Charities require masters of all trades
14 June 1999
19 December 2013
Full Federal Court confirms a ‘public benevolent institution’ does not need to provide direct relief
20 June 2014
13 May 2014
19 December 2013
7 October 2014
The charity sector has not escaped the growing need to become commercially aware. Reduced public sector funding has pushed charities into coming up with increasingly ingenious ways to raise cash. This, coupled with stricter regulations governing charitable bodies and the pressures of being in the media spotlight has meant that many long-established charities have been forced to overhaul the way in which they govern themselves to respond to the increasingly competitive marketplace.
Judith Hill, head of Farrer & Co's charity group, claims charities now often deliver better services. But she adds: "They need to get more efficient. They need professional help and to be more business-like. Whereas 10 years ago you had a lot of retired generals working in the voluntary sector, these days people regard it as a profession."
The knock-on effect of this "professionalisation" is that lawyers acting in the charity sector are having to become increasingly specialised. When Hill started out in the field 10 years ago, she was the only charity practitioner at the firm. Now she has five other fee earners working exclusively in the charity sector.
"It's a very exciting and vibrant area," she says. "Things are really moving, lawyers are becoming more important and I think charities recognise this."
However, Hill disagrees with the oft-repeated complaint that charity has turned into pure business. "The motivation of people who work in the voluntary sector is very different from those who work in the commercial sector," she claims. And, pointing out that charity work has an extra dimension with which non-specialists are simply not in tune, she says: "If lawyers don't have that experience - and I've noticed this happen to clients who have non-specialists acting for them - you can see they don't spot the moment at which it matters."
She uses the example of settling disputes with disgruntled employees: "Charities can't pay as much as they might like because they have to take the charities' funds into consideration. It's a mistake for any charity to go to someone who doesn't know charity law."
John Claricoat, partner in niche charity practice Claricoat Phillips, confirms the trend towards a more corporate culture. "The Royal National Institute for the Blind is going through an enormous strategy discussion at the moment and the documents you receive are full of managerial jargon," he says.
The governance of charities is a large area of work for lawyers, according to Lord Phillips of Sudbury, head of Bates Wells & Braithwaite's charity team. "You're dealing with a very different culture now than when the charity may have been founded," he says.
"A hundred and fifty years ago it was more collegiate, while today the culture is corporate. That's a big change and many charities are having to grapple with that."
He sees the charity lawyer's job in these circumstances as more of an art than a science. "The wise charity lawyer will go with the grain and the history of the charity and resist the temptation to impose a blueprint," he says. "There's a wonderful diversity in charity work - it's a dense and rich cottage garden, rather than a prairie farm."
It is apparent that charity lawyers are not the rarefied bunch they might be perceived to be. In fact, to be a really good charity lawyer these days requires a good grasp on many aspects of law from employment to intellectual property, as well as understanding the charities themselves.
Michael Scott, head of Charles Russell's charities group, however, is concerned that there are not enough lawyers in the charity field who have the necessary commercial experience to deal with charities' changing needs. "The problem with some charity lawyers is that they are sitting snugly in the private client department, because that department is clearly involved in a lot of aspects of charity - private tax, wills, trusts and so on," he says.
Scott sees the way forward as working in a team, drawing specialisms from across the board under the leadership of an experienced charity lawyer.
Scott sees commercial nous as essential for dealing with the increasing number of mergers and reorganisations that are taking place in the sector. "There's a lot of duplication," he says. "For example, there are over 600 cancer research charities alone." He believes the answer to this apparent inefficient situation is often to double up. "A merger need not mean losing your name," he says. "There are mergers, reorganisations, consortia and so on. These are just different ways of skinning a cat. But people who give money to charities want to see that the charity is well organised."
He adds that the main question for charities and their lawyers is whether the charity is in the right shape to achieve its aims.
Gary De'Ath, head of the charity team at Birmingham firm Shakespeares, reports an increasing number of charity consortia, and thinks lawyers should familiarise themselves with the constitutions of such organisations. Among the benefits of such arrangements, one of which he is currently putting together in the West Midlands for a new hospice, De'Ath lists economies of scale, combined expertise and talent, potential to raise the profile of the different organisations involved and, very importantly, greater leverage for fund raising.
Another increasing trend that De'Ath is dealing with is what he calls "social purpose companies" - private companies set up with a declared social purpose enshrined in their constitutions. These companies will most probably set up a charitable arm and may even convert fully after a number of years. "I think this is leading the way to how voluntary organisations are working towards meeting commercial companies in the middle," he says. "Charities are coming out of the dark ages."
But in order for charities to grow into their new, commercialised image, the issue of taxation must be addressed. So far, all government attempts to do so have fallen far short of satisfactory, according to De'Ath and many of his colleagues. "Currently, if more than 10 per cent of a charity's revenue is raised through trade, the Inland Revenue can tax all of its revenue, so charities tend to trade through subsidiaries instead," he reveals.
He wants an end to what he terms this "draconian" practice, and advocates a small tax-free allowance of around £2,500 per year, followed by a sliding scale of tax, up to 50 per cent of the charity's total income. This way, he says, charities could trade without having to set up subsidiary companies.
Hill adds that the current green paper on charities taxation was a disappointment when it emerged after lengthy consultation. She says detailed representations changing VAT rebate and Advance Corporation Tax (ACT) provisions made by the Charity Law Association, of which she is deputy chairman, were definitively stamped on by the Government.
"The Inland Revenue and Customs & Excise have made it clear that we should be focusing on tax breaks available to donors to encourage charitable giving," she says. "But when you consider the VAT recoverable [on charities] is £400m per year, with the same figure for ACT, it takes an awful lot of donations to make up £800m in a year. The much-vaunted wish of government to help charity just doesn't pan out."
Another key area which lawyers are currently debating is that of the Register of Charities. The Charity Commission sent out a review of the register for consultation last year, and has now implemented the results of that review, many of which have met with little support.
Claricoat says: "The Charity Law Association made a very full response to the consultation paper, including opinions from three eminent counsel, and our representations have been completely ignored. The Charity Commission is using the register as a tool of regulation when it was never intended for that purpose."
Lawyers are disheartened, he says, because the Charity Commission, now run by civil servants as opposed to lawyers, has taken it upon itself to refuse to register charities, even when their objectives are legally charitable, on the grounds that it does not like the look of the charity's activities.
In the good old days, according to lawyers, the commission would invite a draft constitution of a proposed charity and then advise from there how to ensure that its criteria were satisfied. Now an application must be complete before submission, ready for the commission's five-strong board - of whom only two are lawyers - to judge on its ability to be considered a charity.
Claricoat echoes the sentiments of many when he claims: "What they should be doing is registering the charity, and if they don't like the activities being carried out, they should then discuss that with the trustees."
Although the commission's stated purpose behind this modus operandi is to give the public confidence in its ability to keep out bogus charities, Claricoat points to the other side of the coin: "If the commission refuses to register charities that hold funds donated for charitable purposes, the donors can't claim any tax or business relief on those funds, and what happens then? This throws the whole sector into confusion."
Lord Phillips sees three reasons for the commission's recent behaviour. Firstly, charity law is becoming far more complicated. Secondly, the commission "has been seriously shot at twice in the past 10 years", and thirdly, because we now live in a "managerialist age". He says the commission's pre-policing activities are "a big problem which is going to have to be curtailed", but he nevertheless supports its legal remit to police and support the sector, a duality of roles which he says leads to great dynamism within the area.
Following on from the consultation, the commission has recently issued three new consultations for lawyers to get their teeth into: an analysis of the Recreational Charities Act 1958; promoting community development; and maintaining an accurate register. This last idea has provoked some concern among lawyers, as with about 187,000 registered charities on its books, the commission's aim to go through them all checking for eligibility is hardly going to be a quick process. Indeed, many think there are neither the resources nor the time for the commission to effectively undertake such a mammoth task.
Dawn of a new culture of giving
When Dawn Primarolo, Paymaster General at the Treasury, announced a review of charity taxation, charities and their advisers were hoping for a new dawn on the fiscal regulation of charities. But the long-awaited consultation document issued by the Treasury in March does not herald a major shift in government thinking.
In its original submission to the review, the Charity Law Association (CLA) stated that: "Tax on charitable property or income is in principle wrong and thus requires positive justification if it is to be accepted". Moreover, it viewed the taxation of funds as inherently wasteful and a disincentive to potential donors (by removing the element of choice from the taxed portion of the gift).
However, the Government sees the current exemptions from taxation as "generous reliefs".
Further differences arise when it comes to competition between charities and business. The CLA believes the exemptions enjoyed by charities are not unfair to competing businesses and the comparison between a private enterprise and an organisation established to provide a public service is a false one.
The Government, however, remains committed to protecting businesses it believes are threatened by competing charities and will continue its review. Again, the CLA rejects the idea that taxation should underpin principles of charity law and that fiscal policy concerning charity trading should be conditioned by concern about the risks to charity of trading: this is a matter of trust law. The Goverment thinks otherwise and rejects the proposal that all trading profits should be exempt.
Some of the CLA's points of detail do, however, appear to have been accepted by the Government. The Government is considering reducing the minimum threshold of gift aid from £250 to £100 and simplifying the paperwork. Its recognition of the illogicality of the discrepant treatment of one-off fundraising events in the contexts of direct tax and VAT is also welcome. It accepts the VAT regime is preferable, proposing to produce clearer guidance on the proper analysis of these events.
A further small mercy is the idea of a de minimis threshold below which charities may enjoy tax-free trading income. However, a general exemption is not negotiable.
Various suggestions were made for improving the lot of charities with subsidiary companies but most of these were rejected. The increased flexibility in the Deed of Covenant scheme for subsidiary companies in 1997 may be extended to gift aid. That would allow subsidiary companies to wait until after the end of an accounting period before deciding what amount to donate to the parent company.
Exemption from direct tax for profits from sponsorship and licensing of a charity's name or logo may be permitted.
For many, the VAT proposals do not go far enough. In particular, the provision in section 33 of the VAT Act 1994 allowing local authorities a full refund of their irrecoverable VAT will not be extended to charities. A large and unacceptable rise in public spending would result. And the invocation of EC VAT requirements as an objection to the introduction of new VAT reliefs is comprehensible even though it will fuel the antipathies of Eurosceptics and anti-Europeans in this country. The Government will, within the constraints rehearsed in the consultation document, listen to suggestions for bringing VAT rules and reliefs up to date.
The uncharitable critic might say, with Horace, that the mountains went into labour and a silly little mouse was born. But aspiration must be balanced by economic reality. And the war in Kosovo, which began after the consultation document was written, will not come cheap.
Hubert Picarda is a tenant at 3 New Square and president of the Charity Law Association. The third edition of his book, Law and Practice Relating to Charities, is available in the autumn.