Recent changes to legislation may not appear to affect charities, but read the small print. Simon Wethered reports.
In addition to the much trumpeted and well-publicised Government initiatives to boost charitable gifts under the title of “Getting Britain Giving”, the recent changes to legislation will have a real impact on charities in trading, employment, contract law and data protection – but to find out what they are you'll have to read the small print.
The Budget – Trading
Where trading is likely to be on a small scale, the rigmarole of setting up a trading subsidiary which covenants its profits can now be avoided, and the charity can trade without being charged tax provided that the trading turnover does not in any year exceed 25 per cent of the charity's total gross income, or £50,000 if the gross income exceeds £200,000.
There is welcome flexibility that the relief will still be available if the charity can show that at the beginning of the year it had a “reasonable expectation” that the limits would not be exceeded.
If queried by the Inland Revenue, it will be useful to have evidence as to what the reasonable expectation for income and expenditure was at the beginning of any financial year, for example minutes of meetings, business plans and cashflow forecasts. The constitution will, however, need to be checked to ensure there is the power to trade, or an application made to the Charity Commission for consent to change it.
When it comes to fund-raising, the changes represent a rare instance of collaboration between the Inland Revenue and Customs & Excise – if the requirements for exemption for VAT are met, then the Revenue will accept that they are also met for corporation tax purposes.
Events publicised as being for fund raising will in principle be exempt from VAT (and corporation tax) provided that no more than 15 events of the same type are held in one location in any one financial year and no more than two nights accommodation are included; plenty of opportunities for efficient planning there.
Furthermore, small-scale events producing no more than £1,000 per week are also exempt; that's quite a lot of coffee mornings.
There is, however, the curious caveat that the exemption will be lost if these events result in “unfair competition” with the commercial, VAT paying sector. Quite how and by whom this will be evaluated, let alone policed, is unclear.
However, in the field of advertising the changes will have a dual affect. Although supplies to charities for their advertising will now be zero VAT-rated, there are two restrictions which appear somewhat mean: it does not apply in relation to advertising by way of mailshots, nor does it apply where services are in connection with the establishment of the charity's own website.
Recent legislative changes in the employment field will affect employees working for charities, but will not affect genuine volunteers.
The key changes to maternity rights are that all pregnant employees will be entitled to 18 weeks (previously 14 weeks) ordinary maternity leave, regardless of length of service, and will be entitled to take additional maternity leave of 29 weeks after one year of service (previously two years of service was required).
Regulations have been introduced entitling all employees with one year of service to take unpaid parental leave in relation to children born after 15 December 1999. The basic entitlement is 13 weeks over the first five years of a child's life. The precise arrangements as to how the leave can be taken must be worked out between the employer and employees, failing which the regulations provide a “fallback” scheme.
The regulations are, however, being challenged by the Trades Union Congress (TUC) which says that the Government has not implemented the European Directive correctly. The TUC believes that all employees with children under the age of five should be entitled to take the leave, not just those with children born after 15 December 1999. In light of a decision against the Irish government on the same point, it appears that the TUC challenge will succeed.
Draft regulations have also been laid before Parliament enhancing the rights of part-time workers. They are due to come into force on 1 July 2000 and say that part-time workers should have the same pro-rated pay and benefits as their full-time colleagues.
The Contracts Act 1999
At first glance, the Contracts (Rights of Third Parties) Act 1999, which came into force on 11 May 2000, appear to be of little relevance to charities and the not-for-profit sector.
In fact, the act introduces new revolutionary rights so that a person who is not a party to a contract may nevertheless enforce it, either when the contract specifically provides it, or it confers a benefit on a third party.
So where a fund-raising or commercial participator agreement has been entered into by a trading subsidiary and the charity is a party only for the purpose of complying with the legislation, that charity should now be able to enforce that contract, for example to prevent abuse of the charity's name.
But a charity may also find that third parties which it thought had no recourse against it now do; non-compliance with a covenant in a lease, for example, may be enforced by a fellow tenant.
Thought should therefore be given, on a case by case basis, to including in contracts the exclusion of the effect of the act in terms permitted by it.
Charities should be aware of the impact of the Data Protection Act 1998, which came into force on 1 March 2000. The act regulates the use of personal data (for example names and addresses of individuals) and determines what should be done with such data.
Of principal concern to charities will be the fact that data obtained for specific purposes may be used only in connection with those purposes. In most cases the data subject (the person who is the subject of the relevant personal data) must have given their consent to the processing that is intended to be carried out. So, if a charity has collected personal data for the purposes, for example, of membership administration, it may not be used for other purposes, such as the sending of donation requests.
All data controllers (organisations which determine the purposes for which and the manner in which data are to be processed) must notify their processing to the Data Protection Commissioner and must comply with the eight Data Protection Principles contained in the act.
Effectively, the principles are a code of good conduct. Among other measures they provide that data from data subjects must be relevant for its purpose, up-to-date and not kept for longer than is necessary for the relevant purpose.
A further principle, which is new to the 1998 act, provides that personal data must not be sent outside of the European Economic Area unless certain conditions apply. This will have an impact on international organisations and those charities which send personal data abroad for any purpose.
Simon Wethered is a partner at Charles Russell. This article is a general outline only and should not be relied on as advice from the firm.
the lawyer 22 may 2000
The Human Rights Act 1998
The Human Rights Act 1998 (HRA) will come into force in the UK on 2 October 2000. It will incorporate the majority of the European Convention for the Protection of Human Rights and Fundamental Freedoms. Under the HRA it will be unlawful for any public authority to act in a way which is incompatible with a convention right. Although the term 'public authorities' has not been defined, it is clear that the HRA will apply to private bodies while exercising a public function, for example a professional organisation.
Two Articles, which will be of interest to such organisations, are:
The Right to Freedom of Expression (Article 10). Under Article 10(1) of the convention, 'Everyone has the right to freedom of expression…' This might apply to an employee of a charity, or a non-profit making organisation, who has views conflicting with the objectives of the charity, if those views conflict with a public function of the charity. Would the organisation then have the right to dismiss or reprimand the employee for their views? Although on the face of the title, it appears that an employee has the 'freedom' to express any views, Article 10(2) permits an organisation to restrict its employees if it would be necessary 'for the protection of the reputation or the rights of others'. This is, however, a potential minefield.
The Right to a Fair Trial (Article 6). This article aims to ensure fairness in civil and criminal procedures, with regard to both ordinary courts and administrative tribunals. Article 6 will therefore be applicable to non-profit making bodies carrying out disciplinary functions, for example professional organisations such as the General Medical Council.
However, private organisations and employers should beware. Although the HRA does not appear to affect them directly, their procedures may become subject to scrutiny in the courts or tribunals (if an employee brings an action, for example) and these courts and tribunals (which are public bodies per se) would therefore have to determine the issue in accordance with the HRA. Prudence and good sense suggest that employment and regulatory procedures and policies should be drawn up or received with the new HRA in mind.