Section 27: Restrictions on mortgaging

108.     Section 27 makes a number of amendments to section 38 of the 1993 Act. At present, the grant of any mortgage over charity land requires the authority of the court or the Charity Commission, unless it is being granted by way of security for the repayment of a specific loan. Where the mortgage is granted for such a purpose, that authority is not necessary so long as the trustees obtain and consider proper advice, before executing the mortgage, on certain matters concerned with whether the loan is expedient in the interests of the charity. This section extends the circumstances in which a charity does not require the formal authority of the court or the Commission to allow land belonging to a charity to be used as security.

109.     The substitution made by subsection (2) provides for the extension of the circumstances in which consent is not required, and prescribes the matters on which the trustees must obtain written advice in the case of a mortgage to secure the repayment of a proposed loan or grant (new subsection (3)), and in the case of a mortgage to secure the discharge of any other proposed obligation (new subsection (3A)).

110.     New subsections (3B) to (3D) make provision for the r,gime for which consent is not required to be extended to mortgages which are intended to secure not only the loan which is under immediate consideration, but also any future loan which the lender might make to the borrower. This is subject to the requirement in new subsection (3D) that such a future transaction must not be entered into unless proper advice (as prescribed by new subsection (3) or (3A))has been taken in respect of that transaction.

Section 28: Annual audit or examination of accounts of charities which are not companies

111.     Section 28 makes a number of amendments to section 43 of the 1993 Act. At present under section 43 of the 1993 Act a charity which is not a company must have its accounts for a particular financial year professionally audited (that is, audited by a person eligible under the Companies Act 1989 to audit the accounts of a company) if either:

• its gross income or total expenditure exceeded £250,000 in that financial year; or

• its gross income or total expenditure exceeded £250,000 in either of the two years preceding that financial year.

112.     The substitution made by subsection (2) of this section removes from the requirement to have an audit any references to the expenditure of a charity, which means that the level of a charity's expenditure is no longer relevant in determining whether or not its accounts must be audited. Nor is there any longer a requirement to consider the income of the charity in the preceding two years before the year in question. New section 43(1) sets the audit requirement at an income level of £500,000 per annum and introduces an additional asset value threshold of £2.8million. The asset value threshold applies only to those charities that are required to prepare a full annual statement of accounts under section 42(1) (i.e. the threshold does not apply to charities which prepare the simpler form of accounts under section 42(3)). This means that the asset threshold would apply at present only to charities with gross income of more than £100,000 per annum.

113.     The amendment made by subsection (3) to section 43(2) preserves the requirement that a charity's auditor must be a person eligible to audit company accounts. The purpose of the amendment is to apply to auditors of charity accounts the rules on ineligibility on grounds of lack of independence that are contained in Part 2 of the Companies Act 1989.

114.     Subsection (4) amends section 43(3) of the Charities Act 1993. This section relates to the requirement placed on charities which fall below the audit requirement threshold to have their accounts independently examined. Section 28 of the Deregulation and Contracting Out Act 1994 amended section 43(3) so that the requirement to have an independent examination was placed on charities whose gross income or total expenditure in that year exceeded £10,000. This amendment removes the consideration of expenditure from the requirement to have an independent examination. The accounts of charities with incomes above £10,000 but below the new threshold of £500,000 would be subject to independent examination.

115.     Subsection (5) provides for the new subsection (3A) to be inserted after section 43(3) of the 1993 Act. This new subsection relates to those charities which would have been required to have an audit under the previous r,gime but will not be so required under the new r,gime - that is, those with incomes above the old threshold of £250,000 but below the new threshold of £500,000. Where those charities do not have their accounts professionally audited the accounts are required to be independently examined by someone with a relevant qualification. For the purposes of the Act a relevant qualification would be membership of a body recognised under section 249D(3) of the Companies Act 1985, which would currently be one of the following bodies:

• Institute of Chartered Accountants in England and Wales;

• Institute of Chartered Accountants of Scotland;

• Institute of Chartered Accountants in Ireland;

• Association of Chartered Certified Accountants;

• Association of Authorised Public Accountants;

• Association of International Accountants;

• Association of Accounting Technicians;

• Chartered Institute of Management Accountants;

• Institute of Chartered Secretaries and Administrators;

• Or;

• a member of the Chartered Institute of Public Finance and Accountancy, or;

• a Fellow of the Association of Charity Independent Examiners.

• The Minister for the Cabinet Office has the power by order (given by subsection (6)) to add a description of person to the list, to remove a description of person from the list, or to alter an entry in the list.

116.     Subsection (6) substitutes a new section 43(8) of the 1993 Act for the existing section 43(8). Under this new subsection the Minister for the Cabinet Office retains the power to amend the audit threshold and the requirements for independent examination.

Section 29: Duty of auditor etc. of charity which is not a company to report matters to Commission.

117.     Auditors of registered charities which are not companies have a specific statutory duty (a "whistleblowing" duty) to report to the Charity Commission abuse or significant breaches of charity law or regulation. This duty arises under regulation 7(5) of the Charities (Accounts and Reports) Regulations 2005 ⁵. Auditors who comply with the duty have statutory protection from the risk of action for breach of confidence or defamation. Auditors of charitable companies, however, would have to rely on the protection given by case law if they made a similar report in the 'public interest'.

⁵ SI 2005/572

118.     Subsection (1) of section 29 inserts new section 44A into the 1993 Act. Currently section 44 of the 1993 Act confers on the Secretary of State a power to make regulations about the duties of auditors under section 43; that power has been exercised in the Charities (Accounts and Reports) Regulations 2005. Regulation 7(5) of those regulations imposes on the auditor of a charity a duty to communicate to the Commissioners in writing any matter relating to the activities or affairs of the charity which he has reasonable cause to believe is, or is likely to be, of material significance for the exercise in relation to the charity of the Commissioners' functions under section 8 (inquiries) or 18 (protective powers) of the 1993 Act. The effect of that duty is to release an auditor acting in pursuance of regulation 7(5) from his duty of confidentiality to the trustees of the charity and to enable him to report relevant matters about the charity without risking action for breach of confidence. The new section 44A prescribes the "whistleblowing" duties and powers of auditors and extends those duties and powers to independent examiners. New section 44A also provides that, where auditors or independent examiners act in accordance with their "whistleblowing" duties or powers, no duty to which they are are subject - such as the duty of confidentiality towards their clients - would be contravened merely as a result of the information or opinion contained in their report (section 44A(1)-(7)).

119.     Subsection (2) of section 29 amends section 46 of the 1993 Act, which makes special provision as respects the accounts and annual reports of exempt and excepted charities. Subsection (2)(b) provides for new sections 46(2A) and (2B) to be inserted after section 46(2) of the 1993 Act. It confers on the auditor or independent examiner of an exempt charity which is not a company the same duties, powers and protection as auditors and independent examiners of unincorporated charities are given under new section 44A(2) to (7).

Section 30: Group Accounts

120.     Section 30 inserts new section 49A into the 1993 Act and gives effect to new Schedule 5A inserted into the 1993 Act by Schedule 6 to the Act. These introduce a requirement on a charity ("the parent charity") which has subsidiaries under its control to prepare annual accounts relating to the whole group consisting of the parent and all of its subsidiaries. The present requirement is generally that the parent and each of its subsidiaries should prepare accounts relating to itself alone.

121.     Paragraph 3 of new Schedule 5A provides the requirement for parent charities to prepare group accounts which must comply with regulations made by the Minister for the Cabinet Office regarding their form and contents. Paragraph 4 provides certain exceptions to the requirement to prepare group accounts, and enables regulations made by the Minister for the Cabinet Office to prescribe further exceptions. Paragraph 5 provides for the preservation of group accounts.

122.      Paragraph 6 of new Schedule 5A makes provision for the audit of the accounts of larger groups, and paragraph 7 provides for the examination of accounts of smaller groups. The relevant gross income and asset thresholds for the purposes of determining larger groups would be prescribed in regulations made by the Minister for the Cabinet Office.

123.     Paragraph 10 makes provision for the annual reports of parent charities to include such information as may be prescribed in regulations about the activities of their subsidiaries. It also includes a requirement for the group accounts to be submitted to the Commission with the copy of the annual report along with a copy of the report on the accounts made by the auditor or independent examiner.

124.      Other provision made by new Schedule 5A includes supplementary provisions relating to audits of group accounts; the extension of the duty of auditors or reporting accountants to report matters to the Commission; provision relating to excepted and exempt charities; the requirement for group accounts to be available for public inspection; and an extension of relevant existing offences to the requirements to prepare group accounts

Section 31: Relaxation of restriction on altering memorandum etc. of charitable company

125.     Section 31 amends section 64 of the 1993 Act. Subsection (2) replaces section 64(2) with a revised section 64(2). The revised section 64(2) limits the occasions on which alterations of a charitable company's memorandum or articles of association would require the prior written consent of the Charity Commission, referred to as regulated alterations.

126.     Subsection (2) provides for a new subsection (2A) to be inserted after section 64(2). The regulated alterations for which the Charity Commission's prior written consent is required are provided for by section 64(2A)(a)-(c).

Section 32: Annual audit or examination of accounts of charitable companies

127.     The provisions in this section relate specifically to the audit thresholds for charitable companies. The revised thresholds will ensure greater consistency in the audit thresholds for charitable companies and unincorporated charities. The provisions in this section amend sections 249A and 249B of the Companies Act 1985 and have been developed in conjunction with the Department of Trade and Industry.

128.     Subsection (1) amends section 249A(4) of the Companies Act 1985. Section 249A(4) of the 1985 Act provides for the circumstances in which a charitable company may have a reporting accountant's report rather than an audit. Currently charitable companies with incomes between £90,000 and £250,000 per annum (section 249A(4)(b) of the 1985 Act) and assets of less than £1.4 million (section 249A(4)(c) of the 1985 Act) may have a reporting accountant's report. Paragraphs (a) and (b) of subsection (1) respectively increase the reporting accountant conditions so that charitable companies with gross incomes of more than £90,000 but not more than £500,000 and those with assets of not more than £2.8 million would be able to have a reporting accountant's report as opposed to an audit.

129.     Subsection (2) provides for the associated increase in the audit exemption threshold where a charitable company is a parent company or subsidiary undertaking. Section 249B(1C) of the Companies Act 1985 provides that, where a charitable company is a parent company or subsidiary undertaking, an audit exemption for a particular year is available if in that year the group turnover is not more than £350,000 net (£420,000 gross). The charitable group threshold is 40% higher than that for the individual charitable company threshold. For that reason subsection (2) provides that the new threshold for audit exemption for charitable groups is 40% higher than the new threshold for charitable companies individually. The new threshold is therefore £700,000 net or £840,000 gross.

Section 33: Duty of auditor etc. of charitable company to report matters to Commission

130.     Section 33 provides for the new section 68A to be inserted after section 68. It extends to persons acting as auditors of charitable companies under Chapter 5 of Part 11 of the Companies Act 1985, and to reporting accountants of charitable companies under section 249C of that Act, the duties, powers and protection given to auditors and independent examiners under section 44A(2)-(7) of the 1993 Act.

Section 34 and Schedule 7: Charitable incorporated organisations

131.     Section 34 and Schedule 7 make provision for a new legal form, the Charitable Incorporated Organisation ("CIO"). The CIO is the first legal form to be created specifically to meet the needs of charities. Its purpose is to avoid the need for charities which wish to benefit from incorporation to register as companies and be liable to dual regulation by Companies House as well as the Charity Commission.

132.     The suggestion of a new legal form for charities was first made in the Department of Trade and Industry's review of company law in 2001 ⁶. It was subsequently developed by an advisory group set up by the Charity Commission. The proposal was endorsed by the Strategy Unit whose report provides a summary of the CIO's main characteristics ⁷. Further detail was given in a background paper. In its reply to the Strategy Unit, the Government accepted the proposals for CIOs and said that it proposed to review the need for other legal forms five years after the CIO is introduced ⁸.

⁶ Modern Company Law: Final Report, para. 4.63ff

⁷ Box 5.3 on page 58 - see footnote 1 for the web address of the Strategy Unit's report

⁸ paras. 4.14-15 - see footnote 2 for the web address of the Government's response to the Strategy Unit report

133.     The Act sets out the basic framework for the CIO. Further technical provisions, which may need amendment in the light of experience of the CIO's operation, will be contained in secondary legislation. An exposure draft of the relevant secondary legislation is available at http://communities.homeoffice.gov.uk/activecomms/ac-publications/publications/290701/charities_dummy_reg.pdf.

134.     Section 34 is preparatory. Schedule 7, which contains the substantive provisions, proceeds by inserting a new Part 8A (sections 69A-Q) and a new Schedule 5B into the Charities Act 1993 and making various minor amendments to that Act. The new Part 8A contains provisions dealing with the nature and constitution of the CIO; its registration as a charity; the conversion of a charitable company, registered industrial and provident society or community interest company into a CIO; the amalgamation of CIOs; the transfer of a CIO's property, rights and liabilities to another CIO; and the Minister for the Cabinet Office's power to make regulations about the winding up, insolvency and dissolution of CIOs, and about their administration. The new Schedule 5B contains supplementary technical provisions. Part 2 of Schedule 7 contains amendments to the Charities Act 1993.

135.     Section 69A requires a CIO to be a body corporate with a constitution, a principal office in England or Wales and one or more members with no or limited liability.

136.     Section 69B specifies the matters that must be stated or provided for in the CIO's constitution, requires the constitution to be in a form specified by the Charity Commission and written in English (or in either English or Welsh if the CIO's principal office is in Wales), and enables the Minister for the Cabinet Office to make further provision in regulations.

137.     Section 69C requires the CIO's name to appear in legible characters in various business and financial documents, and for these documents to state that the organisation is a CIO if that is not clear from the organisation's name.

138.     Section 69D creates criminal offences of failure to comply with the previous section, and one other offence.

139.     Section 69E allows any one or more persons to apply to the Commission for a CIO to be constituted and registered as a charity, requires the applicants to supply the Commission with the CIO's proposed constitution and any other documents or information that may be required and specifies the circumstances in which the Commission may or must refuse the application.

140.     Section 69F provides that if the Charity Commission registers a CIO as a charity it becomes by virtue of its registration a body corporate constituted in accordance with the application. The entry in the register is to include the date of registration and a note saying that the charity is constituted as a CIO, and a copy of the entry is to be sent to the CIO at its principal address.

141.     Section 69G allows a charitable company or a registered industrial and provident society (except for a company or society which has a share capital not fully paid up, or which is an exempt charity) to apply for conversion to a CIO. It requires the Charity Commission to be supplied with certain documents and information, including a copy of the special or unanimous written resolution that the company or registered society should be converted to a CIO and a copy of the resolution adopting the CIO's proposed constitution. If the application is made by a company limited by guarantee the constitution must specify the amount up to which the members are liable, which amount is not to be less than the amount to which they would be liable if the assets of the company were wound up. Where the members' guarantee is £10 or less, it is automatically extinguished on conversion of the company to a CIO.

142.     Section 69H and section 69I contain supplementary provisions about the conversion of companies and registered industrial and provident societies. Section 69J provides the Minister for the Cabinet Office with a power to make regulations providing for the conversion of a community interest company into a CIO, and for its registration as a charity.

143.     Section 69K allows any two or more CIOs to apply to the Commission to be amalgamated. Before such an application can be granted, each of the CIOs affected has to pass a resolution either by a 75 per cent majority of those voting at a general meeting or unanimously otherwise than at a general meeting, and to give notice of the proposed amalgamation in the way that in the opinion of the trustees will make it most likely to come to the attention of those affected. Those affected may make written representations to the Charity Commission, and the Commission may refuse an application if there is a serious risk that the new CIO would be unable to pursue its purposes. The Commission may also refuse an application to amalgamate if it is not satisfied that the constitution of the amalgamated CIO makes the same, or substantially the same, provision on these matters:

• purposes;

• application of property on dissolution;

• benefits authorised to be paid to trustees or members of the CIO, or persons connected with trustees or members,

• as the constitutions of each of the CIOs forming the amalgamated CIO.

144.     Section 69L contains supplementary provisions on amalgamations.

145.     Section 69M allows one CIO to transfer all its properties, rights and liabilities to another. If a CIO resolves to make such a transfer, the Charity Commission must be sent a copy of the resolution, and may direct the CIO to give public notice of the resolution. If the Commission so directs, it must take into account any representations made by interested parties. The resolution does not take effect until it is confirmed by the Commission, and the Commission must refuse to confirm it if there is a serious risk that the transferee CIO would be unable properly to pursue the purposes of the transferor. The Commission may refuse to confirm the resolution if it is not satisfied that the constitution of the transferee CIO makes the same, or substantially the same, provision on these matters:

• purposes;

• application of property on dissolution;

• benefits authorised to be paid to trustees or members of the CIO, or persons connected with trustees or members,

• as the constitution of the transferring CIO. A resolution would be deemed to be confirmed within six months of its receipt by the Commission, unless the Commission had already confirmed or refused to confirm the resolution, or had extended the period of its consideration by up to an additional six months.

146.     Section 69N allows the Minister for the Cabinet Office to make regulations about the winding up, insolvency, dissolution, and revival and restoration to the register following dissolution, of CIOs.

147.     Sections 69O-Q contain miscellaneous supplementary provisions, including at section 69Q a power for the Minister for the Cabinet Office to make regulations about applications for registration of CIOs, the administration of CIOs, and CIOs generally.

148.     The new Schedule 5B makes further provision about CIOs. Paragraph 1 enables a CIO to do anything which is calculated to further its purposes and gives the CIO's charity trustees the responsibility of managing its affairs. Paragraphs 2 to 4 contain provisions to do with the CIO's constitution. Paragraphs 5 to 8 concern the validity of acts done by the CIO and provide that, in general but with some limitations, the validity of those acts may not be called into question on the ground that the CIO lacked constitutional capacity. Paragraphs 9 and 10 require members of a CIO and CIO charity trustees, subject to regulations made by the Minister for the Cabinet Office, to act in the way most likely to further the purposes of the CIO and, in the case of trustees, to exercise reasonable care and skill. Paragraph 11 prevents CIO charity trustees from benefiting personally in certain circumstances from arrangements or transactions entered into by the CIO. Paragraph 14 allows a CIO to amend its constitution and specifies the circumstances in which it may do so. Paragraph 15 requires the CIO to send the Charity Commission a copy of the amendment and allows the Commission to refuse to register it in certain circumstances.

149.     The remainder of the Schedule consists of minor, largely consequential, amendments to the Charities Act 1993.

Section 35: Waiver of trustee's disqualification

150.     Currently a person that has been disqualified from being a charity trustee by virtue of section 72(1)(a) to (f) of the Charities Act 1993 may apply to the Charity Commission to waive his disqualification either generally or in relation to a particular charity or class of charity. Paragraphs (a) and (b) of section 72(4) prohibit a waiver from being granted in relation to a charity which is a company on specified grounds.

151.     Section 35 provides for new subsection (4A) to be inserted into section 72 of the 1993 Act. Under new subsection (4A) the Charity Commission must grant an application for a waiver from disqualification from a person who has been disqualified by virtue of section 72(1)(d) or (e) for more than 5 years unless it is satisfied that there are special circumstances for not granting the waiver. However, that would not apply where the Charity Commission was prohibited from granting the waiver under subsection (4)(a) and (b).

Section 36: Remuneration of trustees etc. providing services to charity

152.     A trustee (including the director of a charitable company) may not directly or indirectly receive any remuneration, or other form of valuable benefit, from his charity without authority. Currently authority for a trustee's remuneration can come from either:

• a provision in the charity's governing instrument; or

• an order made by the Charity Commission (under section 26 of the Charities Act 1993) or by the court; or

• statutory provision (e.g. Schedule. 1 to the Housing Act 1996, which allows for the remuneration of charity trustees of some charitable housing associations in some circumstances).

153.     This section inserts two new sections, 73A and 73B, into the 1993 Act. Section 73A provides a statutory power for the trustee body to pay remuneration to a person who either is a trustee of the charity or is connected (as defined in section 73B(5)) with a trustee of the charity who might receive a benefit as a result of the connected person's remuneration. An example of a connected person's remuneration benefiting a trustee is where persons A and B are spouses with joint finances, person A is a trustee of a charity, and person B receives remuneration from that charity. Section 73A also provides safeguards to prevent misuse of this power.

154.     Subsections (2) to (6) set out the conditions that need to be met for remuneration to be payable under this section.

155.     Subsection (7) provides that this section does not apply to remuneration for services provided by a person acting in the capacity of trustee, nor under a contract of employment. Neither does this section apply to any other remuneration to which a person is entitled specified in the provisions and orders that are set out in subsection (8).

156.     New section 73(B)(2) and (3) contains two safeguards to prevent misuse of the power: the duty to have regard to Charity Commission guidance, and the requirement to act in accordance with the duty of care set out in section 1(1) of the Trustee Act 2000.