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Developments in Foundation Law in Europe pp 51–69Cite as

Regulation Absent: The Chimera of Charitable Foundation Law in England and Wales

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Part of the book series: Ius Gentium: Comparative Perspectives on Law and Justice ((IUSGENT,volume 39))

Abstract

Charitable foundations in England and Wales are not separately regulated, but fall within the general law of charities and are subject to the same legal obligations and responsibilities as all other charitable organisations. Whilst the ‘one size fits all’ approach taken by English and Welsh law allows for clarity and consistency, charitable foundations have argued that in practice it discourages philanthropy and results in greater operating burdens for foundations. Recent reform of charity law in England and Wales through the Charities Act 2006 provided an opportunity for an overhaul of the general regulatory regime with the potential to provide law tailored specifically for charitable foundations. Despite extensive lobbying and a recommendation for lighter regulation by a Joint Parliamentary Committee, that opportunity was not taken. The Charities Act 2006 strengthened but retained the all-encompassing nature and framework of English and Welsh charity law. This chapter sets out that regulatory framework and examines the specific regulatory issues for charitable foundations and the arguments raised for their separate treatment.

This chapter was written in 2011, an earlier version was delivered at the International Society for Third-Sector Research’s 9th International Conference at Kadir Has University, Istanbul, in July 2010. I am grateful to Chiara Prele for organising the conference panel, to Ann Sinclair for her research assistance and to Oonagh Breen, Francesco Schurr, Anthony Zito and the panel audience for their comments and suggestions.

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Notes

  1. 1.

    For a broad ranging historical account of foundations, see Smith and Borgmann (2001, 2–34) and Leat (2001, 268–281).

  2. 2.

    Foundations with non-charitable purposes can also exist but are unable to take the advantages of charitable status such as taxation relief. Such foundations similarly fall under the general law.

  3. 3.

    Calls have been made to extend these types of foundations from geographical communities to communities of interest similar to the situation in the USA, see Driscoll and Grant (2009, 17–19). For a discussion on community foundations in the UK and their role in both philanthropy and community development, see Daly (2008).

  4. 4.

    The Community Foundation Network (2010) reports a doubling of donations to community foundations in 2008/2009.

  5. 5.

    Figures are for the year 2007–2008.

  6. 6.

    It should be noted that these figures need to be put in context of the fact that most the grants were given by a small handful of very large foundations such as the Welcome Trust.

  7. 7.

    The Northern Rock Foundation is a prime example. The foundation’s funding from Northern Rock bank was cut in the wake of the financial crisis affecting the bank, leading to the Foundation having to cut its own programmes.

  8. 8.

    The Charities Act 2006 amended provisions in the Charities Act 1993. The provisions of both Acts are now consolidated in the Charities Act 2011. References in this chapter are to the 2006 and 2011 Acts.

  9. 9.

    However, note that not all charities need to register with the Charity Commission (there is a £5,000 threshold) and former exempt charities that have another principal regulator do not need to register, for example, universities which are principally regulated by the Higher Education and Funding Council for England.

  10. 10.

    It also has general duties and incidental powers to facilitate performance of its functions and duties set out in (Section 7 Charities Act 2006, Sections 16, 20 Charities Act 2011).

  11. 11.

    For an in-depth examination of the regulation of charities in England and Wales, see Luxton (2001).

  12. 12.

    Section 2(2) Charities Act 2006 replaces the previous four ‘heads’ of charitable purposes from Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531 with a new list of 13 purposes: prevention or relief of poverty; advancement of education; advancement of religion; advancement of health or the saving of lives; advancement of citizenship or community development; advancement of the arts, culture, heritage or science; advancement of amateur sport; advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity; advancement of environmental protection or improvement; relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage; advancement of animal welfare; promotion of the efficiency of the armed forces of the crown; and other purposes already recognised as charitable under existing law or analogous/within the spirit section of the purposes listed in Section 2(2).

  13. 13.

    See also Schedule 5 of the 2006 Act. Excepted charities (which include churches chapels and associated funds of certain Christian denominations, charitable service funds of the armed forces, scout and guide groups) are not required to register with the Charity Commission but will still remain within the Commission’s supervisory remit. This is subject to the provision that from 2012 excepted charities with an annual income over £100,000 will be required to register with the Commission. Exempt charities are not required to register with the Charity Commission and generally have a separate ‘principal’ regulator that ensures their compliance with charity law. Universities are exempt charities but are regulated by the Higher Education Funding Council for England. See Schedule 3 Charities Act 2011.

  14. 14.

    Some older foundations have been established by Royal Charter or Act of Parliament. For model documents, see http://www.charitycommission.gov.uk/start_up_a_charity/guidance_on_registering/mgds.aspx

  15. 15.

    Under (Section 38 Charities Act 2006, Section 191 Charities Act 2011), the Charity Commission has power to relieve a trustee from personal liability where the trustee has acted honestly and reasonably and ought fairly to be excused.

  16. 16.

    Separate legislation also introduced a further specific organisational form, the ‘community interest company’, for non-charitable social enterprises. This organisational form similarly includes an asset lock, a requirement of a social mission, and has its own regulator: see Companies (Audit, Investigations and Community Enterprise) Act 2004, Part 2. For discussion of the corporate forms, see Dunn and Riley (2004).

  17. 17.

    The code has been promulgated, among others, by the National Council for Voluntary Organisations, the Association of Chief Executives of Voluntary Organisations as well as the Charity Commission. For discussion, see Dawson and Dunn (2006).

  18. 18.

    Trading will be caught by the wholly and exclusively charitable rule where it is not ancillary to the charity’s primary charitable purpose.

  19. 19.

    Gift aid allows charities to reclaim from HMRC the income tax paid by the donor on donations where the donor is a UK taxpayer.

  20. 20.

    For a discussion, see Dawson (2000).

  21. 21.

    VAT relief is available, for example, on advertisements, goods and services for disabled people and construction of buildings; see http://www.hmrc.gov.uk/charities/vat/purchases.htm

  22. 22.

    The rules set out in this section apply to accounts post 1 April 2008. For discussion, see Morgan (2010).

  23. 23.

    Section 16 covers, inter alia, jurisdiction over appointment and removal of trustees, establishing or implementing a scheme for the administration of a charity, vesting and transferring property. The general power to advise is set out in Section 29 Charities Act 1993, amended by the Charities Act 2006 and consolidated in Section 110 Charities Act 2011.

  24. 24.

    The reform process began in earnest with a report from the Treasury’s Strategy Unit (2002), the proposals of which were supported by the Government in response; see Home Office (2003), eventually resulting in the Charities Act 2006.

  25. 25.

    Although there are suggestions that one should be introduced similar to requirements in the legal regimes of the USA or Canada, see Driscoll and Grant (2009). Their research found a median payout of 3.5 % for 21 foundations in the study, alongside an overall increase in asset value above that necessary to maintain endowment.

  26. 26.

    See in particular Joint Committee on the Draft Charities Bill (2004c, Memorandum from Nuffield Foundation DCH195), Joint Committee on the Draft Charities Bill (2004b, 16 June, Q138-139 (David Emerson, Chief Executive of the Association of Charitable Foundations)), Joint Committee on the Draft Charities Bill (2004b, Memorandum from the Association of Charitable Foundations, DCH23, paras 3, 6).

  27. 27.

    They cited, in addition, monitoring by the Charity Commission and lack of privacy as disincentives. The commitment and motivations of the founder are important in discerning the real existence of a disadvantage to philanthropy from the regulatory regime. See the complaint by one that gift aid provides a better scheme because of the availability of tax relief without the burden of sifting through applications: ‘Having a foundation attracts applications – somebody has to deal with them’ cited in Joint Committee on the Draft Charities Bill (2004b, Supplementary Memorandum from the Association of Charitable Foundations, DCH276, Annex 2).

  28. 28.

    For discussion, see Joint Committee on the Draft Charities Bill (2004a, para 132), Joint Committee on the Draft Charities Bill (2004c, Memorandum from Rayne Foundation DCH204, para 11.2–11.3, Memorandum from the Sainsbury Family Charitable Trusts DCH329). See now Charities (Accounts and Reports) Regulations 2008.

  29. 29.

    Baroness Rawlings, supporting the views of Lord Sainsbury, put forward the view that proper regulation of grant-making foundations should simply be ‘are the recipients of their donations proper charities, and are their expenses reasonable and legitimate?’ House of Lords Hansard Vol 668 pt 26, col 951, 20 January 2005.

  30. 30.

    This was mooted before the Joint Committee by the Minister in charge of the sector at the time and taken up further in debates on the Bill. These duties are now set out in (Section 7 Charities Act 2006, Sections 16, 20 Charities Act 2011).

  31. 31.

    This was vigorously debated in the passage of the Charities Bill; see, for example, House of Lords Debate (Grand Committee), Hansard, Vol 669 col 300–301, 304GC, 23 February 2005 (Lord Hodgson and Earl of Caithness).

  32. 32.

    See, for example, House of Lords Hansard Vol 668 pt 26, col 902–905, 20 January 2005. See also Baroness Rawlings in the same debate at col 95 and House of Lords Debate (Grand Committee), Hansard, Vol 670 col 260-261GC, 8 March 2005.

  33. 33.

    ‘Of course the commissioners have full information, as must the Inland Revenue, but I believe that it is almost like a human right: you should be able to give money to a foundation and to make the give without drawing attention to yourself’ House of Lords Debate (Grand Committee), Hansard, Vol 670 col 260-261GC, 8 March 2005 (Lord Sainsbury).

  34. 34.

    For a comparison of gift aid and foundations, see Siederer (2005).

  35. 35.

    House of Lords Debate (Grand Committee), Hansard, Vol 670 col 268-269GC, 8 March 2005. Lord Sainsbury along with Lord Swinfen in the Grand Committee supported an unsuccessful proposal put forward by Lord Hodgson to allow charities the right to make anonymous donations; see House of Lords Debate (Grand Committee), Hansard, Vol 670 col 260-261GC, 8 March 2005.

  36. 36.

    SORP does allow non-disclosure of grants in limited circumstances. The exceptions are currently set out in paragraph 200 and cover grants to individuals; grants made in the lifetime of either the settlor or the settlor’s spouse/civil partner; grants which are neither material to the charities overall activities nor, if the grant is made to an institution, material to the context of institutional grants; and finally, where to disclose the grant would ‘seriously prejudice either the grant maker or the recipient’.

  37. 37.

    See House of Lords Hansard, Vol 672 pt 11, col 801, 7 June 2005. The point was also raised as a recommendation for change by Lloyd (2004).

  38. 38.

    The exception is trustees of pensions trusts who fall under their own regulations: see Pensions Acts 1995 and 2004. For an examination of the practical barriers to investment, see Breeze (2008).

  39. 39.

    However, liability may be excluded by a trustee exemption clause; see Armitage v Nurse [1997] 3 WLR 1046. The Law Commission successfully recommended the adoption of a non-statutory rule of practice governing disclosure and explanation of exemption clauses: Law Commission (2006).

  40. 40.

    See Cowan v Scargill [1985] Ch 270, Harries v Church Commissioners of England [1992] 1 WLR 1241. Examining investment from the best interests of the beneficiaries also means that trustees are somewhat limited in any ethical or social investment that they make, where the purpose of the investment is for market return. Charity trustees are less restricted than trustees of other types of trusts in applying ethical investment policies because they may more easily fall within the exceptions for non-financial criteria set out in Cowan v. Scargill [1985] Ch 270. For grant-making foundations, it may be harder to find a consensus amongst beneficiaries and so fall within one of the exceptions given the broad scope of their operations. Research from the Charity Commission suggests that only a small proportion of foundations employ an ethical investment policy, largely on the grounds of trustee caution to ensure maximum market returns; see Charity Commission (2009). Purpose-related investment where market returns are not the primary object of the investment are more common, and indeed, other research suggests that some foundations are manoeuvring within the investment parameters by using small proportions of endowment for purpose investment; see Bolton (2008).

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  1. Newcastle Law School, Newcastle University, 21-24 Windsor Terrace, Newcastle upon Tyne, NE1 7RU, UK

    Alison Dunn

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  1. Independent legal scholar and consultant on foundation and non-profit organization, Turin, Italy

    Chiara Prele

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Dunn, A. (2014). Regulation Absent: The Chimera of Charitable Foundation Law in England and Wales. In: Prele, C. (eds) Developments in Foundation Law in Europe. Ius Gentium: Comparative Perspectives on Law and Justice, vol 39. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-9069-7_4

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