It’s now been over two years since Burness Paull incorporated South Seeds – a community gardening project which became the first Scottish Charitable Incorporated Organisation (“SCIO”).  Since then, we have incorporated many more – including both organisations applying for charitable status from scratch, and existing charities which have chosen to take advantage of the benefits of the SCIO model and convert to the new legal form.  We thought it would be a good time to look back over our experiences to date, and to answer some of the questions and concerns which crop up most frequently in connection with the SCIO model.

What is a SCIO?

In basic terms, the SCIO is a legal model which has been created specifically for the Scottish charity sector.  It allows Scottish charities to form themselves into corporate bodies - with the benefit of limited liability - without becoming companies (or industrial & provident societies). That means that even the smallest charity can access the benefits of incorporation - including limited liability and legal capacity – and can hold property, employ people, incur debts, enter into contracts etc in its own name without being subject to the more complex apparatus of company law.

For new charities, the application for charitable status and incorporation process works as a single (one-stop shop) process through the Office of the Scottish Charity Regulator (OSCR).

Why choose to become a SCIO rather than a company limited by guarantee?

The SCIO has been designed to provide the key benefits of becoming a company, such as a defined legal identity and limited liability (usually the key motivating factors for becoming a company limited by guarantee), whilst removing some of the associated burdens.  For example, administration tends to be significantly reduced, as there is no requirement to notify any regulator about appointments or resignations of board members.  Also the law relating to SCIOs is self-contained and very manageable - unlike company law, where the sheer volume of legislation and case law can represent a significant concern for charitable companies.

But what about…?

Despite the above benefits, we have found that a number of concerns are often raised in relation to SCIOs; many of which can be fairly easily dealt with.

  • Loss of charitable status means SCIO ceases to exist – This seems to cause great concern for some clients, who have the impression that they could have the rug pulled from under them, and that if something went wrong, their organisation could be closed down by OSCR overnight.  In reality, this would never happen; OSCR would have no interest in closing down a charity without having exhausted all other options, and remain committed to working with charities as much as they possibly can, to address any issues.  Charitable status is only ever withdrawn as an absolute last resort after all other attempts had failed.
  • A SCIO cannot be restored to the Scottish Charity Register in the same way that a limited company can be restored to the Register of Companies – However, again, for the reasons mentioned in the previous point, it is very unlikely that this would become an issue.  In the event that this did happen, a fresh application to OSCR could be made; however, it would not be guaranteed that the charity could then have its assets restored, or be allowed to retain its charity number.
  • Not “tried and tested” – It is indeed early days for the SCIO model, and it will take time for banks, landlords, some funders and the general public to become familiar with it, but we believe that this will quickly become less of an issue, as awareness grows  in relation to the model and its potential benefits.
  • Lack of the rigorous regulatory framework provided by the company model – Whilst the company model does indeed provide a rigorous regulatory framework, it also contains a lot of provisions which are rarely seen in charitable organisations.   Also, the SCIO is still bound by charity law and regulated by OSCR, and in effect, charity trustees are under equally stringent obligations as company directors when it comes to acting in the best interests of their organisation.
  • Does not provide/support strong governance – We would question this; the two-tier structure of the SCIO, i.e. consisting of members and charity trustees, mirrors that of limited companies with their members and directors, and is designed to work in much the same way.
  • Unlike Companies House, OSCR does not maintain a register of charity trustees, and does not provide access to annual accounts – Whilst this is true, SCIOs are under a legal obligation to maintain registers of trustees and members.  Members of the public can also request copies of the register of trustees with addresses and (in cases where there are safety/security issues only) names redacted, direct from the SCIO. The SCIO must then respond to such a request within 28 days (provided the request is reasonable).

Also, as with any other Scottish charity, members of the public can also request copies of the SCIO’s latest statement of accounts from them direct.

  • Unlike a company, SCIOs may prepare accounts on a receipts and payments basis – This is only true for SCIOs whose income and assets falls below a set threshold, and is again designed to reduce the burden of administration, particularly for smaller bodies with less resources and less complex finances.  Larger SCIOs will still have to provide independently examined or fully audited accounts, depending on their status.
  • Issues around winding-up – different level of protection for creditors/third parties and wrongful trading regime does not apply – There are two points to consider in relation to this;
    a) Firstly, whilst many people are aware that SCIOs are not bound by the provisions of company law, it appears to be less well-known that they are covered by an alternative, detailed dissolution regime under The Scottish Charitable Incorporated Organisations (Removal from the Register and Dissolution) Regulations 2011.  In the case of a solvent SCIO, OSCR will only grant consent to a dissolution once confirmation is provided that the SCIO has settled all of its outstanding liabilities.  There are further detailed provisions concerning the dissolution of an insolvent SCIO (with outstanding debts in excess of £1,500), including creditor-led sequestration.  Full details can be obtained from OSCR’s guidance entitled ‘SCIOs: A Guide’. In summary, whilst the protection offered by the SCIO Dissolution Regulations may be different from that provided by company law, there would be likely to be limited impact at a practical level.
    b) Secondly, whilst there is a perception that this would be an obstacle to securing grant funding or loans, it should be remembered that there are other popular legal models for charitable bodies which, like the SCIO, are not governed by company law and which do not offer the same protections, such as industrial and provident societies, and charitable trusts.  The fact that such models continue to exist and thrive demonstrates that the protections laid down in company legislation are clearly not always required by charitable organisations.
  • SCIOs cannot grant a floating charge – Again, this is an option which is only open to companies, but other forms of charity such as trusts and industrial and provident societies can grant them.  This should not really present a significant obstacle, especially given that other options remain available, and tend to be more useful to a lender or grant funder as security in any case (such as standard securities).
  • Community Right to Buy legislation does not currently allow a SCIO to be registered as a community body – The current position is that only companies can be registered, but the legislation is expected to be updated over the next couple of years to include the SCIO model.  However, a company can convert to a SCIO via a fairly straightforward process, so any organisations that wanted to incorporate as a company at this time for the purposes of registering as a community body could still change to a SCIO – and access the benefits provided by the model - further on down the line.

Whilst the above questions are among those that are most often asked about the SCIO, new queries crop up all the time – particularly where organisations are moving into new areas, or require closely tailored structures and governing documents.  However, we believe that the SCIO is a simple and adaptable alternative to previously available options, so if there is anything else you want to know just get in touch.