What do Save the Children International, Cancer Research UK, the Arts Council of England and the British Red Cross all have in common? They are all well-known charitable institutions in the UK. According to the latest statistics there are nearly 169,000 charities in England and Wales catering for an enormous number of different causes. But what, exactly, is a charity and how can a charity be set up in the UK? In this article we will explain why charities exist and the steps involved in establishing a new UK charity.
What is a charity?
In essence, a charity is an organisation that does not make a profit and has been set up exclusively for the benefit of members of the public. Any money made by charities must be used to further their aims. This contrasts with private companies which exist to make profits for shareholders.
According to Section 1 of the Charities Act 2011, “For the purposes of the law of England and Wales, ‘charity’ means an institution which:
“(a) is established for charitable purposes only, and
“(b) falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities.”
Charities in England and Wales are regulated by the independent Charity Commission, a non-ministerial government department which is accountable to Parliament.
Setting up a charity in the UK
There are six main steps to setting up a new charity in England and Wales, as follows:
- Check whether you are eligible to set up a charity.
- Find your charity trustees.
- Choose your charity name.
- Choose a structure.
- Create a governing document.
- Register your charity.
It is important to complete the first five steps before registering your charity. This will ensure that you meet the legal criteria to gain charitable status and that you have made the decisions necessary for registration.
Please note that the process of setting up a charity is different in Scotland and Northern Ireland from that in England and Wales. In the following sections we will focus on the steps necessary to establish a charity in England and Wales.
Step 1 – Find your charity trustees
A trustee is a person who is in charge of the control, management and administration of the charity. Trustees may have other names, such as managing trustees, committee members, governors or directors. Charities normally have at least three trustees. Because of the responsibilities placed on charity trustees it is important to select individuals who understand, are committed to and have the capacity needed for the role.
Most trustees are not paid for the work that they do for the charity, although they may be paid if this is allowed by the governing document, by the Charity Commission or by the courts.
Although trustees are not normally paid, they can claim expenses, including for:
- Travel to and from trustee meetings.
- Overnight accommodation.
- Postage, telephone calls and broadband time for charity work.
- Childcare or care of other dependants while attending meetings.
The Charity Commission provides detailed guidance on the trustee recruitment process. This includes deciding on the skills, experience and knowledge needed, the interview and shortlisting process, how to vet potential trustees and how to make the appointment.
It is important to understand that not everyone can be a charity trustee. Some people are automatically barred from becoming trustees unless they are authorised to do so by the Charities Commission, including those who have:
- An unspent conviction for an offence such as dishonesty or deception (e.g. fraud), terrorism, money laundering, bribery, contravening a Charity Commission Order or Direction, misconduct in public office, perjury, perverting the course of justice or aiding and/or abetting the above offences or the attempting thereof.
- Been declared bankrupt or entered into a formal arrangement (e.g. an IVA) with a creditor.
- Been removed as a company director or charity trustee as a result of wrongdoing.
- Been on the sex offenders register.
- An unspent sanction for contempt of Court.
- Disobeyed a Commission Order.
- Been named as a designated person (under specific anti-terrorist legislation).
Step 2 – Ensure that your charity has ‘‘charitable purposes for the public benefit’’
Charities must have a ‘‘charitable’’ purpose from among those defined in the Charities Act 2011, as follows:
- The prevention or relief of poverty.
- The advancement of education.
- The advancement of religion.
- The advancement of health or the saving of lives.
- The advancement of citizenship or community development.
- The advancement of the arts, culture, heritage or science.
- The advancement of amateur sport.
- The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity.
- The advancement of environmental protection or improvement.
- The relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage.
- The advancement of animal welfare.
- The promotion of the efficiency of the armed forces of the Crown or of the efficiency of the police, fire and rescue services or ambulance services.
When defining your charitable purposes it is important to set out a) what outcomes your charity will achieve, b) how it will achieve these outcomes, c) who will benefit from these outcomes, and d) to where the benefits extend. It is also important to ensure that the purposes are clear, precise, unambiguous and complete. As the Charity Commission states, if the purpose of the charity is not clear then they cannot be certain that it is charitable.
The Commission provide much online guidance about how to write charitable purposes.
Step 3 – Choose your charity name
A charity must have a ‘‘main name’’ and can also have an optional ‘‘working name’’. For example, the main name for the NSPCC is the ‘‘National Society for the Prevention of Cruelty to Children’’, but its working name is the ‘‘NSPCC’’.
When choosing a main and/or working names for your charity it is important to ensure that they are not the same or too similar to those of any existing charity. You may be asked to provide evidence that you have permission if you use a name which either is or includes:
- A famous or copyrighted work (e.g. a book or a piece of music).
- The name of a famous person or character.
- A trade mark.
- A royal title (e.g. His Majesty).
It is also important not to use words or letters which may be offensive or a name which could be misleading.
Step 4 – Choose a structure
There are four commonly-used types of charitable structure from which to choose, as follows:
- Charitable Company – A charitable company is a body corporate that, when registered, is limited by guarantees rather than shares. Because charitable companies are distinct legal entities with limited liability for trustees, this is a suitable structure for larger charities that intend to employ staff, hold large funds and potentially take large risks. Charitable companies must be incorporated at Companies House. When registering a charitable company you will need to select ‘‘private company limited by guarantee’’ in your application. The company will be registered also with the Charity Commission.
- Charitable Incorporated Organisation (CIO) – A CIO is also a separate legal entity from its trustees but it is not subject to the same regulatory requirements as companies (because it is not a company). There are two types of CIO: Foundation CIOs and Association CIOs. Foundation CIOs are typically run by a small group of trustees who are responsible for making key decisions. Association CIOs normally have more members, including trustees and non-trustees. Although a CIO is not a company, trustees still have limited liability for its debts and liabilities.
- Charitable Trusts – A charitable trust is not incorporated and is not a distinct legal entity separate from its trustees. The trustees do not, therefore, have the benefit of limited liability from the debts and liabilities of the trust. Charitable trusts are commonly used where the charity will be run exclusively by its trustees and there is a need to manage assets such as money, investments, land or buildings.
- Unincorporated Charitable Associations – This is the most straightforward legal structure for a charity, typically used by a group of individuals with a shared purpose and where there is no need to employ staff or own premises. Unincorporated associations are the preferred structure for sports clubs and community groups. It is important to bear in mind that members of unincorporated associations are liable for any debts and liabilities of the charity. For those who want to set up a new charity with little risk of liability, minimal setup and little administration then an unincorporated association may be the best choice.
Step 5 – Create a ‘‘governing document’’
All charities must have a governing document or rulebook that tells trustees and others:
- The charity’s purpose.
- The names of the trustees.
- How the charity is run.
- How trustees will be appointed.
- Rules about trustees’ expenses.
- Rules about payment of expenses to trustees.
- How disputes should be resolved.
- How to close the charity.
The type of governing document that you will need depends upon the charity structure. Limited companies must have ‘‘articles of association’’, CIOs have a ‘‘foundation’’ or ‘‘association’’ constitution, unincorporated charitable associations have ‘‘constitutions’’ and charitable trusts have a ‘‘trust deed’’ or ‘‘will’’. For more details on what should be included in a governing document, we recommend that you review the guidance provided by the Charity Commission.
Step 6 – Register your charity
Under the rules in England and Wales you will need either to register your charity, if it has an income of more than £5,000pa, or else to establish a CIO.
The charity registration process can be completed online. During this process you will need to provide:
- Details of your charity’s charitable purposes and how you will run your charity for public benefit.
- Proof that your charity’s annual income is above £5,000 (unless setting up a CIO).
- Charity name.
- Charity bank or building society details.
- Most recent charity accounts.
- Charity contact details.
- Trustees’ details.
- Governing document in PDF format.
Once your application has been received, it will normally reviewed by the Charity Commission and a decision will be made within 10 to 30 days. If your application is approved then the Charity Commission will write to you and add your charity to the official register of charities in England and Wales.
You can also register your charity with HMRC to get recognition for your charitable status, allowing you to claim Gift Aid.
Setting up a charity in England and Wales involves more than filling in a simple application form. There are many important decisions to be made regarding trustees, name, structure and how the organisation will be run. For advice on incorporating your new charity with Companies House as a Company Limited by Guarantee, speak to one of our expert company formation specialists who can guide you through the process.