New implications for cross border charities
It has been five years since the Office of the Scottish Charity Regulator (OSCR) first evaluated Scotland’s cross border charities. Since then the number of charities falling into this category has increased by over 40%, and there are now 965 cross border charities on the Scottish Register.
To comply with the Charities and Trustee Investment (Scotland) Act 2005, all organisations which represent themselves as charities in Scotland must register with OSCR, which has a duty to monitor them. This is the case even where there is already a "home country" charity regulator in the place where the organisation was first established. In almost all cases cross border charities registered with OSCR originate from England and Wales.
It is an important part of risk management that trustees of charities operating in more than one legal jurisdiction (whether at home in the UK or abroad) keep appraised of legal, tax and regulatory compliance issues. These are some of the recent developments from Scotland.
Land reform
The Scottish Government has been seeking to develop a wide range of land reform issues. One particular proposal was to create a new and onerous legal duty on charity trustees “to engage with the local community before taking any decision on the management, use or transfer of land under the charity’s control”. This raised several concerns in the sector as to the uncertainty, cost and complexity that such a new duty could bring to the way in which charities in Scotland manage land.
Although the proposal was not included in the Land Reform (Scotland) Bill 2015 when it was published in June, the Scottish Government is expected to introduce guidance on community engagement for all Scottish landowners, but no longer singles out charity trustees. While this measure may come to focus only on large land owning entities, charities of all sizes could still be affected by the change.
Taxation policy
In order to obtain charity tax status, all Scottish charities must comply with the English and Welsh charity test under UK tax law. HM Revenue & Customs, and not OSCR, therefore regulates charity tax recognition. However, increasing devolution of taxation to the Scottish Parliament creates complexities for cross border charities as Scottish taxation policy diverges from the UK.
Elements of the Scotland Act 2012 are now affecting cross border charities: on 1 April 2015, Land & Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax in Scotland for all property transactions, whether residential or commercial. Specific provision is made for charities to qualify for relief from LBTT, such that a property is exempt from the tax if the buyer is a charity which intends to hold the property (or the greater part of it) for qualifying charitable purposes, and the property transaction has not been entered into for the purpose of avoiding tax.
Purchasing property as an investment qualifies for the relief where profits are to be applied for charitable purposes. Subject to meeting the qualifying criteria, the relief extends beyond Scottish registered charities to those in the rest of the UK, the EU, Iceland and Norway. Care needs to be taken as certain disqualifying events can apply to restrict or remove the relief altogether.
The 2012 Act also introduced a new Scottish Landfill Tax and, from 6 April next year, a Scottish rate of income tax. With this will come the ability to raise or lower income tax. Any change would be applied equally across all tax bands.
The Scotland Bill goes one step further and sets out to devolve to the Scottish Parliament complete control of the rates and bands of income tax. However, central parts of the tax, including reliefs such as Gift Aid, remain reserved to Westminster. Calculating Gift Aid by reference to the UK, and not the Scottish, rates will have an indirect impact on cross border charities. This is because where the rates north and south of the border diverge, discrepancies will appear in the level of tax rebate.
As an example, if the UK income tax basic rate remained set at 20% and the Scottish rate is introduced at, say 21%, a Gift Aid donation would only produce a 20% (UK rate) tax rebate to the donee charity. The additional 1% of tax would not be rebated to the charity or to the donor.
The Chancellor has recently announced changes to inheritance tax but this tax remains reserved to the UK Parliament. The reduced 36% rate which applies to estates where 10% or more of the estate value is left to charity will therefore be unaffected by the recent and proposed Scottish devolution of taxation policy.
Fundraising reporting
To help reinforce public confidence in the Sector and to stamp out aggressive fundraising practices, large charities in England and Wales will soon have a legal duty to publically report their fundraising methods and the number of complaints which they receive. There is no move yet in Scotland to follow suit, but charity leaders are undertaking an immediate informal review of the situation.
Another current area of attention is restricted funds. These can take many different forms, depending on the source of funds. In Scotland, a restricted fund is “Property (including money) given to a charity for a specific purpose and in respect of which conditions have been imposed as to its use”.
Funds raised or gifted to a charity for its operations and work in Scotland will be restricted for use and application in Scotland, to the exclusion of being applied by the charity elsewhere in the UK. It is therefore vital that granters, legatees and fundraisers are clear about the ultimate destination of gifted funds.
The Charities Restricted Funds Reorganisation (Scotland) Regulations 2012 do provide a method of changing the purpose for which funds may be used and to vary or remove conditions attaching to restricted funds.
However, the wishes of a donor or granter can only be overridden where his or her consent to any such variation cannot be obtained, say because the individual has died, lost capacity or cannot be traced, or if the grant giving organisation no longer exists. OSCR also needs to be satisfied that one or more of the Reorganisation Conditions has been met - for example, that the intended purposes of the fund have been fulfilled or have ceased to be charitable.
Regulation initiatives
OSCR’s consultation on "Targeted Regulation" closed at the end of May. It introduced a number of topics aimed at promoting openness and which could bring the Scottish Charity Register closer in line with the Charity Commission’s Register. These include the online publication of charity accounts, the development and (ultimately) online publication of a charity trustee database, and a "Serious Incident Reporting" mechanism.
Efforts to align such initiatives north and south of the border are helpful to cross border charity trustees but care still needs to be taken on the key differences in practice which exist or develop over time.
One recent example of that is the increase from £500,000 to £1m in the audit exemption threshold in England and Wales, for accounting years ending on or after 31 March 2015. There are no plans at present to amend the audit threshold in Scotland, which remains set at £500,000.
Analysis from OSCR’s evaluation reports distinguishes the profile of Scotland’s cross border charities from the wider Scottish charity profile. There is a predominance of charitable companies, as opposed to unincorporated associations, and a heavier weighting towards charities with a higher level of turnover and asset value. Such charities may therefore already be required to have a full audit of their accounts. The impact of this divergence in regulatory practice may therefore be limited but some cross border charities will be affected.
Trustee residency
The concept of all charities registered with OSCR being required to have at least one Scottish resident trustee was raised a number of years ago but has since received little attention. There is currently no restriction on non-Scottish residents (or non-UK residents for that matter) acting as charity trustees, nor are there any additional requirements on them in fulfilling their duties under the 2005 Act.
Nonetheless, Scottish registered charities which are governed and controlled out of another legal jurisdiction must maintain strong engagement with their network of resident employees or branch committee members to keep appraised of local issues.
The results drawn from OSCR’s evaluation and monitoring reports of cross border charities in Scotland establish the need to raise awareness among this group of the requirements of being a Scottish registered charity and of the duties of trustees under Section 66 of the 2005 Act.
Risk management
Managing risk effectively is an essential function of charity governance, the responsibility for which rests firmly at board level. Mitigating the risks associated with operating in more than one jurisdiction requires close engagement with the charity’s local network and keeping appraised of, or seeking professionally advice on, the often complex and diverging legal, tax and regulatory regimes which exist across the UK and elsewhere.
