Putting trust in authority

Since the mid-1980s, social and financial problems have been adversely affecting the functions and services offered by local councils.

At worst, they have resorted to stringent cuts that produce a barrage of complaints from taxpayers and corresponding bad press. At best, these organisations have sought alternative routes for financing various public services and amenities.

One of the most important and exciting solutions to come to light of late is the possibility of the transfer of selected services to charitable status, with the effect of breathing new life, finance and opportunity into a variety of organisations.

A great variety of popular and expensive public services lend themselves to being converted into charities. The list includes museums, art galleries and art collections, sports centres, tourist centres and even residential homes for the elderly.

Thankfully, local councils are recognising charitable trusts as a useful alternative, which demands some skillful and scrupulous negotiations on the part of the solicitor, and may even call for specialist expertise.

There are numerous financial benefits to be gained from the change in status to a non-profit-making body, but, more importantly, declining services can be safeguarded and actually improved. Charities find themselves reaping many tax benefits, such as those running sports facilities being exempt from Vat. In general, charities have mandatory relief from 80 per cent of national non domestic rates.

Indeed, charities are particularly well-placed in relation to forms of taxation, including inheritance tax, capital gains tax, income tax, national non domestic rates and stamp duty. Tax relief is also available on donations to charities, which enhances the value to the charity itself and encourages donors to give, simply because the gift has greater value in the hands of the recipient. With regard to Vat, charities are fully liable to pay, but there are a number of specific reliefs by way of zero rating, or even exemption.

Most significantly, there is much greater flexibility in terms of funding charities, which can attract finance from various grant-giving bodies as well as donations from individuals. Therefore, a company limited by guarantee or a charitable industrial and provident society can empower the charity to approach lenders if it needs to borrow money.

Yet another advantage in terms of funding is the appeal that charities hold for sponsorship – usually from businesses – not to mention the obvious attraction of finding oneself to be in the running for National Lottery funding.

While democratic control of local authority management may be lost, charitable bodies frequently lend themselves to far greater levels of community involvement and better management. Further, the local authority can exercise its influence through membership of the charity or funding by way of continued grants.

At the same time, local authorities must appreciate that only certain operations lend themselves to transfer to charitable status. For example, the bodies must be “exclusively charitable”, although commercial or trading activities could be run by a subsidiary organisation converting profits to the parent charity.

Once the move towards creating a charity has been decided, a number of tasks must be fulfiled. If there is any doubt about the validity of the body, it is advisable to approach the Charity Commission, possibly even before any documentation has been drawn up. The type of structure should also be determined, and there are really only three practical choices: a limited company (usually limited by guarantee), a charitable or non-charitable industrial and provident society, and an unincorporated trust.

A separate application has to be made to the Charity Commission, except in the case of a charitable industrial and provident society, which would classify as an “exempt” charity enjoying the same fiscal advantages.

There is considerable debate about the power of local authorities to establish charitable trusts or similar bodies in various fields of activity and provide grant funding thereafter. In many cases, there are specific statutory powers enabling authorities to create charities and transfer assets to them. For example, theatres and concert halls are covered by Section 145 of the Local Government Act 1972, while libraries and museums are governed by the Public Libraries and Museums Act of 1964.

This firm's local and public authority department has been involved in charity transfers on behalf of a number of local authorities. From experience it has found that, when it comes to the business of setting up charities, the most favourable option is the establishment of a company limited by guarantee or an industrial and provident society.

Nevertheless, whatever route to charitable status may be preferred by local authorities, it is clear that charities are likely to become an increasingly attractive option for the maintenance and development of public services and leisure facilities in the future.

Simon Randall is head of the local and public authority department at Lawrence Graham.>