If you are considering setting up your new entity as a charity, there are some issues that should be considered before making a final decision on the type of entity that is best for your organisation. Below, we look at the advantages and disadvantages of obtaining charitable status.
Advantages of being a charity
- Charities do not generally have to pay income/corporation tax (in the case of some types of income), capital gains tax, or stamp duty, and gifts to charities are usually free of inheritance tax.
- A charity pays no more than 20% of normal business rates on the buildings which they use and occupy to further their charitable purposes – in many cases the local authority will award, upon application, the additional 20% as a further relief, giving 100% rates relief; As part of this, we are seeing more and more landlords with surplus property renting to charities at peppercorn rents, to obtain rates relief.
- A charity can get special VAT treatment in some circumstances. Many think charities are exempt from VAT, but this is not the case.
- Charities are often able to raise funds from the public, grant-making trusts and local government more easily than non-charitable bodies.
- Charities can reclaim gift aid on many of the donations received from private individuals.
- Charities are able to give the public the assurance that they are being monitored and advised by Office of the Scottish Charity Regulator (OSCR), or in England and Wales, The Charity Commission.
- Charities can obtain information from OSCR and The Charity Commission, both of whom provide a range of free publications. OSCR guidance on becoming a charity can be found here.
Disadvantages of being a charity
- A charity must have exclusively charitable purposes. Some organisations may carry out a range of activities, where only some of them are charitable activities. In general, to meet the charity test and register as a charity, the organisation would have to stop its non-charitable activities, subject to certain types of charitable trading which are allowed. The non-charitable activities can continue if carried on by a separate non-charitable organisation, which can in turn gift aid any profits it makes to the charity.
- There are strict rules that apply to trade by charities. Guidance on this can be found in The Charity Commission’s guidelines for Charities and Trading (CC35).
- If incorporated as a company limited guarantee will be dealing with two Regulators – OSCR and Companies House.
- Trustees are not allowed to receive financial benefits from the charity which they manage unless this is specifically authorised by the governing document of the charity or by OSCR, and no more than 50% of Trustees in number can be remunerated. Financial benefits include salaries, services, or the awarding of business contracts to a trustee’s own business from the charity. (Further guidance can be found in Payment of Charity Trustees (CC11) as produced by The Charity Commission). Similarly, where a spouse, relative or partner of a trustee receives such benefits, this is classed as Trustees’ remuneration. Trustees are, however, entitled to be reimbursed for their reasonable out-of-pocket expenses, for example, travelling expenses in connection with attending trustee meetings.
- Charity law imposes certain financial reporting obligations; these vary with the size of the charity. Further details may be found in OSCR’s guidance – Scottish Charity Accounts, An Updated Guide to the 2006 Regulations
- Trustees need to avoid any situation where charitable and personal interests conflict.
- There are limits to the extent of political or campaigning activities which a charity can take on – OSCR has produced some FAQs
If it’s not fitting to register as a charity, are there any other options?
- The organisation could consider registering a Community Interest Company (CIC) which cannot be a charity, and therefore liable to Corporation Tax on any profits generated in the year. However, it is slightly easier to apply for funding than is the case or a commercial company.
- There is a separate CIC Regulator who must be reported to annually, and all CIC’s contain an asset lock that limits the distribution of profits, and there are restrictions on the level of Directors’ remuneration that can be paid in a financial year.