Charities in Scotland: trustees’ responsibilities

It is often con­sid­ered an hon­our to act as a trustee for a char­i­ty and an oppor­tu­ni­ty to give some­thing back to the com­mu­ni­ty. How­ev­er, becom­ing a trustee involves a cer­tain com­mit­ment and lev­el of respon­si­bil­i­ty which should not be under­es­ti­mat­ed.

Whether you are already a trustee for a char­i­ty, be it a local project or a house­hold name, or are think­ing of becom­ing involved, there are a num­ber of respon­si­bil­i­ties that being a trustee places upon you.

We out­line the main respon­si­bil­i­ties below, with a par­tic­u­lar empha­sis on account­ing and audit require­ments for Scot­tish char­i­ties.

Background

The char­i­ties sec­tor in Scot­land is gen­er­al­ly over­seen by the Office of the Scot­tish Char­i­ty Reg­u­la­tor (OSCR), also known as the ‘Scot­tish Char­i­ty Reg­u­la­tor’. The OSCR is a non-min­is­te­r­i­al gov­ern­ment depart­ment which is the inde­pen­dent reg­u­la­tor and reg­is­trar for Scot­tish char­i­ties.

The OSCR plays an impor­tant role in the char­i­ty sec­tor and is in place to give the pub­lic con­fi­dence in the integri­ty of char­i­ties and to help char­i­ty trustees to under­stand and com­ply with their legal duties.

A key part of the OSCR’s work is to pro­vide advice to trustees. A great deal of use­ful advice can be found on the OSCR web­site, where there is a sec­tion ded­i­cat­ed to char­i­ty trustees’ duties.

Types of charity

The main leg­is­la­tion which char­i­ties in Scot­land oper­ate is the Char­i­ties and Trustee Invest­ment Act (Scot­land) 2005 (the 2005 Act). Char­i­ties can be cre­at­ed in a num­ber of ways but are usu­al­ly either:

• incor­po­rat­ed under the Com­pa­nies Act 2006 or ear­li­er (lim­it­ed com­pa­ny char­i­ties)
• incor­po­rat­ed under the 2005 Act through The Scot­tish Char­i­ta­ble Incor­po­rat­ed Organ­i­sa­tions Reg­u­la­tions 2011 (‘the Gen­er­al Reg­u­la­tions’) (Scot­tish char­i­ta­ble incor­po­rat­ed organ­i­sa­tions, SCIOs); or
• cre­at­ed by a dec­la­ra­tion of trust (unin­cor­po­rat­ed char­i­ties).

Each of these char­i­ties needs to reg­is­ter and file their accounts with the OSCR and lim­it­ed com­pa­nies are addi­tion­al­ly reg­is­tered with Com­pa­nies House.

The type of the char­i­ty will deter­mine the full extent of a trustee’s respon­si­bil­i­ties.

Who is a trustee?

The 2005 Act defines trustees as ‘per­sons hav­ing the gen­er­al con­trol and man­age­ment of the admin­is­tra­tion of a char­i­ty’. This def­i­n­i­tion would typ­i­cal­ly include:

• for unin­cor­po­rat­ed char­i­ties and SCIOs, mem­bers of the exec­u­tive or man­age­ment com­mit­tee
• for lim­it­ed com­pa­ny char­i­ties, the direc­tors or mem­bers of the man­age­ment com­mit­tee.

Char­i­ties need at all times to ful­fil the char­i­ta­ble pur­pose for which they were cre­at­ed and it is the duty of all the trustees to ensure this.

Trustee restrictions and liabilities

In addi­tion to the respon­si­bil­i­ties of being a trustee, there are also a num­ber of restric­tions which may apply. These are aimed at pre­vent­ing a con­flict of inter­est aris­ing between a trustee’s per­son­al inter­ests and their duties as a trustee. These pro­vide that gen­er­al­ly:

• trustees can­not ben­e­fit per­son­al­ly from the char­i­ty, although rea­son­able out of pock­et expens­es may be reim­bursed
• trustees should not be paid for their role as trustee.

There are lim­it­ed excep­tions to these prin­ci­ples which are set out in the 2005 Act. Where trustees do not act pru­dent­ly, law­ful­ly or in accor­dance with their gov­ern­ing doc­u­ment they may find them­selves per­son­al­ly respon­si­ble for any loss they cause to the char­i­ty.

Trustees’ responsibilities

The OSCR guid­ance ‘Char­i­ty Trustee Duties’ explains what it means to be a trustee. Trustees have full respon­si­bil­i­ty for the char­i­ty and a gen­er­al duty to act in the inter­ests of the char­i­ty. This means they should:

• oper­ate in a way which is con­sis­tent with the char­i­ty’s char­i­ta­ble pur­pos­es
• fol­low the law and the rules in the char­i­ty’s gov­ern­ing doc­u­ment
• act with care and dili­gence
• man­age any con­flict of inter­est between the char­i­ty and any per­son or organ­i­sa­tion that may appoint the char­i­ty’s trustees.

Trustees have a duty to make sure that their char­i­ty’s funds are only applied in the fur­ther­ance of its char­i­ta­ble objects. They need to be able to demon­strate that this is the case, so they should keep records which are capa­ble of doing this.

Char­i­ty trustees must put the inter­ests of the char­i­ty before their own needs or those of any rel­a­tives or busi­ness inter­ests. Where a deci­sion must be tak­en where one option would be in the inter­ests of a trustee and anoth­er in that of the char­i­ty a trustee should make sure the oth­er trustees know of the con­flict and should not take part in the dis­cus­sion or deci­sion.

Char­i­ty Trustee Duties also pro­vides infor­ma­tion on some spe­cif­ic duties con­tained in the 2005 Act. The guid­ance sets out trustees’ duties to:

• updat­ing your char­i­ty’s details — pro­vide all the infor­ma­tion need­ed to keep the Scot­tish Char­i­ty Reg­is­ter up to date
• report­ing to the OSCR — com­ply with the statu­to­ry duty to sup­ply cer­tain infor­ma­tion to the OSCR regard­ing annu­al mon­i­tor­ing, char­i­ty account­ing and mak­ing changes to your char­i­ty
• finan­cial record keep­ing and record­ing — keep prop­er account­ing records and pre­pare an annu­al state­ment of account and annu­al report which are exter­nal­ly scru­ti­nised and sent along­side the annu­al return to the OSCR
• fundrais­ing — take con­trol of how the char­i­ty rais­es funds
• pro­vide infor­ma­tion to the pub­lic.

These duties are shared by every indi­vid­ual in charge of the char­i­ty. No indi­vid­ual char­i­ty trustee (for exam­ple the Chair or Trea­sur­er) has more respon­si­bil­i­ty than any oth­er trustee.

Accounting requirements

The 2005 Act requires that char­i­ties:

• keep full and accu­rate account­ing records (and funds require­ments are of par­tic­u­lar impor­tance here)
• pre­pare char­i­ty accounts and an annu­al report on its activ­i­ties
• ensure an audit or inde­pen­dent exam­i­na­tion is car­ried out
• sub­mit an annu­al return, annu­al report and accounts to OSCR (and, for lim­it­ed com­pa­ny char­i­ties, to Com­pa­nies House).

The extent to which these require­ments have to be met gen­er­al­ly depends upon the type of char­i­ty and how much income is gen­er­at­ed.

Funds requirements

An impor­tant aspect of account­ing for char­i­ties is the under­stand­ing of the dif­fer­ent ‘funds’ that a char­i­ty can have.

Essen­tial­ly funds rep­re­sent the income of the char­i­ty and there may be restric­tions on how cer­tain types of funds raised can be used. For exam­ple, a dona­tion may be received only on the under­stand­ing that it is to be used for a spec­i­fied pur­pose.

It is then the trustees’ respon­si­bil­i­ty to ensure that such ‘restrict­ed’ funds are used only as intend­ed.

Fundraising

The effec­tive man­age­ment and con­trol of fundrais­ing is also an impor­tant trustee respon­si­bil­i­ty. The Scot­tish Fundrais­ing Stan­dards Pan­el over­sees fundrais­ing stan­dards and deals with fundrais­ing com­plaints for Scot­tish reg­is­tered char­i­ties in line with the Code of Fundrais­ing Prac­tice.

The annual report

The annu­al report is often a fair­ly com­pre­hen­sive doc­u­ment, as leg­is­la­tion sets out the min­i­mum amount of infor­ma­tion that has to be includ­ed. The report gen­er­al­ly includes:

• a trustees’ report (which can dou­ble as a direc­tors’ report and a strate­gic report, if required for char­i­ta­ble com­pa­nies)
• a state­ment of finan­cial activ­i­ties for the year
• an income and expen­di­ture account for the year (for some char­i­ta­ble com­pa­nies)
• a bal­ance sheet
• a state­ment of cash­flows
• notes to the accounts (includ­ing account­ing poli­cies).

Audit requirements

Whether or not a char­i­ty requires an audit will depend main­ly upon how much income is received or gen­er­at­ed and their year end:

• all char­i­ties where income exceeds £500,000 require an audit (this thresh­old will rise to £1,000,000 for account­ing peri­ods which start on or after 1 Jan­u­ary 2026)
• all oth­er char­i­ties require an inde­pen­dent exam­i­na­tion. Where ‘accru­als’ accounts are pre­pared the inde­pen­dent exam­in­er must be suit­ably qual­i­fied.

There are oth­er cri­te­ria to con­sid­er, par­tic­u­lar­ly regard­ing total assets, and we would be pleased to dis­cuss these in more detail with you.

Reporting requirements

There is a com­pre­hen­sive frame­work in place that deter­mines how a char­i­ty’s accounts should be pre­pared.

Unin­cor­po­rat­ed char­i­ties with income below £250,000 may pre­pare receipts and pay­ments accounts, unless their gov­ern­ing doc­u­ment says oth­er­wise.

All oth­er char­i­ties must pre­pare accounts that show a ‘true and fair’ view and are referred to as ‘accru­als’ accounts. To show a ‘true and fair’ view the accounts gen­er­al­ly need to fol­low the require­ments of the Char­i­ties State­ment of Rec­om­mend­ed Prac­tice (SORP). The SORP can be viewed at www.charitysorp.org and char­i­ties are able to build a bespoke ver­sion of the SORP deal­ing with their own cir­cum­stances.