profits (NPOs). They are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. To attain charitable status, organizations must apply for tax-exempt status with the Internal Revenue Service (IRS).
IRC 501(c)(3) organizations are prohibited from organizing or operating for the benefit of private interests, and no part of their net earnings may benefit any private shareholder or individual. They are also restricted in the amount of political and legislative lobbying activities they can conduct. Churches and religious organizations are among the charitable organizations that may qualify for exemption from federal income tax under Section 501(c)(3).
Private foundations are also considered charitable organizations under IRC 501(c)(3). They typically have a single major source of funding, usually from gifts from a single family or corporation, and they primarily make grants rather than directly operating charitable programs.
In addition to federal tax exemption, charitable organizations in the US may also be eligible for other benefits, such as tax-deductible contributions and clean energy tax credits. To maintain their tax-exempt status, organizations must comply with various requirements and regulations outlined by the IRS.
In summary, US charitable status is primarily defined by an organization's tax-exempt status and its dedication to religious, charitable, scientific, literary, or educational purposes. Organizations must adhere to specific regulations and requirements to attain and maintain this status, ensuring their operations remain in the public interest.
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UK charity regulation
Charity regulation in the UK is a complex area, with a range of laws and regulations governing the sector. The Charities Act 2011 is a key piece of legislation, which outlines the legal framework for charities and was amended by the Charities Act 2022. This Act sets out the requirements for charity governance, including the duties of trustees, and covers charitable companies, charitable incorporated organisations (CIOs), and charitable trusts.
The Charity Commission is the main regulator for charities in England and Wales, ensuring public confidence in the sector. They provide guidance and support to charities, and have the power to investigate charities, for example, in cases of financial mismanagement. The Commission also maintains a register of charities, and each charity's governing document can be found here. This document outlines the charity's aims, beneficiaries, and powers. Trustees are responsible for ensuring the charity complies with its governing document and the law, and for delivering the charity's purposes.
Charities are subject to general laws such as tax, data protection, and health and safety, and must also comply with specific regulations depending on their structure and activities. For example, if a charity owns land, employs staff, or works with children, there are additional legal requirements. Furthermore, the Fundraising Regulator sets out best practices for charitable fundraising to protect donors and support fundraisers.
In terms of charity types, a community interest company (CIC) is a specific form that must benefit the community and can be used by social enterprises, but not charities. Trusts are another common form, regulated by the Trustee Acts, and the body of trustees can apply for a certificate of incorporation to become a legal entity, allowing them to hold property and enter into contracts, for example.
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Charity Commission powers
The Charity Commission for Northern Ireland was established under the Charities Act (Northern Ireland) in 2008. The Commission has a range of powers, which are regularly utilised and have been increasing incrementally as other Commencement Orders come into force. The Charity Commission's powers include:
- Investigatory powers: The Commission can investigate and identify misconduct or mismanagement in the administration of charities and take remedial or protective action. This includes serious misconduct or mismanagement and instances where there is a likelihood of significant risk or harm to a charity or its beneficiaries.
- Providing information and advice: The Commission can advise and guide charities on matters relating to the performance of a trustee's duties. This empowers charities to work on their internal structures and ensures good governance within the organisation.
- Requiring a charity to change its name: The Commission can require a charity to change its name if it is the same as or too similar to that of another charity, or if it is likely to give the impression that the charity is connected to a government entity or individual when it is not.
- Publishing guidance: The Commission publishes guidance based on priority, focusing on the needs of the greatest number of charity trustees first. The guidance assists charity trustees in complying with their legal duties and understanding the Commission's processes and information requirements.
- Other regulatory powers: The Commission has additional regulatory powers under the Charities Act 2011, which enable them to take action in specific situations. These powers are outlined in Section 46 of the Act and include the ability to freeze bank accounts, suspend or remove trustees, and appoint new trustees.
The Charity Commission for Northern Ireland's powers are similar to those of the Charity Commission of England and Wales, which also has a role in regulating and providing guidance to charities. Charities in the UK are subject to various laws and regulations, including tax, data protection, and health and safety, and must comply with their governing documents and legal responsibilities.
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UK charity tax incentives
Charities in the UK do not pay tax on most of their income and gains if they use it for charitable purposes. This is known as 'charitable expenditure'. Charities are, however, required to pay tax on any money they do not use for charitable purposes. They also pay business rates on non-domestic buildings but receive an 80% discount.
Charities in the UK are also required to complete a tax return if they need to pay tax or if HMRC asks them to. They can claim back any tax that has been deducted.
There are several tax incentives in the UK for individuals who give to charity. Donations by individuals to charity or to community amateur sports clubs (CASCs) are tax-free. This is called tax relief. Tax relief is also available if individuals give certain qualifying assets to charity. These assets include:
- Shares or securities listed on a recognised stock exchange (including London and any recognised overseas stock exchange)
- AIM-listed shares
- Units in authorised unit trusts and shares in open-ended investment companies
- Freehold or leasehold interests in land in the UK
The Gift Aid scheme is another tax relief option available to donors. It provides tax relief to both the charity and the donor, where the donor is a higher or additional-rate taxpayer. As long as the donor is a UK taxpayer and signs a Gift Aid declaration, the charity is able to reclaim the basic rate of tax, which currently equates to 25p for every £1 donated.
A UK tax-resident non-domiciled (non-dom) individual can receive tax incentives for giving to charity in the same way as a UK-domiciled individual. However, if the non-dom individual opts for the remittance basis of taxation, the gift of cash or assets from overseas to a UK charity may be treated as a remittance of income or gains to the UK and is therefore subject to an income tax or capital gains tax charge in the UK. To prevent this, the donor may consider making donations to an overseas bank account of the charity.
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Frequently asked questions
Charity law in the UK is focused on the regulation and legislation of non-profit organisations to ensure public trust and transparency.
The two key requirements for an organisation to be considered a charity in the UK are charitable purpose and public benefit.
Charities in the UK must comply with general laws such as tax, data protection, and health and safety. They are also subject to specific charity laws and regulations, such as the Charities Act 2021, which aim to improve regulation and administration, address misconduct, and increase transparency.
Charity law in the UK and the US have some similarities, but there are also differences. Both jurisdictions have laws and regulations in place to ensure that charities operate in the public interest and comply with applicable laws. However, the US philanthropic world is driven by visible leadership from an elite with commitment and resources, while the UK seeks to emulate this while maintaining its culture of privacy.
The key features of charity law in the UK include the requirement for a governing document, compliance with applicable laws and regulations, financial accounting and management, and the role of trustees or company secretaries in ensuring legal obligations are met.
