Morton Fraser’s Third Sector team is frequently involved in assisting clients setting up new charities, be they trusts, companies, and now, SCIOs. Every new charity faces similar issues, no matter what form they take. We’ve canvassed opinions here on some top tips for those of you who may be thinking about setting up a new charity.
1. Have a clear vision
Quite understandably, charities are often established as a result of a person’s passion or personal experience. As such, setting up a new charity can become a great personal mission, and this sometimes leads people to become blinkered to their ultimate goal.
While there is something to be said for encouraging diversity in the charitable sector (in terms of size; geographic location etc), we can’t help but feel that, sometimes, resources might be better spent if they were to be pooled together, or in some cases, for a person who is passionate about a particular cause and wants to support it, to find an existing charity which fits with their own objectives, and to support that charity, rather than setting out on their own.
To give you an example, British Forces News has reported in the past that (in the UK) there are over 2,000 charities supporting the armed forces with a combined income of £800 million. It also found that the number of new charities which had been set up to support the armed forces had tripled each year since 2005. This prompted Sir Richard Dannatt, former head of the armed forces to say at the time:
"I think the issue that is perhaps most pertinent to the service charity community is whether in fact there is a case to be made for better co-ordination and co-operation between the charities, so that there isn't overlap and that people aren't duplicating what someone else is already doing."
This first tip sounds like we are doing ourselves out of a job! But, the point we are making is that setting up a new charity is not always the best solution to the problem.
If you are confident that a new charity is needed, you must formulate a clear vision:
- what is the charity’s objective? How will it deliver on this?
- how will it meets its liabilities?
- will it survive without you? Is there a succession plan? Will you be able to ‘let go’?
2. Identify skills gaps
Every charity will - by law - have to have trustees, irrespective of the legal form which the charity takes. In Scotland, trustees are defined as being those “having general control and management of the administration of a charity”. The group might be called the ‘board’ or the ‘management committee’. You will need to make sure that, whatever it is called, the group contains people with the right skills or experience to really add value, and to lead and manage the charity. For example, if you feel you are not strong on financial matters, then consider whether you need someone on the board who has a financial background and who can assist the board in understanding the budget and the accounts. But, once you’ve got that person on the board, don’t assume you yourself can then just wash your hands of all matters financial – trustees are collectively responsible for the affairs of the charity.
If your charity delivers a service, think about whether it might be appropriate to bring a service user onto the board, so that the board gets a balanced view of what it is, or should be, delivering.
Remember always that one of the duties which a trustee owes to his charity is to “act with the care and diligence that is reasonable to expect of a person who is managing the affairs of another”, and bear in mind that this is a higher standard than how a person conducts his own affairs.
3. Give proper thought to the structure and the constitution
Charities can come in all shapes and sizes. In terms of legal structures, in Scotland a charity can be an unincorporated association, a company, a trust or a SCIO (and there are many other more obscure vehicles which could be used, such as a friendly society). Broadly speaking, the different types of structures fall into two camps – incorporated and unincorporated vehicles. Incorporated vehicles offer the benefits of limited liability for their members and separate legal personality (so, for example, such a charity can own property, employ people and sue – or be sued – in its own name). Unincorporated vehicles do not offer these ‘protections’, which can have quite serious consequences. For these reasons, where a charity intends to take on ‘risk’ e.g. by employing people, entering into contracts, or buying property, we usually recommend the use of an incorporated vehicle. For a charity which is purely grant-giving, an unincorporated body may be appropriate. There are different reporting requirements depending on the kind of vehicle which is used (for example, a charitable company needs to report both to OSCR -the Scottish charity regulator- and Companies House), so all these factors should be considered when choosing the most appropriate structure.
Any charity will have a constitution of one form or another (so for example, a trust will have a trust deed, and a company will have its articles of association). You should think carefully about what the constitution should say, particularly regarding:
- what the charity’s activities are (its purposes);
- who the members are; and
- how trustees are appointed.
- It is worth taking the time at the start to think carefully think about these matters. Time spent doing this in the early stages can save a lot of pain if, later on, the view is that the constitution doesn’t work, and it has to be changed (which will require members’ consent, and may require OSCR’s consent too).
4. Have a financial plan, and be aware of the funding landscape
We mentioned earlier that when you are setting up a charity, you need to consider how that charity will be funded – will money come from donations; payment for services; loan finance, from grant funders, or from some other source or activity?
The Scottish Council for Voluntary Organisations website is a great place to start if you need to find out more about the different kinds of funding which is available, and sources of funding.
If your charity is to rely on funding from a grant making body, or loan finance, then you should always remember that entering into this kind of arrangement should only be done if it is in the best interests of the charity. Also, you should carefully consider the extent to which that funder expects to be able to influence what the charity does, or if it intends to place conditions on how the funds are used. This is an area which OSCR recently focused on in its ‘Who’s in Charge’ publication.
5. Use knowledgeable and reliable professional advisors
Setting up a charity can be complex and it is almost always necessary to seek professional advice at some point. In fact, the sooner you find the right people to help you achieve your vision for the charity the smoother the process is likely to be. Most importantly, getting advice early on about the form and structure of the charity before proceeding too far down the line can help to avoid costly and time consuming mistakes. Ultimately, taking advice from the start should result in an organisation which is better suited to achieve your aims.
Of course, trustees should instruct advisers who have experience in advising on the issues which are particular to charities, because many of the considerations will be unique to charitable organisations. Familiarity with these issues and with OSCR’s requirements is an attribute to look for when seeking an adviser but it is also important that your professional team have the wider commercial knowledge necessary to assist with the more general considerations which should be borne in mind, such as funding.
By getting these experts involved from the start you should begin to build a network of advisers who will be able to provide ongoing support.
6. Don’t underestimate how long the process might take
OSCR is not under any statutory obligation to turn new applications round within a specific time frame so, it may ‘take as long as it takes’. Informally though, OSCR indicates that it will take them around 3 months to consider an application and to provide a view on whether the application meets its requirements. But, OSCR can turn applications round more quickly if they are given comprehensive information at the outset. So, you will need to factor this timeframe into the process. Bear in mind that the constitution of the new organisation is one of the documents which OSCR needs to see, so you will need to agree that with the intended trustees or steering committee in advance of making an application. OSCR will also expect to see a document setting out the organisation’s intended activities – this could be a business plan or other such document. It doesn’t need to be a lengthy or complex, as long as it sets out the intended activities, and allows OSCR to assess whether ‘public benefit’ test will be met. The more information you can provide to OSCR at the outset, the quicker a decision will be made.
Also, don’t forget that once OSCR has granted charitable status to your organisation, you will still need to apply to HMRC for its charitable recognition in order for the charity to benefit from charitable tax reliefs (in particular, gift aid). HMRC’s turnaround time is also around three months (but they will backdate their recognition to the date on which OSCR grants charitable status).
7. Take advantage of free resources
There are lots of useful (and free!) resources available which we would recommend you have a read over if you are thinking of setting up a new charity. OSCR’s website has a wealth of information – we would certainly recommend their guidance on ‘Meeting the Charity Test’.
Another good source of information is the Scottish Council for Voluntary Organisation’s (SCVO). It has a section dedicated to ‘governance and structures’, which contains an impressive amount of information on the different kinds of legal structures which can be used.
Last but not least, have a look at the articles and factsheets which the Third Sector team here at Morton Fraser have written - Charities and third sector.
A word of caution though – when looking for free resources, do bear in mind that charity law is different north and south of the border, so you should not necessarily rely on material which relates to charities in England. (The suggestions set out above do all focus on Scots law.)
8. Make sure your trustees are informed
We mentioned earlier that it is important to get the right people on board as trustees. For a person to reach a considered view on whether they wish to become involved as a trustee, they must understand what will be required of them in that role. For all Scottish charities, the legal duties of a trustee are set out in the Charities and Trustee Investment (Scotland) Act 2005. (the '2005' Act') In short, a charity trustee must:
- act in the interest of the charity;
- operate in a manner consistent with the charity's purposes;
- act with due care and diligence; and
- ensure that the charity complies with the provisions of the 2005 Act and other relevant legislation.
OSCR has some useful guidance on trustee duties.
If the charity is a company, then the trustees will be directors of the company – under the Companies Act 2006, directors owe duties to the company. These duties are similar (but not identical) to the duties owed by a trustee, so the trustee of a charitable company owes two different sets of duties to the charity. Any potential trustee needs to understand the structure of the charity and the corresponding duties owed by a trustee/ director to that charity.
That deals briefly with the legal aspects of being a trustee, but what about the practical aspects? You will need to make it clear to potential trustees what level of commitment will be expected of them – how often and where will board meetings be held; will trustees be expected to attend external events to represent and promote the charity; to what extent will their input be required on operational matters, such as completing funding applications?
Once appointed, it is considered good practice to provide induction training to trustees. Sometimes, your advisers may agree to provide this training at no cost, so speak to your lawyer or accountant about this. Failing which, there are external training organisations who can do this (either for free or for a fee). All new trustees should also be provided with a ‘pack’ of relevant documents which, for a new charity, should include as a minimum its constitution and any internal policies and procedures. Going forward, you should consider trustees’ ongoing training requirements – you could combine this with sessions on good governance and strategy.
9. Keep up with your housekeeping
All charities are currently required to report to OSCR on an annual basis by submitting an Annual Return and annual accounts (and in some cases, also a Monitoring Return). These returns are due 9 months after the end of the charity’s financial year. In addition, there is an ongoing obligation to seek OSCR’s advance consent to certain changes (and also to notify them after the change has been made). Always bear these requirements in mind if you are thinking of making a change to your charity or its constitution. There is also a general duty to keep your charity’s register entry up to date. All of these reporting requirements are statutory and there are consequences for failing to comply with them.
In 2012, ‘OSCR Online’ was introduced which allows charities to lodge a range of documents with OSCR electronically. This should make it easier for charities to lodge certain documents with the regulator and to keep their details up to date.
Charitable companies are not only subject to the filing requirements of OSCR, they must also comply with company law in terms of the returns made to Companies House. These requirements can be extensive, but at the most basic level, a company is required to lodge with Companies House an Annual Return and company accounts. Companies House also need to be informed of any changes relating to the company, such as the appointment of new directors or any changes to the constitution.
With all of these reporting requirements to be complied with, it is sensible for every charity to have one person responsible for making sure that all necessary returns are made on time to both OSCR and Companies House.
Establishing this role from the start is a good way to ensure the charity never falls foul of the various deadlines. Keeping on top of things like accounts and records will make things easier when the time comes to report to members, OSCR, and Companies House.
Funders such as the Big Lottery will also keep a keen eye on whether a charity is keeping up-to-date with these requirements – there are instances where funders have refused to consider applications from charities, because their accounts are overdue with OSCR.
10. Keep the charity’s activities under review
Going forward, it is important to keep the charity’s activities in check, and to make sure what it is doing falls squarely within its ‘purposes’ as set out in the constitution. Sometimes, charities can be susceptible to mission creep - if a charity’s purpose is to support the homeless in Edinburgh, then no matter the good intentions, it should not be supporting the homeless in Aberdeen. If a charity wants to branch out to achieve a different purpose, then it will need to bear in mind that its members, OSCR and also any funders will need to consent to such a change.
Charities also need to be watchful if they carry out trading activities. Any such trading should only be carried out in furtherance of the charitable purposes, and there are a number of considerations here which may mean that a charity should consider setting up a trading subsidiary to conduct such trading activities.
There are inevitably a wide range of issues which one needs to consider when setting up a new charity, and so this article is intended to flag up just some of these. Getting it right from the start in terms of choosing the most appropriate structure and having informed (and engaged) trustees will stand a charity in good stead going forward. Take advantage of the free resources which are available, and always use advisers who understand the implications of charity law, and the sector in general. Our Third Sector team has considerable experience in setting up new charities and advising on all aspects of charity law.
The content of this webpage is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser LLP accepts no responsibility for the content of any third party website to which this webpage refers. Morton Fraser LLP is authorised and regulated by the Financial Conduct Authority.