Charity

In our last charities and third sector blog, Alan Eccles and Helen Nelson looked at the various options available for selecting an appropriate third sector legal vehicle.

Our intended key messages being:- (1) the end of the trust is nigh (or essentially been) unless there is a very specific reason; (2) unincorporated associations are unlikely to be an appropriately “safe” legal vehicle for most, if not all, organisations (new and existing); (3) “straightforwardness” is important- does the legal form work effectively and efficiently?; and (4) informed choice is key- why is a particular structure being used?

What is happening in practice? The statistics

We thought it would be helpful to show in an illustrated form (click graph to enlarge) recent trends in ‎legal forms being used by new organisations in the charities and third sector. We have sourced this information from the Office of the Scottish Charity Regulator (“OSCR”) and the Community Interest Company Regulator’s (“CIC Regulator”) published information. OSCR information, as you will see, extends, over the last twelve months as more information is immediately publicly accessible. Whereas, the CIC Regulator information commences in September 2014.

graph 11 dec 14

We recognise that there may be some third sector organisations which are not registered with OSCR or the CIC Regulator, but we believe the information outlined will give a good flavour and indication of legal vehicle preference in Scotland.

What can we detect?

Scottish Charitable Incorporated Organisations (“SCIOs”) are popular and form an increasingly important proportion of Scottish charities. They seem to be talking “market share” from both companies and trusts. That perhaps is because of the flexibility offered by a SCIO allowing it to be crafted at the outset to operate in company-like or trust-like manner.

It is notable that trusts are losing their position as a vehicle of choice. We can understand why- certainly for new charities, the trust offers little that is attractive (such as lack of corporate status, potential unlimited personal liability, contracting difficulties and dealing with certain “quirks” of trust law (which sometimes do not manifest themselves until a “problem” occurs)). There will be some very specific exceptions in very specific situations (e.g. if other legislation affecting the charity required a trust- however, we cannot immediately think of such a situation). Existing charitable trusts would be advised to consider if remaining a trust continues to be appropriate.

Unincorporated associations (“UA”) are remaining relatively resilient in their uptake. We view this as a potentially worrying statistic. While a UA might be viewed as simple, the liability risks (for trustees and members) and the uncertainty surrounding what UA law actually is (it is somewhat incomplete and nebulous) would, for us, militate against using an UA. UAs are often found associated with umbrella bodies, which operate, broadly, as a jigsaw puzzle with a major centrepiece at its heart and smaller pieces surrounding the centre. As well as liability risks, a negative with a UA is the slightly strange legal nature of a UA- they do not exist as separate entities, but rather exist as an amalgam of the legal relationship amongst the members. If, say, a simply constructed SCIO was used, the jigsaw pieces would remain more constant as a SCIO is a standalone and constant legal entity. Again, existing UA charities would be likely to wish to (at least) consider if this form remains appropriate.

Companies remain fairly popular, but are likely to become less common with the rise of the SCIO. As familiarity of the SCIO‎ grows (particularly for third parties such as funders, banks and landlords), we predict that the size of charity utilising the SCIO will also grow. The use of companies will no doubt remain as a well-understood legal vehicle and will continue to have a real place at the point of considering which structure to use. Most charities set up as a company will probably wish to remain as a company (unlike trusts and UAs).

We have some recent information on Scottish registered Community Interest Companies (“CIC”) (i.e. Scottish registered at Companies House and registered with the CIC Regulator). There are a good number of these although the available information shows a “spikiness” to their use. We will continue to monitor this trend. An interesting piece of research would be to understand why a CIC was chosen over either a non-charitable company or charitable company or SCIO. As we outlined in our last blog, it is important that the chosen legal vehicle actually offers benefits. A CIC can definitely do so in the right place, but in others it might add to the complexity of the organisation (immediately or down the line).

We should also mention the place of statutory corporations. There are a small number of statutory corporations seeking charitable status. For existing organisations that have a statutory status there may be historical, reputational or operational reasons for retaining that status. In many cases, a statutory constitutional basis (especially if the statutory basis is found in an Act of Parliament) is to be avoided or exited. Our team members have been involved in most of the Acts of the Scottish Parliament involving charities and we are likely to look at the issues arising in a future blog piece. For now, it is enough to note that they are rare as a type of new charity.

Where are the Industrial & Provident Societies? For a long time a staple body in certain parts of the charities sector (particularly in care and housing) and more recently finding favour as “Bencomms” in community energy projects. Again, it will be of interest to investigate further the reasons for the lack of new Industrial & Provident Societies. Perhaps it could be lack of flexibility, additional regulation from the Financial Conduct Authority, complexity or other legal forms being adapted and group structures being used to provide some of the traditional benefits of an Industrial & Provident Societies. An Industrial & Provident Society can have a place, but on the whole we would be unlikely to recommend to many charities that this form offers benefits which cannot be found elsewhere. As ever, there will be exceptions.

Some concluding thoughts

The available information seems to show:-

the rise of the SCIO;

the fall of the trust; and

the perseverance of the unincorporated association.

Back in 2009, Alan Eccles from this blog wrote in the publication, Third Sector that “[a] new form of charitable vehicle is not unwelcome and could provide choice. However, SCIOs are not necessarily a panacea and their use will need careful consideration.” In keeping with our last blog, we hold true to that- no legal form is a “panacea” (SCIO or otherwise), choice is welcome and choice should be just that- a real and informed choice based on the activities of the organisation, its assets and its aims and objectives.

Alan Eccles and Helen Nelson form part of the firm wide Charities & Third Sector team at Brodies and have experience in working with not for profit organisations of all sizes, ranging from grant giving trusts to service providing charities. If you are thinking of setting up a charity, or indeed reviewing the constitution/legal form of an established charity, both Alan and Helen would be happy to answer any queries or comments you may have.

Alan Eccles – 0141 245 6255 or alan.eccles@brodies.com

Helen Nelson – 0141 428 3353 or helen.nelson@brodies.com

Alan Eccles

Partner at Brodies LLP
Alan is a Partner specialising in private client (succession, incapacity and asset protection) matters as well as the charities, third and impact sectors.
Alan Eccles