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Essay: Charities and Trustee Investment Act 2005 – Aims and Successes

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  • Charities and Trustee Investment Act 2005 - Aims and Successes
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Introduction

Over a decade ago, the enactment of the Charities and Trustee Investment (Scotland) Act 2005, made provisions for the reform of Charity Law in Scotland. Prior to the 2005 Act, the only Act to address the issues of Charity Law in Scotland directly was the Miscellaneous Provisions (Scotland) Act 1990. There was a lot of confusion surrounding the 1990 Act; “given difficulties in identifying and making contact with charities and their professional advisers and the absence of any previous legal foundation on which to develop charity law.” And so the 2005 Act was introduced to address the issues which the 1990 Act failed to do.

Charities hold a unique position in our public sector. They rely on the trust of the public for their income, through fundraising. The way in which charities are regulated is therefore key to ensuring the charity brand as a whole remains intact.

Prior to the 2005 Act, high profile scandals such as ‘Moonbeams’ and ‘Breast Cancer Research (Scotland)’ , as well as multiple academic reports prompted calls for reform both North and South of the border. The 2005 Act introduced a regulatory framework which was novel to Scotland; including a regulatory body, a registry body and stricter accounting requirements. These regulatory functions were already in place in England and Wales, giving Scotland a framework to be inspired by, and base their new regulations upon.

In some parts of the 2005 Act, Scotland’s legislators chose to diverge from England and Wales, opting to introduce a Scottish definition of ‘Charitable Purpose’, and Public benefit. The differences between the two definitions are superficial, but continue to present challenges for both Scottish, and cross-border charities. The growing confidence of devolved powers within Scotland has led to the 2005 Act containing Scottish political agenda that results in “distinct legal consequences”. These consequences differ in their impact upon charity regulation.
Whilst the content of the 2005 Act provides sufficient regulation, a lack of resources provided to Charities and their governing body OSCR, takes away from the success of the 2005 Act. The public’s trust in Charity brand has decreased over the past few years. OSCR’s inability to regulate efficiently with its limited resources has led to a fall in a transparency of the charity brand. High profile scandals across the UK such as Kids Company have not helped to expand that trust.

This dissertation looks at the aims and successes of the 2005 Act, how its provisions result in distinct consequences, and how the regulations have faired after 13 years of the Act being in force. It shall discuss this within the context of both Scotland in itself, and within the United Kingdom in a social and legal context.

Chapter 1 – The Progression of Charity Law pre-2005

Pre 1990 Act

The concept of Charity Law has long been an accepted part of Scotland’s common law, in the sphere of “charitable and public trusts” . It falls within the broader species of Scottish Public trusts, as a more specific class of Charitable Trusts. A Scottish Public trust is a trust where “the beneficial interest is intended for the benefit of a section of the public” . This distinction within Scottish public trusts derives from the case of Special Commissioners for the Purposes of Income Tax v Pemsel , where Lord Watson categorised that being such a class of Public Trust is principally concerned with providing a benefit to a section of the public which can be classified as “the poor”. The benefit to the poor is something that underpins Charity Law throughout its history, and is a continuous theme throughout its progression to its current principles today. Pemsel was an English Appeal case, however the Judges were all aware of the impact of their decision on Scotland’s position.
The meaning of Charity in Scotland took on a self-explanatory form in its early days, and as mentioned in the Stair Memorial Encyclopedia, the meaning of Charity in Scots Common law has a ‘self evident’ definition that executors, trustees and the public alike can safely interpret without a detailed guide from the courts. There was a very wide interpretation of Charity in Scotland prior to the 1990 Act, and there was no exhaustive judicial definition in Scottish courts. It is a far different story in England and Wales, where there was a highly detailed and technical definition of the meaning of Charity.

Lord Watson, the only Scottish judge in the Pemsel case, disagreed that the word had no technical meaning in Scots Law. Watson reviewed past Scots case law, and whilst agreeing that no direct definition of the word had been given, he concluded that:

“In the first place, they establish positively that charity is not limited to relief of the physical wants of the poor, but includes their intellectual and moral culture; and, in the second place, they suggest very strongly that purposes which concern others than the poor may nevertheless be charitable purposes in the sense of Scotch Law.”

Therefore Watson concludes that no direct definition had been given in Scotland, but accounts for the fact that charity law has a deep-rooted origin in a country’s culture. This is a possible nod to the fact that Scotland would proceed to seek their own unique definition of “Charitable”, as it is clear that the cultures between England and Scotland, whilst similar, have their significant differences. This distinction is subsequently reflected in the final definition of the Charity Test in the 2005 Act.

It has also been suggested that Watson was embarrassed at the thought of imposing an English definition in Scots courts, and so efforts were made to try and minimize the differences between the two systems. No matter, it remains that “the significance of the word ‘charitable’ is fundamentally different in the two systems, and the unification of meaning achieved in Pemsel is strictly limited to the interpretation of taxation and rating statutes”

Before the Pemsel Test was established and adopted in Scotland, it was stated that the Statute of Elizabeth did not apply to Scotland, and the technical definition used in England would not be used in Scotland, but that rather the popular meaning of charity, concerning the relief of poverty, was to be applied in Scotland. The Lord President in Bairds Trustee explained the meaning of charitable as he saw it;

“It appears to me that “charity” and “charitable” have one sense, and one only, in ordinary familiar and popular use. Charity is relief of poverty, and a charitable act or a charitable purpose consists in relieving poverty, and whatever goes beyond that is not within the meaning of the word “charity” as it occurs in this statute.”

This definition of ‘Charitable Purposes’ was re-established in Winks Executors v Tallent, where it was noted that Scotland’s origins of Charity law do not derive from the “the Statue of Elizabeth and the artificial structure which has been erected upon it” but that the courts have established it through common law, allowing for a flexibility within its development. It was adeptly described as the “patchwork of different legal forms has enabled the charitable sector to develop flexibly and in response to social and economic changes with few of the legal constraints which have for many years been a feature of the regulation of Charities in England and Wales”

By the time that Special Commissioners for the Purposes of Income Tax v Pemsel came to interpret “charitable” in a UK taxation statute, the law of Charities in England and Wales had developed its own elaborate jurisprudence. Lord Macnaghten’s definition; “Charity in its legal sense comprises four principal divisions: Trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community” was used in Scotland for taxation purposes. In the subsequent case of City of Glasgow Police Athletic Association , Lord Normand commented on the embarrassment of Scottish Judges in being forced to apply English Law, due to the lack of clarity given in their own Scottish Jurisdiction. It is important to note that Scotland is in an uncomfortable position where Charities must follow the English Definition, as implications of UK Tax relief is one of the main advantages of registering as a charity. It was decided in the above case that Scottish Courts must apply the English Charity test in regards to UK taxation.

Expansion of the Definition

In the subsequent case of Scottish Burial Reform and Crematorium Society Ltd Appellants v Glasgow Corporation, the English Charity Test was confirmed as the official Charity test in Scotland, as well as England. This case expanded the definition of public benefit, and as Lord Reid noted in his judgement; “The appellants must also show that the public benefit is of a king within the spirit and intendment of the Statute of Elizabeth I. The preamble specifies a number of objects which were then recognised as charitable. But in more recent times a wide variety of other objects have come to be recognised as also being charitable.” This highlights that the definition given in the Statute of Elizabeth was outdated, as the meaning of charitable had grown and expanded with societal and economic changes. It is clear that the expansion of public benefit in this case evidences that the meaning of Charitable Purpose has been closely linked with a common interpretation, rather than a specified and strict list. Lord Reid’s fellow judge, Lord Upjohn also recognised this progression of the definition of Charitable Purpose along with society’s transformation, and stated that;

“Upon the first point it must be remembered that Lord MacNaghten’s classification was taken from Sir Samuel Romilly’s argument in Morice v Bishop of Durham 162 years ago when the great majority of the inhabitants of the country were living in conditions which today would be regarded as of the utmost squalor. The concept of purposes beneficial to the community might then appear to have the qualities of a class and so perhaps, to a lesser extent, in 1891.”

It was clear by the point that the Charity Sector as a whole, in both England and Scotland was in great need of reform. It was deemed outdated, and the Statute of Elizabeth had “been stretched almost to breaking point.” In an effort by the judges to avoid the common man’s liability to rates or taxes. In a report published by the government of the time , and in the reasoning’s of Judges dealing with charity cases, it was clear that there was an urgent need for the definition of ‘Charity’ to be clarified, so that abuses of the brand’s benefits may be avoided.

The beginning of the 1990 Act

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