Charity regulation review: consultation

Annex: Technical strand topics

A. Charity reorganisations for statutory charities

Reorganisation allows often older charities to make changes to become more effective in a number of ways. For the small number of charities established under Royal charter or an Act of Parliament or Act of the Scottish Parliament the process of reorganisation can be complex.

Changes made in Section 14 of the Charities (Regulation and Administration) (Scotland) Act 2023 have clarified the position where endowments are held but did not address wider stakeholder concerns about the reorganisation of these charities, as opposed to just their endowments.

A Royal Charter charity must still turn to the Privy Council for authority to reorganise and the stakeholders have advised that the Privy Council procedures in this area are ‘dauntingly time-consuming and expensive’. In the case of charities established by an Act of Parliament, they may have no alternative but to proceed with a private Bill in the Scottish Parliament, which is not always a good use of the charity’s money or the Parliament’s time.

B. Incorporation to a Scottish Charitable Incorporated Organisation (SCIO)

Incorporation means that the charity as a legal entity can enter into contracts in its own right and the charity trustees do not have the same liability if something goes wrong. In recent years incorporation is often a requirement for funding. This area can be problematic, particularly for smaller charities. A change from an unincorporated form to an incorporated form with limited liability provides protection for trustees and is recommended when employing staff or owning property.

For charities the incorporation process, sometimes called ‘change of legal form’ means they must a) set up a new incorporated charity, usually a SCIO, b) transfer all assets and liabilities from the unincorporated charity to the new charity and c) wind up the unincorporated charity. The OSCR processes for establishing new SCIOs, registering other incorporated bodies as charities, or winding up the old charities are not necessarily the issue here. It is often the transfer of all assets and liabilities from the old charity to the new charity which can be time consuming and expensive. Some charities who would benefit from the SCIO form withdraw from the process due to these complexities.

Around 54% of charities across Scotland have incomes of less than £25,000^[1]. As a result, they have limited capacity to access legal advice.

C. Review of audit thresholds

We have become aware that charities are finding it increasingly difficult to appoint an auditor. At the moment the evidence is anecdotal. However, we believe that over time there is a risk that charities requiring an audit will struggle to appoint an auditor, meaning that they would be unable to file annual accounts with OSCR to comply with the Charities Accounts (Scotland) Regulations 2006 (the 2006 Regulations) and the 2005 Act.

The gap between the audit threshold for Scottish charities in the 2006 Regulations and the Companies Act 2006 audit income threshold is now considerable (£500k compared to over £10m). This, combined with economic conditions and increased regulatory requirements, means that it can be difficult for audit registered firms to offer audit services to charities for a fee that is financially viable for the firm and affordable to the charity.

The audit income threshold for charities in Scotland and Northern Ireland is currently £500k, in England and Wales the threshold is higher, currently £1m. Some stakeholders have publicly called for the threshold to be raised to £1m. The Scottish Charity Sector in broad terms has a lower income than England and Wales, with only around 1,500 Scottish charities currently subject to the audit thresholds.

OSCR have advised that the number of charities falling above the gross income threshold of £500k for an Audit has remained relatively stable. This suggests that the threshold is not the root cause of the issues, and therefore raising the threshold might not be the best or only intervention available.

Raising the threshold would have a knock-on effect of creating more demand for independent examinations (required where an audit is not), where there is already a shortage of independent examiners. An independent examination is a form of external scrutiny of the accounts which is less rigorous than an audit. However, if the threshold were raised the charities likely to move out of the audit requirement would be likely still to require a professionally qualified person to carry out the independent examination. So, a change of threshold would not in itself reduce the demand on professional accountancy firms and individuals.

The audit thresholds are set out in the Charities Accounts (Scotland) Regulations 2006. Any change to the threshold would need to be made by amendment regulations, as opposed to it being a matter of discretion for OSCR. We understand from OSCR that data on the Scottish Charity Register indicates that an increase in the audit threshold to £1 million would bring around 500 charities out of the current audit requirements and place them under independent examination requirements.