Nonprofit Law in England & Wales

Current as of May 2021

This section describes the legal framework governing nonprofit

organizations (also known as non-governmental organizations or NGOs)
in England & Wales, and includes translations of legislative provisions
relevant for a foundation or advisor undertaking an equivalency
determination of a foreign grantee under IRS Revenue Procedure 92-94.

These reports have been prepared by the International Center for Not-
for-Profit Law (ICNL). Please direct corrections and comments to Lily
Liu.

We include hyperlinks to the following information, to the extent

available:

• Longer country reports analyzing various aspects of local

legislation; and
• Texts of local laws that affect the decision whether or not to
qualify a grantee (generally in translation, although ICNL and the
Council cannot warrant the accuracy of any translation; in addition,
legislative excerpts were selected by in-country contacts, and ICNL
and the Council cannot warrant that all relevant provisions have
been translated).

Table of Contents

I. Summary
A. Types of Organizations
B. Tax Laws
II. Applicable Laws
III. Relevant Legal Forms
 A. General Legal Forms
B. Public Benefit Status
IV. Specific Questions Regarding Local Law

A. Inurement
B. Proprietary Interest
C. Dissolution
D. Activities
E. Political Activities
F. Discrimination
G. Control of Organization
V. Tax Laws

A. Tax Exemptions
B. Incentives for Philanthropy
C. Value Added Tax
D. Property Tax
E. Other Tax Benefits
F. Double Tax Treaty
VI. Knowledgeable Contacts

I. Summary
This report is limited to England and Wales. Scotland and Northern
Ireland, the other two components of the United Kingdom, have
separate legal systems. In the past, their provisions for regulating
charities have differed significantly, but Scotland and Northern Ireland
both now have similar regulatory regimes.

A. Types of Organizations
England and Wales is a common law, non-federal jurisdiction with five
primary forms of not-for-profit, nongovernmental organizations
(NPOs): [1]

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 • Companies limited by guarantee (including community interest
companies, or CICs);
• Unincorporated associations;
• Trusts;
• Registered societies (formerly known as industrial and provident
societies); and
• Charitable incorporated organizations.

An NPO that takes one of the above forms (excluding CICs) can qualify
as a charity. A charity is eligible for significant tax benefits and, as
discussed below, is subject to a series of regulations relevant to an
equivalency determination.

Other not-for-profit legal forms, which are outside the scope of this
Note due to their limited interaction with U.S. grantmakers, include the
following: some churches which, if they have annual income under
£100,000, are exempt from registration requirements affecting
charities; charities specially incorporated by Royal Charter or by an Act
of Parliament; political parties; and unions.

B. Tax Laws
Charities are exempt from income tax and corporation tax on grants,
donations, and similar sources of income. Certain commercial activities
carried out by a charity are tax-exempt below a certain threshold.
Membership subscriptions are exempt as well, provided that they are
essentially donations and not fees for benefits, which may be subject to
tax. Donations of cash by corporations and natural persons to charities
qualify for tax relief under the so-called “Gift Aid” scheme, described in
Section V(B). Donations of shares, land, and buildings also qualify for tax
relief.

The Value Added Tax (VAT) is required to be collected by entities,

including NPOs, whose turnover exceeds £85,000 in a given year.

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Certain transactions are exempt from VAT, including most grants.
Certain goods and services are zero-rated, including those donated to
charity for sale or export, and medical and scientific equipment for use
in medical research and treatment.

II. Applicable Laws

• Charities Acts 1992 and 2011 (the 2011 Act consolidated the 1993
Act and 2006 Act); and the Charities (Protection and Social
Investment) Act 2016
• Companies Act 2006
• Companies (Audit, Investigations and Community Enterprise) Act
2004
• Trustee Acts 1925 and 2000
• Co-operative and Community Benefit Societies Act 2014
• Finance Acts 2010 and 2011
• Corporation Tax Act 2010
• Income Tax Act 2007
• Taxation of Chargeable Gains Act 1992;
• Equality Act 2010
• Human Rights Act 1998
• Transparency of Lobbying, Non-Party Campaigning and Trade
Union Administration Act 2014

III. Relevant Legal Forms

A. General Legal Forms
The law of England and Wales creates five NPO forms pertinent to this
Note: the company limited by guarantee (including community interest
companies [CICs] which can also be incorporated as companies limited
by shares), unincorporated association, trust, registered society

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(formerly known as an industrial and provident society), and charitable
incorporated organization.

An entity set up under any of these five NPO structures—excluding

CICs—can qualify as a charity. [2] The Charities Act 2011 defines a
charity as a body or trust that is established for a charitable purpose and
provides a benefit to the public. The Act includes a list of charitable
purposes, with 12 specific headings and one general heading. (For a
detailed discussion of what constitutes “charity,” please see Section
III(B).) A charity must register with the Charity Commission for England
and Wales if it has a gross annual income of over £5,000 per year.
Charitable incorporated organizations (CIOs) must register with the
Charity Commission regardless of their income. Some charities, known
as exempt or excepted charities, are not required to register.

Company Limited by Guarantee

A company limited by guarantee is a membership organization in which

the members' liability is limited to some nominal amount, such as £1.
The membership can be quite large, or it may be limited to the trustees.
A company limited by guarantee can be not-for-profit in nature. It is a
legal person, and it is registered by the Companies House. Companies
are governed by the Companies Act 2006.

A subset of companies limited by guarantee, the community interest

company (CIC), was introduced in 2004 and may be of interest to U.S.
grantmakers as it is among the fastest-growing public interest-oriented
organizational forms in the UK. The CIC must be established for the
benefit of the community and can be used by social enterprise
organizations, but not by charities. The main distinguishing features of
the CIC are a lock on company assets that ensures their use in the
community interest, and a limitation or cap on dividends. CICs are
governed by the Companies (Audit, Investigations and Community
Enterprise) Act 2004 along with the Companies Act 2006. [3]

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Unincorporated Association

An unincorporated association is a membership organization. Charities

and other NPOs commonly fall in this category, including many
community associations, sports clubs, and social clubs. An
unincorporated association is not a legal person. Members of the
management committee are jointly and severally liable for the
organization's debts; officers or members may also be liable.
Unincorporated associations are governed by a body of case law and
not by statute. [4]

Trust

A trust is an entity created to hold and manage assets for the benefit of
others. [5] The trust must pursue a charitable purpose and is governed
by trustees.

A trust ordinarily is not a legal person. Under the Charities Act 2011,
however, the body of trustees can apply to the Charity Commission for
a certificate of incorporation (Charities Act 2011 Part 12). An
incorporated body of trustees is a legal person, but without the usual
corporate limitation on liability. Incorporation allows the trust to
perform particular functions—e.g., to hold property, enter into
contracts, sue and be sued—in its own name rather than in the names of
trustees. [6]

A trust is regulated by the Trustees Acts 1925 and 2000, in addition to a

substantial body of case law.

Registered Society (Formerly Known as Industrial and Provident Society)

A registered society is a not-for-profit corporate entity. It is a legal

person. There are two types of registered societies: the co-operative
society and the community benefit society. The latter type is widely
used for charitable and non-charitable housing associations, as well as
for some other charitable organizations. The principal advantage of the

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registered society is that its governing law, the Co-operative and
Community Benefit Societies Act (which replaced the Industrial and
Provident Societies Act 1965), is simpler than the law governing
companies. Registered societies are regulated by the Financial Conduct
Authority. While charitable registered societies are generally required to
register as charities with the Charity Commission, those that are
registered providers of social housing are exempt from this requirement
(Charities Act 2011 Part 4 Section 30).

Charitable Incorporated Organization (CIO)

A charitable incorporated organization is a membership organization.

The membership may be limited to the trustees (“a foundation CIO”) or
it may be broader (“an association CIO”). A CIO is a legal person. CIOs
register solely with the Charity Commission; this registration confers
both corporate and charitable status. A charitable incorporated
organization is governed by the Charities Act 2011 and regulations made
there under. Fifty-eight percent of newly-registered charities are now
established as charitable incorporated organizations.

B. Public Benefit Status

The Charity Commission for England and Wales registers and regulates
charities. Its website contains policy guidelines and publications,
summaries of the common law, and the register of charities.

Under the Charities Act 2011, a charity is defined as a body or trust

which is for a charitable purpose that provides a benefit to the
public. [7] The list of charitable purposes has 12 specific headings and
one general heading, as follows:

1. The prevention or relief of poverty;

2. The advancement of education;
3. The advancement of religion;

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 4. The advancement of health or the saving of lives;
5. The advancement of citizenship or community development;
6. The advancement of the arts, culture, heritage, or science;
7. The advancement of amateur sport;
8. The advancement of human rights, conflict resolution, or
reconciliation, or the promotion of religious or racial harmony or
equality or diversity;
9. The advancement of environmental protection or improvement;
10. The relief of those in need by reason of youth, age, ill-health,
disability, financial hardship, or other disadvantage;
11. The advancement of animal welfare;
12. The promotion of the efficiency of the armed forces of the
Crown or of the efficiency of the police, fire, and rescue services or
ambulance services; and
13. Other purposes that are currently recognized as charitable or
are in the spirit of any purposes currently recognized as charitable.

The final provision enables new purposes to be recognized by the

Charity Commission or the High Court. A commentary on the
descriptions of charitable purposes in the Charities Act 2006 appears on
the Charity Commission website.

In addition to falling under the statutory list of purposes, a charitable

purpose must be for the public benefit. General guidance as to the
meaning of “public benefit” is available in the Charity Commission
website’s “Public Benefit Guides,” which were revised in September
2013.

IV. SPECIFIC QUESTIONS REGARDING LOCAL LAW

A. INUREMENT

Charities

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Charities must not distribute profits as dividends or otherwise (Charity
Commission Publication, "Registering as a Charity,” CC 21). Under
charity law, all expenditures must further the organization's charitable
purposes.

This principle applies to salaries as well as other expenditures. Charities

that are subject to statutory audits (those with an annual gross income
which exceeds £1m, or which have gross assets exceeding £3.6m and
gross income exceeding £250,000) must report the number of
employees whose salaries fall in intervals of £10,000 over £60,000—for
instance, those between £60,000 and £70,000, and between £70,000
and £80,000.

Trustees ordinarily cannot receive payment for acting as a trustee nor

may they be employed by the charity, unless the charity's governing
documents permit it. If the governing documents do not contain such a
provision, the charity must seek authorization from the Charity
Commission or the High Court of England and Wales. Section 185 of the
Charities Act 2011 includes a power to pay trustees for goods or
services delivered to the charity, provided that: a) such payment is not
expressly prohibited by the governing document; b) only a minority of
trustees are so paid; and c) other conditions are met (Charity
Commission Publication, "Trustee Expenses and Payments," CC11,
March 2012). All payments to trustees including expenses must be
disclosed in the Annual Accounts. [8]

Other NPOS

The law generally does not prohibit inurement for non-charitable NPOs.

B. Proprietary Interest

Charities

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A charity generally holds proprietary interest in its assets. Donors can,
however, retain a proprietary interest in their donations by reaching an
agreement with the charity at the time of the donation. Such an
agreement, which is sometimes known as a claw-back provision, allows
the donor to retrieve the property in particular circumstances—for
example, if the charity fails to use the assets for the designated
purpose, or if the charity dissolves. Property will also be returnable to
the donor on the failure of a charitable appeal unless they have made a
disclaimer or the donor cannot be traced following advertisement
(Charities Act 2011 Section 63).

Other NPOS

Other NPOs are free to let donors retain a proprietary interest in

donations. These organizations and their donors can reach whatever
agreement they wish. Mutual benefit organizations, for instance, often
return contributions to members when they retire from the
organization.

C. Dissolution

Charities

The assets of a charity, upon its dissolution, must be conveyed to

another charity or other charities pursuing the same or similar purposes.
This is generally set out in the dissolution provision of the charity’s
governing documents. In addition, both the court and the Charity
Commission have broad powers to intervene in the affairs of a charity to
protect charity property and mandate its transfer in order to ensure that
it continues to be applied for charitable purposes (Charities Act 2011
Part 6).

Other NPOS

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The assets of other NPOs, upon their dissolution, are distributed
according to the organization’s governing documents. In general, the
assets need not be conveyed to a charity or other NPO. In the case of a
community interest company (CIC), however, any surplus assets must
be transferred to another asset-locked entity—that is, an entity the
assets of which are locked for use in the community interest.

D. Activities

1. General Activities

A charity can be established only for a charitable purpose, and its

activities must advance that purpose (Charities Act 2011 Section
(1)(1)(a)). It cannot engage in certain commercial or political activities.
As discussed below, these sorts of restrictions are generally limited to
charities and do not apply to other NPO forms.

2. Economic Activities

Charities may carry out trade activities in the course of performing a

primary purpose of the charity. This is commonly known as “primary
purpose trading.” [9] Examples include:

• The provision of educational services by a charitable school or

college in return for course fees;
• The carrying out of trade activities involving the charity's
beneficiaries;
• The holding of an art exhibition by a charitable art gallery or
museum in return for admission fees;
• The provision of residential accommodation by a residential care
charity in return for payment;
• The sale of tickets for a theatrical production staged by a theatre
charity; and

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 • The sale of certain educational goods by a charitable art gallery or
museum.

Trustees may also engage in trading activities to raise money. If

fundraising is the main or sole aim of such trading activities (rather than
"primary purpose trading" that also happens to produce income), this is
called "non-primary purpose trading." Charities may not directly carry
out non-primary purpose trading where a significant risk to their assets
would be involved. There are special tax rules to help charities that wish
to carry out small amounts of non-primary purpose trading, when all the
profits from the trading are to be used by the charity. The limits are set
out in the following table. [10]

Total of charity's incoming Maximum permitted "non-purpose

resources in a particular tax year trading" turnover in that tax year
Under £32,000 £8,000
25 percent of charity's total incoming
£32,000 to £320,000
resources
Over £320,000 £80,000
Commercial and economic activities other than the exceptions set out
above cannot be conducted directly by the charity; however, any
commercial and economic activities can be conducted through a for-
profit subsidiary with the profits then transferred tax-free to the charity.
Many charities now have trading subsidiaries for fundraising
purposes. [11]

These restrictions on economic activities apply only to charities, not to

other NPOs.

E. Political Activities

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A charity can never be formed for the purpose of engaging in political
activities. [12] A charity may, however, engage in some political
activities as a means of achieving its charitable purposes.

A charity can lobby legislators, urge the public to communicate with

legislators about issues, and engage in other activities to influence
government bodies to change the law or policy if: (i) the issues relate to
the charity's specific purposes or to the well-being of the charitable
sector in general; and (ii) these political activities are not the main
reason for its existence (see Charity Commission Publication CC9, B1).
There is no set limit on the proportion of resources that can be used for
lobbying or advocacy, and in some cases the trustees may choose to
focus most or all of their resources on political activity for a period.
Political activity cannot, however, be the only way in which the charity
pursues its purposes (Charity Commission Publication CC9, D8). In
addition, charities cannot support a political party or candidate,
although they may engage with a political party in support of their own
charitable purposes (Charity Commission Publication CC9, E1, E2).
Lastly, a charity’s political activities are subject to additional constraints
during the one-year period before a general election, according to the
provisions of the Transparency of Lobbying, Non-Party Campaigning
and Trade Union Administration Act of 2014. These election period
constraints apply to all NPOs.

NPOs other than charities are generally free to engage in political

activities, subject to restrictions under the Broadcast Law, Protest Law,
and Transparency of Lobbying, Non-Party Campaigning and Trade
Union Administration Act of 2014 as noted above. Community interest
companies (CICs) may be subject to additional restrictions on political
activities, as well.

F. Discrimination

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The Equality Act 2010 prevents discrimination on the following grounds,
known as protected characteristics:

• Age;
• Disability;
• Gender reassignment;
• Marriage and civil partnership;
• Pregnancy and maternity;
• Race;
• Religion or belief;
• Sex; and
• Sexual orientation.

The Act allows a charity to restrict benefits to people with shared

protected characteristics in certain defined circumstances. (More
information is available from the Equalities and Human Rights
Commission or "Supporting Specific Beneficiary Groups: Equality Act
Summary Guidance" from the Charity Commission.)

G. Control of Organization
With regard to charities, there is a broad principle that charity trustees
should be independent. It is, however, possible for another legal person
to have the legal right to appoint or elect directors, officers, or trustees
of a charity. In the case of a charity established as a company limited by
guarantee under company law, the members always have the right to
remove directors. Therefore, it is possible that a charity may be
controlled, perhaps indirectly, by a for-profit entity or by an American
grantor charity (which requires that the charity specifically so provide in
an affidavit; the affidavit may be requested by the Charity Commission
upon registration).

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These concerns are more pronounced in the case of other NPOs: There
are no restrictions on the control of these entities by other
organizations or persons.

V. Tax Laws
The following section discusses relevant tax legislation, recognizing that
taxes may affect the amount of the grant actually flowing to the
grantee.

A. Tax Exemptions
Charities are exempt from most forms of direct taxation. They do not
pay tax on grants, donations, and similar sources of income. Charities
are exempt from taxation on donations they receive from both
corporations and individuals, including grants from foreign sources.
Membership subscriptions are exempt if they are essentially donations,
but if they entitle donors to benefits, they can be deemed trading
activity and potentially taxed.

The profits of "primary purpose trading" are exempt from tax (but not
necessarily exempt from VAT), provided that the profits are applied
solely to the purposes of the charity. Charities do not pay tax on
investment income, including rent.

B. INCENTIVES FOR PHILANTHROPY

Donations of cash by individuals to charities qualify for tax relief under
the so-called "Gift Aid" scheme. Under this scheme, the charity can
reclaim the basic rate tax of twenty percent that the donor has paid on
the income from which the gift was made. For example, if the charity
receives £400, this is treated as having been made out of a £500 income
from which the donor has already paid £100 in tax. The charity can claim
the £100 from the Inland Revenue. In addition, a donor who is a higher-
rate taxpayer can claim back higher-rate relief from Her Majesty's

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Revenue and Customs (HMRC), reducing the net cost of making the gift.
Each donor must complete a simple Gift Aid Certificate. A single
certificate can cover a series of donations. The charity is then able to
reclaim the basic tax rate from the relevant HMRC office (Income Tax
Act 2007 (individuals)). There is a separate scheme providing top-up
payments to charities on small donations where it is difficult to obtain a
certificate. This applies to donations of £20 or under, up to a maximum
of £8,000 per charity per year and subject to a number of conditions
(see Small Charities Donations Act 2012 for additional guidance).

Apart from donations of cash, tax relief is also available under the Gift
Aid scheme on the sale proceeds of donated goods, provided that the
correct documentation is completed.

Donations by corporations to charities under the Gift Aid scheme

operate in a different way. Gift Aid donations made by corporations are
paid in gross, so no tax is repayable to the charity, but the amount paid
by the corporation can be set against profits for corporation tax
purposes (Corporations Tax Act 2010). [13]

Donations of shares, land, and buildings also benefit from tax relief. In
addition, some charitable giving by businesses (for example,
sponsorship payments) can be treated as allowable expenses of the
business (if made wholly and exclusively for the purposes of the trade)
and deducted when computing the profits of the business for tax
purposes (Finance Act 1990 Section 25, as amended; and Finance Act
2000 Section 39).

There are complex anti-avoidance provisions to prevent abuse of tax

reliefs available (Finance Bill of 2011 Clause 27; Guidance on the
Revenue and Customs website).

The Finance Act 2010 introduced a new requirement that, for tax
purposes, the managers of a charity (which includes board members)

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must be "fit and proper persons" (Finance Act 2010 Schedule 6-7).
Guidance on this requirement is available at the Revenue and
Customs website.

C. Value Added Tax

Charities and other NPOs are generally subject to the standard VAT rate
of 20 percent if they deliver goods and services of a value greater than
£85,000 in a given year. Some supplies are subject to the reduced rate
of 5 percent.

Grants, including grants from foreign donors, are not ordinarily subject
to the VAT. The tax may apply, however, if the donation is paid to
subsidize a trading activity of an NPO, or if the donation is conditioned
on benefits to the donor or a third party. This is a complex area, and
each grant or agreement must be considered on its own facts. Many
services—such as welfare and care provision and some educational
services—are exempt from VAT.

In addition, certain goods and services provided by charities are zero-

rated—that is, taxable but at a zero percent rate—including:

• Goods donated for sale or export;

• Advertisements to raise funds or to publicize the name of the
charity;
• Medical and scientific equipment for use in medical research and
treatment;
• Certain equipment and building alterations for people with
disabilities;
• Construction of new buildings for certain charitable purposes,
including residential accommodation and community buildings;
and
• One-time fundraising events. (This preference applies to certain
qualifying bodies as well as charities.

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Aside from the preference for one-time fundraising events, these
preferences apply only to charities, and not to other NPOs.

D. Property Tax
Charities are entitled to an 80 percent reduction of business rates (the
local property tax). Local authorities have the discretion to grant a
further 20 percent relief.

Non-charitable NPOs can receive partial or total exemption from

property taxes, at the discretion of local authorities.

E. Other Tax Benefits

Charities are exempt from paying ad valorem stamp duty and stamp
duty land tax on the transfer of assets, including shares and land;
inheritance tax on legacies and bequests; and capital gains tax.

F. Double Tax Treaty

England and the United States have entered into a double-taxation
treaty.

VI. Knowledgeable Contacts

• Lindsay Driscoll ([email protected])
• Debra Morris ([email protected])

Footnotes
[1] In England and Wales, these organizations are commonly referred to
as "voluntary organizations."

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[2] For purposes of this Note, the term “other NPOs” refers to pertinent
not-for-profit organizations that do not qualify as charities.

[3]As of August 2014, there were more than 10,000 registered CICs. See
“Office of the Regulator of Community Interest Companies” for more
detailed information on CICs.

[4] The best authority on the topic is Jean Warburton, Unincorporated

Associations: Law and Practice (2d ed.) (London: Sweet & Maxwell,
1992).

[5] A trust can be public or private, however this Note addresses only
public trusts.

[6] See Charity Commission Publication, "Incorporation of Charity

Trustees," CC 43, Section 4.

[7] The 2011 statutory definition of charity is largely a restatement of

the previous law; the common law is preserved for the interpretation of
the terms used.

[8] See “Accounting and Reporting by Charities: Statement of

Recommended Practice,” for more information.

[9] This means that economic activity supports the primary purpose of
the charity, not that the economic activity is the primary purpose of the
organization.

[10] These thresholds were introduced by the Finance Act 2018, which
amended the Income Tax Act 2007 and the Corporation Tax Act 2010.

[11] Charities may engage in other types of trading as well, including

“ancillary” lotteries, and trading within the "small scale exemption." For
more detailed information on these types of economic activities, please
consult Publication CC35, “Trustees, Trading and Tax: How Charities

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May Lawfully Trade,” on the Charity Commission website. For purposes
of this Note, the key point is that the principal purpose of a charity
cannot be to engage in these additional types of trading activities.

[12] Political activities are defined as “activity by a charity aimed at

securing or opposing any change in law or in the policy or decisions of
central government, local authorities or other public bodies whether in
this country or abroad.” More information is available in “Speaking Out -
Guidance on Campaigning and Political Activities by Charities” on the
Charity Commission website.

[13] For further discussion of the “Gift Aid” scheme, see D. Morris,
“Comparative Analysis: The Global Perspective – the Treatment of
Charitable Contributions in the UK.”

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