Scottish Parliament considers proposed reforms to Scottish charity law
Our Charities Panel has submitted evidence to the Scottish Parliament on the new Charities (Regulation and Administration) (Scotland) Bill (the Bill).
Proposed changes to Scottish charity law are being considered by the Scottish Parliament’s Social Justice and Social Security Committee (the Committee). The Bill updates the Charities and Trustees Investment (Scotland) Act 2005 (the 2005 Act).
The ICAS Charities Panel has been fully engaged with the charity law reform agenda. We responded to related Scottish Government consultations in both 2019 and 2021, and we have recently responded to the Committee’s call for written evidence as part of its inquiry into the Bill.
It has taken a while for Scottish Government plans to reform charity law to reach the parliamentary stages, with plans placed on hold during the pandemic.
The proposals for reform are intended to:
- Strengthen the Office of the Scottish Charity Regulator (OSCR)’s powers
- Make charities more accountable and transparent
- Bring Scottish charity law up to date with certain aspects of the law in England and Wales, and in Northern Ireland
We have been calling for a more comprehensive review of the 2005 Act because there hasn’t been a full post-implementation review undertaken since it was passed 17 years ago. While a more comprehensive review isn’t planned at the moment, the Scottish Government has indicated that a review will take place in the next five year parliamentary term. This term will commence following Scottish parliamentary elections in May 2026.
Here is a summary of the proposed reforms:
1. A power for the Office of the Scottish Charity Regulator (OSCR) to issue positive directions to charities. At the moment, OSCR can only require a charity to stop doing something, rather than request a charity to undertake a specific action.
2. A power for OSCR to conduct inquiries into former charities and their charity trustees.
3. Clarification of an existing provision intended to improve the speed and efficiency of OSCR’s powers to gather information for inquiries.
4. A power for OSCR to appoint interim charity trustees.
5. A requirement for OSCR to publish the trustees’ annual reports and accounts of all charities in the Scottish Charity Register. This requirement means that certain information, such as names, will no longer need to be redacted by OSCR prior to publication on its website.
6. Requirements for OSCR to include charity trustee names in the Scottish Charity Register, to keep an internal schedule of charity trustees’ details and to create a publicly searchable record of removed charity trustees. Updated safeguards through exemptions from public disclosure are planned to protect the safety and security of people and premises. These safeguards will apply to all published information, including information normally included in the trustees’ annual report and accounts.
7. Updating the criteria for the automatic disqualification of charity trustees and extending it to individuals in senior management positions in charities.
8. The removal of charities from the Scottish Charity Register for persistently failing to submit trustees’ annual reports and accounts.
9. A specific requirement for charities in the Scottish Charity Register to have and retain a connection to Scotland.
10. A requirement for the assets of former charities removed from the Scottish Charity Register to be used for public benefit.
11. The creation of a record of charity merger within the Scottish Charity Register, including where a charity changes its legal form. This will provide for the transfer of legacies to the appropriate charity without the need to retain a ‘shell’ charity, following a charity merger. Similar arrangements already exist in England and Wales, and in Northern Ireland.
In addition, the Bill includes some minor technical amendments to the 2005 Act.
Our overall view on the proposed reforms
We have set out our views on the Bill and plans for a broader review of Scottish charity law in our written evidence to the Committee.
While broadly supportive of the reforms, we have expressed our disappointment that a broader review is unlikely to happen until the next parliamentary term.
We also emphasise the need for OSCR to apply its power of positive direction proportionately, in accordance with the regulatory principles set out in the 2005 Act. We anticipate that OSCR will exercise this power alongside its powers of inquiry and investigation.
The inclusion of trustees’ names in the Scottish Charity Register
We acknowledge that including trustees’ names in the Scottish Charity Register, will be a big change for charities. It’s important that changes in the information charities need to provide are clearly communicated well in advance of implementation to charity trustees, especially to the trustees of charities with no or limited administrative support.
We are supportive of the updated safeguards for charities where making information public could put the safety and security of its trustees, staff, service users or premises at risk. Charities will need to make a case to OSCR to receive exemptions from public disclosure. It‘s vital, therefore, that the process for applying and approving disclosure exemptions is straightforward, and that charities have enough time to have exemptions approved in advance of having to comply with registration requirements, including the registration of trustee information.
OSCR will also have discretion about the public disclosure of information, even where a charity has not applied to receive an exemption.
Matters of concern to ICAS members not included in the Bill
Charity independent examination
We continue to press for changes to Scottish charity law to strengthen the independent examination regime, by requiring OSCR to issue directions for independent examiners to set out the work that they need to undertake. This would bring the independent examination regime in Scotland in line with the regime in England and Wales.
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 may not be able 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 threshold is now considerable. This, combined with economic conditions and increased regulatory requirements, means that it is increasingly 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.
We believe proposals to increase the charity audit threshold should be subject to public consultation and that an increase in the audit threshold should be accompanied by a more robust independent examination regime.
Insolvency related matters
There are three outstanding insolvency related matters where we believe improvements in the law would be beneficial to the charity sector:
- Under charity law, an insolvency practitioner appointed to a charity, and therefore to the role of charity trustee, cannot be remunerated. This is due to the rule in the 2005 Act that a Scottish charity can’t remunerate 50 percent or more of its trustees. While there is a burdensome workaround which deals with this, we recommend that charity law is changed so that insolvency practitioners can be paid for their services in a straightforward manner.
- There is an inherent conflict between the duties of company directors and the duties of trustees when a charity which operates through a company is facing severe financial distress or insolvency. Directors have a duty to take steps to protect the interests of creditors. In many circumstances this will involve taking a decision to place the company into an insolvency process, most often winding up. However, the 2005 Act requires the charity to give OSCR 42 days’ notice prior to taking steps to wind itself up. There is often an urgent need for the appointment of an insolvency practitioner, making the 42 days’ notice period impractical. The workaround for this is also burdensome, adding unnecessary cost to the legal process of winding up. We would welcome changes to the notice period in the 2005 Act to address this specific issue.
- Insolvency practitioners are not permitted to act as trustee in SCIO sequestrations. Only the Accountant in Bankruptcy can do this. While there have not been many SCIO sequestrations to date, it would make sense to ensure that there continues to be sufficient capacity by permitting insolvency practitioners to act as trustees in this circumstance.
If you have any views on the Scottish charity law reform agenda please let our Charities Panel know by emailing firstname.lastname@example.org.