Charity regulation review: consultation analysis

Chapter 3: Technical areas

Three technical topics have been identified to form part of a ‘technical workstream’, separate from any wider review of charity regulation. Details of these topics were given in the Annex of the consultation document.

Reorganisation of statutory and Royal charter charities

Q9A. Reorganisation of statutory and Royal charter charities: Should this technical topic be reviewed?

Half of respondents (51%) answering Q9A felt that the reorganisation of statutory and Royal charter charities should be reviewed; 12% disagreed, and 37% were unsure. Around half of individuals (49%) and organisations (52%) who responded to the consultation were in favour of this approach, with opinion varying by organisation type from 43% among charities to 71% among umbrella, infrastructure, and membership bodies.

Views on this topic given at Q10 are detailed here. Several respondents commented on the reorganisation of statutory and Royal charter charities, with the majority focusing specifically on NHS Endowment Funds and two respondents providing more general comments on such charities.

Comments on NHS Endowment Funds tended to highlight a 2021 commitment by the Scottish Government to make changes to address the conflict of interest created by the legal structure governing such charities i.e. that the health board is also the trustee of the endowment fund. Respondents raising this topic, which included attendees at a SCVO webinar, welcomed the focus of this technical workstream, calling for confirmation that specific legislative changes and mechanisms by which NHS Endowment Funds could reorganise and make amendments to their governing structure would be considered. Constraints faced by such charities should this issue fail to be considered were noted, in particular reducing the impact these charities have in promoting health and wellbeing in Scotland. NHS Charities Together called for the work to be taken forward in partnership with itself and NHS Endowment Funds, and to identify and seek to mitigate challenges faced by NHS Endowment Funds' changing organisational type, particularly among smaller charities and for an implementation plan to take forward any recommendations.

On the broader issue of all statutory and Royal charter charities forming a technical workstream, one respondent felt any reorganisation must retain and respect the connections these charities benefit from with the Scottish Parliament or Privy Council, and not undermine existing legislation. Another respondent felt it was debatable whether applications to change structures for such bodies should go through OSCR but believed this could be a sensible solution.

“Legislation must make clear to what extent the approval of reorganisation schemes falls under the purview of the OSCR. This clarity will support charities through what is often a complex, time-consuming and costly legal process. The supplemental Charter procedure for Royal Charter bodies to amend their governing documents could be changed to include a default amendment power, exercisable with Privy Council consent. The Charities Act 2022, in force in England and Wales, has introduced changes which may be worth consideration on this issue.” – The Chartered Governance Institute UK & Ireland

Incorporation to a Scottish Charitable Incorporated Organisation (SCIO)

Q9B. Incorporation to a Scottish Charitable Incorporated Organisation (SCIO): Should this technical topic be reviewed?

Among respondents answering Q9B, 57% agreed that incorporation to a SCIO should be reviewed, while 18% disagreed and one quarter (25%) were unsure. Over half of individuals (55%) and three fifths of organisations (59%) who responded to the consultation were in favour, with opinions varying by organisation type from 48% among charities to 92% among umbrella, infrastructure and membership bodies.

Several respondents gave views on changing organisational structure at Q10, and this issue was raised at Q5. However, comments from both those questions specifically relating to incorporating to a SCIO are addressed here.

Support for this workstream was evident in open comments. Respondents’ views highlighted with the consultation paper, noting that navigating incorporation to a SCIO could be costly and complex. Turcan Connell suggested this could be a barrier to charities adopting a better governance structure. Specific entities that could experience challenges to becoming a SCIO were noted as CICs, Trusts and Friendly Societies. One organisation highlighted that there is a provision in England and Wales to allow for the conversion of a CIC to a Charitable Incorporated Organisation but that this was not in place in Scotland.

Legislative amendments were viewed by one professional advisor as a way to increase public trust in SCIOs, provide enhanced protections for groups once incorporated and help trustees better understand the benefits of SCIO status and the types of costs incurred. This organisation felt OSCR is not the only relevant regulator in this regard, as charities could experience difficulties transferring assets from the old charity entity to the new SCIO. Another respondent highlighted potential challenges arising from being allocated a different charity number upon incorporation if inspected by the Care Inspectorate as historical records on the Care Register were then lost.

Suggested improvements were given in Q5. For instance, one respondent suggested clarifying the benefits of incorporation, such as gift aid, rates relief and taxation, while another felt OSCR should ensure applications were not made simply to avoid paying tax. Others suggested more effort should be made to avoid duplication such as checking if there is already a charity providing proposed activities, considering whether all charities should operate under the same legislative framework, considering the length of time taken to become incorporated, and clarifying the level of regulation needed for different types of charities or requiring all charities to become either a SCIO or registered company.

Audit income threshold

Q9C. Audit income thresholds: Should this technical topic be reviewed?

Three quarters (75%) of those answering Q9C felt that the audit income threshold should be reviewed; 10% disagreed, and 15% were unsure. The same proportion of individuals (74%) and organisations (75%) supported a review of this topic. Organisational support varied from 67% support among charities to 100% of professional advisors who supported a review of the audit income threshold.

Many respondents left detailed comments at Q10 on incorporating finance-related matters into a technical workstream and many also provided comments at Q2 indicating financial matters should be incorporated into any review. Analysis of finance matters that respondents felt should be incorporated into any review - aside from the audit income threshold – are covered in Q5. This section considers comments on the audit threshold specifically.

Commonly, respondents suggested that smaller charities, in particular, faced a disproportionate financial burden related to obtaining audits and that the current threshold of £500,000 was set too low. Respondents highlighted that in England and Wales, the threshold is set at £1 million. While there was a sense this could be preferable in Scotland, respondents generally did not specify the level at which the audit threshold should be set. Attendees at the Law Society of Scotland Charity Law Sub-committee event noted the current threshold level was negatively impacting the desire of some charities to grow as exceeding it would require more onerous reporting requirements, while those attending a Scottish Government hosted webinar also highlighted the need for proportionate approaches that take account of the size and complexity of charities.

Differences between the way the threshold operates in Scotland compared to the rest of the UK were also highlighted with calls made to align these. This was a particular concern for charities that operated across the UK. For instance, one respondent noted purchases of fixed assets or investments and loans made or repaid were excluded in England and Wales but that in Scotland, all income except endowment income counted towards the income threshold for audit^[4].

Four faith-based charities highlighted that gross asset values were taken into account in Scotland when determining if an audit was required. They noted a charity might have substantial loans or other liabilities that were not taken into account using a gross value, identifying situations where a charity might own multiple buildings for a limited period, even though income was relatively low. This led to The Scottish Episcopal Church recommending flexibility in such cases of one-off breaches in an income threshold, a view also held by attendees at the ACCA event and at the Scottish Churches Committee event.

Inconsistencies with company law were also highlighted by Age Scotland who stated companies only needed to conduct an audit at income levels of £10.2 million or over.

Q10. Are there any other technical issues you think should be added to the technical workstream?

Over a third (35%) of respondents left open comments at Q10. However, most of these related to areas addressed in other questions. For instance, as open comments were not requested for the questions on the technical workstreams Q9 (A-C), views on these were given in Q10 and have been incorporated in the analysis of Q9. Where changes to organisational structures were raised, views on incorporation to a SCIO are included in Q9B, while other types of changes are addressed in Q5. The only other identified themes at Q10 were trustee matters (incorporated in Q5) and suggested actions for the Scottish Government to consider.

Suggested actions for the Scottish Government

Some respondents suggested actions for the Scottish Government to consider. In relation to the technical workstreams, the Law Society of Scotland called for further thought to be given to the distinction between technical and non-technical aspects and suggested winding up or dissolution, reorganisation and SCIOs more broadly be considered within technical workstreams, as well as SCIO incorporation. They recognised the reorganisation of statutory and Royal charter charities could be considered to have difficult technical questions but felt it could be addressed in any wider review, though did not give further reasons for this. SCVO felt it was for the Scottish Government to determine what topics should be addressed within technical workstreams.

Other points raised included the need to align duties, registrations and thresholds between OSCR and the Charity Commission for England and Wales and to consider the impact of future technologies, though no further detail was provided on this last point.

Calls were made by some respondents in Q6 on the review process. These included to base any review on objective criteria, evidence and feedback from this consultation and to ensure consultation with the sector as part of the review. One respondent requested a fast turnaround time and attendees at an event held by the Law Society of Scotland Charity Law Sub-committee perceived a need to action any review in advance of the next Scottish Parliament elections in May 2026. Conversely, those at the Scottish Churches Committee event questioned whether it was feasible to take forward the work by this date.