scots law
basic advice from govan law centre

charity law - basic guide


New developments (2005):  Charity law reform (pdf) -



Dundee University’s Charity Law Research Unit undertook empirical research over 1997 to 1999 with questionnaires going out to 2,500 charities in Scotland – some 1 in 5 respondents identified charity law and general legal advice as a problem for them. Accordingly, there is a significant need for more access to information and advice in this area of law.

The following brief guide considers some of the issues that any local group of people wishing to set up a community organisation should consider. In all cases, if you wish to set up an unincorporated or incorporated structure you should obtain professional legal assistance.

Solicitors at Govan Law Centre may be able to help – you can e-mail the law centre for details of the range of services we provide in this field.

·     First question to ask – why charitable status? Do you need it? What are the pros and cons. Certainly obtaining charitable status means that the organisation must comply with various requirements – most importantly accounting requirements in terms of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 and Charity Accounts (Scotland) Regulations (1992).

      Accounting requirements – how onerous depends upon gross receipts (simple procedure if below £25,000; over £100,000 require professional audit).

If an organisation does not expect to earn any significant income then charitable status may be a consideration purely in terms of grant, funding and rate relief requirements.

Trading – trading arms? – in some circumstances a charity may wish to consider setting up a separate trading arm (undertaking ‘business’) which can covenant income back to the charity.

Key benefits of charitable status? - relief from income tax on surplus (direct taxation); limited exemptions for VAT; 80% mandatory relief for non-domestic rates (possible to seek discretionary relief on the remaining 20%); donations by way of covenant etc.,

·      If charitable status is necessary – how do you obtain charitable status?

- Charitable status – granted by Inland Revenue – FICO – “Financial Intermediaries and Claims Office” in Edinburgh.

-      Section 506, Income Tax and Corporation Act 1988 states that charity means “any body or person or trust established for charitable purposes only”. However, no statutory definition in Scotland on charitable purposes – FICO base decision upon case law.

-      Case law – is actually English law – leading case of Special Commissioners of Income Tax –v- Pemsel 3 TC 54 (House of Lords decision of 1891). FICO (Scotland) interpret documents using Scots law but base their decision as to charitable purpose upon English case law; in Pemsel, the court (Lord MacNaghten) classified charitable purposes under four headings:

-      The relief of poverty

-      The advancement of education

-      The advancement of religion

-      Other purposes beneficial to the community not falling within any of the proceeding

These are the classifications that the Inland Revenue currently use.

·      Practical point – FICO are happy to look over draft objects clauses, constitutions and Memorandum and Articles of Association – with a view to indicating whether or not suitable for charitable status. FICO, where possible, will also advise on changes necessary – best to forward drafts to FICO in order to avoid problems at a later date.


What legal structure to adopt?


·     Possible to transfer Scottish Charities number (if for example, you go from an unincorporated to incorporated structure – require permission of FICO).

      What is an unincorporated organisation – practical considerations?

·       essentially contract between members;

·       no separate legal persona in law (in other words, not a ‘legal’ identity);

·       liability to individual members of management committee;

·       employers liability; accidents at work (insurance);

·       leases – ex officio? – liability – rates; Repairing, renewing and insuring commercial lease – liabilities arising thereof;

·       management committee as employer of staff; unfair dismissal claims; legal action; redundancy; winding up;

·       structural requirements – key requirements for charitable status – suitable objects clause; should have provision for annual accounting; winding up clause – assets not to be disbursed to non-charity.

·      What is an incorporated legal structure? – practical considerations?

·       4 main types – (one) private co ltd by shares (liability ltd to amount unpaid in shares held); (two) private co ltd by guarantee (liability ltd to amount agreed to contribute if co wound-up); (three) private unlimited company – unlimited liability; (four) plc (shares available to public – liability ltd to unpaid shares).

·       Separate legal persona in law – therefore protection for membership – for example, liability can be limited to £1 from each member in the event of wind-up.

·       REQUIREMENTS – key elements

(a)  Memorandum of Association (co name; registered office; objects and powers);

(b)  Articles of Association (rules governing the internal operation of the co – mgt committee meetings (board); membership criteria if ltd by guarantee);

(c)  Form 10 – directors and secretary details;

(d)  Form 12 – certificate stating compliance with legal requirements – signed before NP; JP or solicitor;

(e) Companies House Registration fee of £20 (£100 same day);


·       annual accounts lodged with companies house

·       shuttle forms each year (update and confirm co details)



Problem in Scotland – very little regulation and monitoring once charity is set up (unless things go really wrong and matters are brought to the attention of the Scottish Charities Office and Lord Advocate). This and various other problem issues are subject to an on-going Scottish Executive consultation and review.

Any charitable voluntary organisation would do well to examine its own structures and practice against the English Charity Commission’s “Hallmarks of a well-run charity”.


© Mike Dailly
Principal Solicitor
Govan Law Centre
18 September 2000