An organisation will fail the charity test if its governing document allows it to use any of its property (assets) for a purpose that is not a charitable purpose under the 2005 Act. This applies during the lifetime of the charity and when the organisation is being wound up.
The 2005 Act says that a charity’s governing document must not allow its assets to be used for non-charitable purposes during the lifetime of the charity or on being wound up. If the governing document allows assets to be used for non-charitable purposes,the organisation cannot be a charity in Scotland.
Examples of where this might happen are when a governing document allows:
Assets must be used for purposes that are charitable under the 2005 Act. Any definitions of ‘charitable’ or ‘charity’ in your governing document must be compatible with the 2005 Act. This can be done by adding a definitions clause to your governing document. See other information below for example clauses to use in governing documents.
An organisation’s governing document does not necessarily have to specify that its assets will be passed to another Scottish charity on wind up. However, if it says that the assets will be passed to an organisation that is not a Scottish charity, they must be used by that organisation for purposes set out under the 2005 Act.
To pass the charity test and to qualify for charitable tax relief, an organisation’s governing document must allow its property to be used only for purposes that are charitable both in Scots law and in UK tax law.
See other information below for example clauses to use in governing documents.
Case 1: an organisation reassured us that assets could not be passed to a non-charity
A Parent Council’s governing document stated that if the Parent Council was dissolved, its assets should be passed to the local authority.
When we looked at the governing document along with the law on Parent Councils, it was clear that the local authority could only use the assets for educational purposes, which are charitable.
This is because if the Parent Council dissolves, the assets would pass to the local authority, as education authority, for the benefit of the school to which the Parent Council belonged.
The Parent Council’s governing document did not allow it to distribute its assets for non-charitable purposes. The application to become a charity was successful.
Clauses that can be used in governing documents to make sure that this requirement of the charity test is met:
‘For the avoidance of doubt the income and property of the organisation shall be applied solely towards promoting the organisation’s charitable purposes.’
‘Any assets remaining after satisfaction of the debts and liabilities of the organisation shall be transferred to some other charitable body or bodies having purposes similar to those of the organisation; the identity of the body or bodies to which such assets are transferred shall be determined by the members of the organisation at, or prior to, the time of dissolution.’
“‘Charitable body’ shall mean a body in the Scottish Charity Register which is also regarded as a charity in relation to the application of the Taxes Acts.
‘Charitable objects’ means a charitable purpose under section 7 of the Charities and Trustee Investment (Scotland) Act 2005 which is also regarded as a charitable purpose in relation to the application of the Taxes Acts.”