The public benefit provisions in the Charities Act 2006 are “critically flawed” and should be repealed, the Public Administration Select Committee has recommended to the government.

It should be the job of Parliament to define what public benefit means and determine the criteria for charitable status, not the Charity Commission or the courts, the Committee has said.

In its post-legislative scrutiny report on the role of the Charity Commission and public benefit, the Committee (PASC) also says that the budget cuts sustained recently by the Charity Commission have left it unable to regulate the sector as effectively as ministers might like.

It calls on ministers to revise the Commission’s statutory objectives so it can refocus its limited resources on regulation rather than wasting time and energy on less critical objectives such as promoting the effective use of charitable resources or “overseeing a reappraisal of what is meant by public benefit”.

It recommends that charities should be required to publish their spend on campaigning and political activity in their annual returns.

It supports the introduction of fines for late filing of annual returns but does not back charges for registering new charities or filing annual returns.

And it rejects Lord Hodgson’s proposal to increase the financial threshold for compulsory registration with the Charity Commission from £5,000 to £25,000, opining that registration is not a significant regulatory burden for charities and that public trust in the sector could be threatened by a higher threshold.

The Committee also highlights chugging and puts fundraising self-regulation “on notice” but stops short of calling for statutory regulation – yet.

And it endorses the government's rejection of the idea that large charities should have the automatic right to pay trustees.

Public benefit

On the contentious public benefit issue, the report states: “We have concluded that, while the Act has been broadly welcomed by the charitable sector, it is critically flawed on the issue of public benefit.”

The stated removal of the presumption of public benefit, the failure to define it on the statute books, and the requirement for the Charity Commission to produce guidance left the Commission in an “impossible position”, as evidenced by the expensive legal battles over independent schools and the Plymouth Brethren, it said.

Requiring the regulator to produce guidance “had the effect of inviting the Commission to become involved in matters such as the charitable status of independent schools which has long been a matter of party political controversy”, it wrote.

“In this respect the Charities Act 2006 has been an administrative and financial disaster for the Charity Commission and for the charities involved, absorbing vast amounts of energy and commitment, as well as money.

“While we have criticised the interpretation of the law by the Charity Commission, we also believe it is essential for Parliament to revisit this legislation and set the criteria for charitable status rather than delegating such decisions to the Charity Commission and the courts.”

Committee chair Bernard Jenkin MP (pictured) added: “The situation must be rectified with a new Act to allow the Commission to focus on its proper job.

“If ministers want the sector to regulate more than at present, they will have to increase its budget.”

No statutory definition

However, the PASC ruled out devising a statutory definition of public benefit, accepting evidence from various inquiry witnesses that a fixed definition would soon become out-of-date.

Instead, it recommended repealing the removal of the presumption of public benefit and the Commission’s statutory public benefit objective.

“This would ensure that no transient government could introduce what amounts to substantive changes in charity law without Parliament’s explicit consent.

“If the government wishes there to be new conditions for what constitutes a charity and qualifies for tax relief, it should bring forward legislation, not leave it to the discretion of the Charity Commission and the courts.”

Plymouth Brethren case

However, the Committee stopped short of passing any judgement on whether it believed the Plymouth Brethren should be granted charitable status. “We have received clear advice from the Attorney General that it is not Parliament’s role to make decision on the charitable status of particular organisations. We will not therefore prejudge the Tribunal decision in the case of the Preston Down Trust, part of the Plymouth Brethren.”

2006 Act 'not fit for changing times'

More generally, the Committee criticised the Act as a missed opportunity. “The Act, while reflecting the political climate of the time, does not equip the regulator or the Cabinet Office with the tools to address the changes in the sector that have occurred in the relatively short space of time since the Act was passed: the reductions in public spending and consequently in charitable income; the growth of non-charitable organisations such as social enterprises, and a new focus on the delivery of public services by charities.

“We trust that the government will accept our recommendations, which have been made with the objective of increasing public trust in charities, while reflecting this changed economic and political climate.”

Click here for sector and Charity Commission reactions to the report.