International

Information for Overseas Institutions 

Third Sector Law

Alison Maclennan

The Issues

  1. Should the Overseas Institution establish a permanent presence in England and Wales as a charity, and if so how is this done?
  2. If so, what form should the charity take?
  3. What are the advantages or disadvantages of each form?
  4. Would an English charity be suitable as a fundraising vehicle within the European Union?
  5. How can funds raised in England and Wales (and Europe) be transferred for use by the Overseas Institution in the US. (i.e. payments made to an overseas body)?

 

We can help by establishing a charitable company limited by guarantee with purposes which are charitable under the law in England and Wales. Third Sector Law would be happy to form a team to establish the charity and administer it within the UK. There are many other issues to be addressed. We can send a questionnaire which, once answered, will help to focus on the issues which might arise. Below are details of some of the choices to be made.

1. Establishing a charity in England and Wales

The Overseas Institution may be a 501 (c) (3) public charity established in the U.S relying on grants and sponsorship from individuals, corporations, other foundations and government. It could be a non political organisation which aims to improve people’s lives. The organisation concentrates on projects broadly aimed at increasing human capital, financial capital and social capital.

2. & 3. The form of charity and some advantages and disadvantages of each.

Under English law, the simplest form to set up and operate is the declaration of trust. The trust is not a separate person from its trustees and there are no special formalities apart from: (1) the necessity to have the original document approveded by the Inland Revenue; and (2) the requirements of charity law, including registration in most cases. Organisations send their trust document and an application form to the Charity Commission with the most recent available accounts (if any) and a description of the activities of the organisation. The Charity Commission will assess the application against the charity test and if successful the organisation will be entered on the register of charities.

An unincorporated charitable association can also be simple to operate within the jurisdiction, provided that the terms of the constitution are clear and workable. Again, no separate legal person is created and in this case there is no requirement for a stamp. The Overseas Institution could draft rules (with advice) that effectively make the UK charity part of the Overseas Institution. None of the rules should be incompatible with English charity law though.

A charitable company involves some operational technicalities and should not be undertaken lightly. First, the formalities on setting up the company necessitate registration as a company. The company is a separate legal person from those who run it. There are also a number of requirements under company law which will have to be observed in addition to the requirements of charity law. The company must have a registered office (an official address); it must have a company secretary; annual returns must be submitted to Companies House; accounts must be audited by a registered company auditor (however small the operations may be); a register of members must be kept and an annual general meeting of the members held. There is an important requirement not to continue to operate if the company is insolvent, ie if its assets are not sufficient to enable its debts and other liabilities to be met. Company law is underpinned by statutory offences. Having a separate legal personality in this way eases matters such as entering contracts with third parties and appointing new trustee directors. The disadvantage with this form is that there is dual regulation by Companies House and the Charity Commission. Whilst this may appear daunting Third Sector Law can act on behalf of the charity to comply with the technical requirements and ensure that the regulations are met. Even small charities can achieve compliance quite easily.

A charitable incorporated organisation (CIO) is a new form of charity which is intended to relieve trustees of many of the complicated company law requirements whilst still giving the organisation the benefits associated with having a corporate existence. Regulation of this type of charity lies with the Charity Commission rather than the Registrar of Companies. (Eventually, charitable companies already established may apply to the Charity Commission to convert into a CIO.) The requirements for establishing a CIO is set out in the Charities Act 2006 and detailed guidance may be required from either the Charity Commission itself or legal advisers. This form is now available but applications will be phased in during 2013.

4. Would an English charity be suitable as a European base?

English charities are the most well established and are given the greatest tax exemptions in the European Union. A case in 2009 established in principle that charities would be free to operate within Europe gaining the maximum benefit from tax exemptions. This means that a German national may give funds to an English charity and may claim any allowances for donations that the German tax system would give, as if that person had made a gift within Germany.

Payments Overseas

Where a charity makes a payment to an overseas body, the onus is on that charity to show that it has taken steps that the Commissioners for HMRC consider are reasonable in the circumstances to ensure that the payment will be applied for charitable purposes. If it has not done so, the payment is deemed to be non-charitable expenditure.

“Applied for charitable purposes” means applied for purposes which are regarded as charitable within Section 2 of the Charities Act 2006. It is not sufficient for the charity to establish that the overseas entity is a charity under the domestic law of the host country.

HMRC’s guidance states that a charity is expected to make adequate enquiries to find out such information as is reasonably available about the overseas body and to establish what evidence is to be provided by that overseas body to show that the payment will be or has been applied for charitable purposes.

Charity trustees must be able to produce evidence to show that the steps that they took to ensure that the payments were applied for charitable purposes were in fact taken. HMRC makes it clear that the nature of the steps will depend upon the scale of operations and size of the sums involved. For small one-off payments an exchange of correspondence between the charity and the overseas body will normally be sufficient; but where the sums are large or part of an ongoing commitment more thorough work is required. That might include independent verification and evidence from earlier involvement with a project where applicable.

If the overseas body is not bound by its own domestic law to apply all of its income for charitable purposes then the trustees should consider a legally-binding agreement to ensure that their payment is applied for charitable purposes and should have a means of establishing whether or not that agreement has been complied with.

Where a charity makes a series of payments it is not necessary to make enquiries each time a payment is made; but trustees need to demonstrate that they are making enquiries of a sufficiently searching nature at regular intervals.

When HMRC reviews payments made it will require information about:

  • To whom the payment has been given;
  • For what charitable purpose it has been given;
  • The nature of the guarantees that the payment will be applied for the purpose for which it was given;
  • The steps taken to ensure the payment will in fact be applied for charitable purposes; and
  • The follow-up action taken by trustees to confirm that the payments have been properly applied.