Scottish charity law: consultation analysis

Section 8

De-registered charities assets and public benefit

Context

If a charity is removed from the Scottish Charity Register but continues to operate as a non-charitable body, it is under a duty to use the assets it held before it de-registered for the charitable purposes then set out in its Register entry.  The former trustees are also under a duty to submit statements of account for the pre-removal assets of the body to OSCR on an annual basis.  OSCR continues to monitor the assets until they are spent or become negligible. 

While any such “pre-removal” assets must be used for charitable purposes, there is no requirement for them to be used to provide public benefit.  This means that assets that have been built up during the life of the charity could potentially be used in ways that did not provide public benefit and for private gain.

Table 23: Question 19 

Should bodies that have de-registered as charities be required to continue to use the assets held at the time of removal from the Scottish Charity Register to provide public benefit?

Over two-thirds of respondents SUPPORTED the proposal that bodies that have de-registered as charities should be required to continue to use the assets held at the time of removal from the Scottish Charity Register to provide public benefit (69%). 

Wider comments provided by respondents showed strong support for this proposal.  The following quote is reflective of many of the comments shared – “Assets that have been built up during the life of a charity should be required to be used to provide public benefit and not for private gain”.

The majority of feedback highlighted the importance of accumulated income and assets secured/generated by bodies that have de-registered as charities continuing to be used for the intended charitable purpose(s) (or as close as is possible to those for which they were given).  

The main feedback was that there was an inherent duty or obligation to safeguard charitable assets and ensure continued public benefit rather than use for private gain – “Assets should always be asset locked for the purpose they were donated or fundraised for”.

Here, many respondents commented that if assets were subsequently used for private gain that this would be misleading to donors/public who had awarded/donated monies on the “good faith” that their contribution would be used for public benefit.  It was felt that this would have a negative impact on public trust and confidence in the charity sector.

Charity sector organisations mentioned that many charities’ constitution or memorandum and articles of association would already contain a provision that in the event of the charity being wound up or otherwise de-registering, that the assets should be transferred to another charity which has aims as close as possible to the de-registering charity.  If this was not the case, then it was suggested that there would require to be a “direction to encourage all forms of charities to have appropriate dissolution clauses in their governing document and to ensure that public benefit must form part of the transfer or continued use of assets following de­registration”.

Indeed, the point regarding the potential to transfer assets to another charity with similar aims and objectives (area of operation) was commonly reported.  Here, it was suggested that the requirement to continue to use the assets to provide public benefit did not need to rest with the de-registered charity, and that “the same outcome could be achieved by handing over assets to another organisation with a similar charitable mission”.  Others suggested transfer of assets to a central fund held by the relevant local authority or governmental department to be used for the public good.

A few charity sector organisations mentioned, however, that additional restrictions, in some cases, might be required, as illustrated by the following quote “For example, some collections held by Trusts that should not be capable of being sold for cash even if this is for charitable or public benefit. This will be specified in the charities’ articles and should only be overturned by an appropriate court order or Act of Parliament”.

A few highlighted that some terms used in the proposal required further clarification/ definition – this included the meaning and scope of “assets” (e.g. fixed/disposable, minimum requirement in terms of value) and “public benefit”, as well as associated guidance/parameters and reasonable timeframes.  Plus, more information on how it would work in practice (and how it would be monitored and enforced).

The additional burden that this proposal might place on de-registered bodies was acknowledged in a handful of cases – with the suggestion (as highlighted above) that where there were difficulties, assets should be transferred to another charity who could use them for similar purposes.  Despite any additional burden it might cause, maintaining public trust was viewed as a key priority.  

Just less than one-fifth of respondents DID NOT SUPPORT a requirement for ‘pre-removal’ assets to be used to provide public benefit if a body de-registers as a charity (17%).  Within the charity sector, membership/professional bodies and local charities were more likely to not support the proposal.

The main feedback provided by these respondents included the following: 

• Concerns were raised regarding complexities and challenges for long-established charities with assets acquired prior to the 2005 Act (i.e. prior to the introduction of public benefit) – “they did not have to provide public benefit” at the time of acquisition and therefore “it would be wrong for these assets to be diverted to another purpose simply because of a subsequent, different, interpretation” of public benefit.
• That the definition of “public benefit” is open to interpretation and relatively fluid - there was concerns that “in the event of future legislation ever altering the definition of public benefit, situations could arise where funds were frozen and could not be used for the purposes intended by the original donors”.
• The accumulated income and assets secured/generated by bodies that have de-registered should be passed to another charity and/or transferred to a general fund that could be managed and distributed across the charity sector by an appropriate organisation – “Monies were given for specific charitable purposes and that should be respected”.
• If not already, then it should be made clear in an organisation’s memorandum and articles how any assets should be dealt with upon dissolution.

Wider feedback reported included:

• It was felt that in most instances the sums concerned would be small and with the growing use of SCIOs as a legal vehicle this might become less of an issue.
• There would be potential implications for independent schools - “If private schools lose their charitable status because they are not considered to provide a public benefit, would they then lose their buildings and assets?”, “How can (independent schools) provide public benefit in any ongoing way if the law is changed to prevent them so doing in terms of legislation?”
• It was felt that the monitoring and enforcement of this proposal would be costly and potentially unworkable.

As highlighted above, some membership/professional bodies which responded to the consultation did not support this proposal - “intrinsically and fundamentally unfair for a former charity, which has ceased to enjoy the benefits of charitable status, to be required to continue to meet the Charity Test in respect of the assets in question”.  Some felt it would be inappropriate - “to impose a continuing obligation that such assets must be used for public benefit would mean that the former charity would still have to meet the full charity test after de-registration as a charity”.  

Further, these respondents highlighted that the meaning of the phrase “public benefit is likely to be fluid. What constitutes “public benefit” in 2019 may not be deemed to do so in 2029”.