Last month, ahead of the party’s annual conference, Nigel Farage MP announced that he intends to ‘give up ownership of Reform UK’. This news follows a period of sustained media interest in, and scrutiny of, Reform’s atypical legal status. Unlike all other major political parties, which are classified as unincorporated associations, Reform exists as an ‘entrepreneurial political start-up’ or, put more simply, a private company. Just like all other companies, Reform has shareholders, the most influential of which is the party’s leader, Farage, who currently owns 53% of the company. For a political party this is highly unusual. Not only do Reform members currently have no control over electing their leader, but it is the company’s major shareholder that has ‘elected’ himself to the role. Naturally, this has resulted in claims that Reform’s current constitution is ‘undemocratic’ and positions Farage as ‘the party’s ultimate kingmaker’.
Due to the current relevance of such issues, and the opaque nature of the topic, it’s useful to shed some light on the legal status of political parties. Focusing in particular on the difference, in practice, between unincorporated associations and private companies. In relation to political parties specifically, the regulatory role of the Electoral Commission, and the impact of the Political Parties, Elections and Referendums Act 2000 (PPERA), should also be explored.
Unincorporated associations
At some point in almost all of our lives we will all be members of an unincorporated association. Whether the organisation takes the form of a sports club, a society or a political party, the defining feature of an unincorporated association is that it has no status in law. As such, an unincorporated association cannot enter into a contract, own property or make a profit. If the association wishes to enter into contractual relations of any kind, the formal contract must be entered into by one of its members (as it is not itself a legal entity).
Ultimately, the point of unincorporated associations is to allow groups of people who share a common purpose to cooperate together in order to act on that shared purpose. Unlike registered companies and charities, unincorporated associations are relatively easy to establish and can actually be created without any formal documentation as long as there is a mutual implicit intention between the members to establish legal relations. Generally, an unincorporated association will be structured around a written constitution detailing the rules of the organisation and stating its objectives, however this constitution does not necessarily have to be written. The constitution, if one does exist, should also detail the process of appointing a management committee to act on the association’s behalf. Furthermore, the process for electing committee members and organisation leaders should be formalised in the association’s constitution. The rules and regulations relating to an unincorporated association’s structure and governance are unlikely to be legally enforceable unless a court determines either i) that there is evidence of a clear intention by the group to create a legal relationship between its members; or ii) it is in the public interest to enforce the organisation’s rules. Interestingly, despite having no legal character, bank accounts can be opened in the name of an unincorporated association, but a bank may request to view the organisation’s constitution before doing so. An unincorporated association may also be liable to pay corporation tax if/when it starts trading or receiving an income. For the payment of corporation tax, section 6 of the Income and Corporation Taxes Act 1988 includes an unincorporated association within the definition of a ‘company’.
Although there are evident benefits of establishing an unincorporated association (as opposed to a registered company or a charity), a lack of legal personality can be highly problematic in practice. Most obviously, as the unincorporated association is not a legal entity, anyone wishing to sue the association will either be unable to, or will be forced to litigate against an individual member. This particular issue resulted in the Scottish Law Commission publishing a Report on Unincorporated Associations in 2009 which recommended a change in regime to ensure that associations are recognised as legal entities if certain statutory criteria are met. However, the UK government failed to take these recommendations forward at the time, noting in their formal response that ‘the current proposals require further work’. Despite the Scottish Law Commission’s report being over 15 years’ old, the wait for statutory intervention in this area goes on. Some larger unincorporated associations, including political parties, may circumvent this issue by having the membership delegate authority to the association’s committee to permit the committee to appoint trustees/form external companies in order to enter into contractual relations or hold property on behalf of the members. But, this is not the norm for smaller unincorporated associations whose individual committee members are left with no option but to bear the burden of litigation themselves.
Political parties as unincorporated associations
As noted above, apart from Reform UK, all of the major UK political parties are classified as unincorporated associations. That includes the Labour Party, the Conservative Party, the Liberal Democrats, the SNP, Plaid Cymru and the Green Party. Political parties, however, do differ from all other unincorporated associations in one key manner – they are subject to specific legislation under the PPERA 2000 and are thus required to register with the Electoral Commission (s.22 PPERA). The Electoral Commission was created in 2001 under s.1(1) of the PPERA and is primarily responsible for independently regulating all political parties in the UK. It also regulates the financial funding of political parties in order to ensure integrity and transparency of party and election financing. S.28 of the PPERA sets out specific statutory requirements for the registration of a party. These requirements include: a declaration that the party intends to contest an election within the UK, that the assets/liabilities condition is met[1], and that the party’s proposed name is not the same/too similar to that of a party that already exists or which is offensive/obscene in nature. S.24 of the PPERA further requires that all party leaders, treasurers and nominating officers have to be registered independently with the Commission.
Crucially, regardless of the legal nature of a political party, the rules regarding regulation by the Electoral Commission remain the same. Thus, despite not being an unincorporated association, Reform is still bound to comply with all obligations on the PPERA and to register with the Electoral Commission. In this regulatory respect therefore, there is no material difference between Reform registering as a private company as opposed to an unincorporated association. So why, then, has Reform taken this unusual step?
Of course, anything stated here is merely speculative, but there are, perhaps, two key practical differences between registering as a private company and an unincorporated association that appealed to the owners of Reform. Firstly, and the most obvious, registering as a company enables the organisation to lawfully turn a profit. The financial incentive here may be relevant to those key shareholders and directors responsible for establishing Reform. The second difference for political parties was mentioned at the outset of this blog and relates to the procedure for electing a party leader. All other political parties are bound by the rules of their own constitutions when electing a leader, whereas Reform do not currently have a constitution by which to be bound, nor is there a committee (chosen by members) to handle internal party affairs. This means there is no formal role assigned to their membership during leadership elections, unlike with all other political parties. Beyond this, it means that the largest shareholder is essential unbound within the organization. Nigel Farage has consequently been able to ‘elect’ himself to the role of party leader. Democratically, this is potentially highly concerning. If, as many predict could happen, Reform continue to perform well in national elections over the coming years, the leader of one of the most influential parties at Westminster could have no democratic mandate from his own party membership.
Nigel Farage has, of course, claimed that the structure of Reform UK is due to change. As he intends to ‘give up control of the party to its members’. However, as Will Dunn recently highlighted, this does not necessarily mean that Reform has to be democratic. As he notes, ‘Reform isn’t moving its shares into a mutually owned trust, like John Lewis or Richer Sounds. It is becoming another type of company, a “company limited by guarantee”, which typically doesn’t have any shareholders. The voting rights of members will be decided by the company’s articles of association, which haven’t been made public’. It seems, therefore, we will have to wait for further details to emerge relating to the exact structure of the new Reform company before assessing how much influence its members will be afforded, and thus how much more democratic it may be. It does seem clear, however, that its structure will remain atypical given it is not transforming into an unincorporated association will instead remain a private entity in some capacity.
Concluding remarks
The unusualness of Reform’s party structure, and the resulting media attention, has shone a spotlight on a relatively under-explored aspect of party-political life. In many respects, unincorporated associations are ‘odd’ entities due to their lack of legal character, but in relation to political parties, they are the norm. The fact that the leaders of Reform have chosen to break this norm may well be indicative of the kind of organisation these individuals wish to lead. From a regulatory perspective, the consequences remain the same, but perhaps it is telling that democratically and financially there are clear differences.
Kate Dewsnip.
Kate is a Graduate Teaching Fellow and PhD candidate at the University of Liverpool School of Law and Social Justice. She is a contributing writer for the Constitution Society.
The Constitution Society is committed to the promotion of informed debate and is politically impartial. Any views expressed in this article are the personal views of the author and not those of The Constitution Society.
[1] S.28 (3C) PPERA: The assets/liabilities condition is met in relation to a party if— (a) the total value of the party’s assets does not exceed £500, and (b) the total amount of the party’s liabilities does not exceed £500.