Much ado about nothing

The Government has put forward its new proposals to free up the charity sector. But as Jon Robins discovers, many regard it as an elaborate exercise in semantics

The test of New labour's radical resolve to shake up the 400-year-old charity law was always going to be how it would treat public schools. Why should Eton College remain a charity, the argument runs, when the likes of Greenpeace cannot?

So there has been much speculation as to where this month#s Government review leaves the Etons and Harrows of this world – and indeed, as commentators have already pointed out, where it will leave schools (in particular, those providing the 'City' LPC).

“Largely unscathed” is the unimpressed view of Lord Phillips of Sudbury, founder of charity law specialists Bates Wells & Braithwaite. Under the proposals contained in the paper, entitled 'Private Action, Public Benefit', schools that currently obtain charitable status if they are for the “advancement of education” would for the first time have to show public benefit, which could mean, for instance, opening up greater facilities to the local community.

As for evidence of the Government's commitment (or lack thereof), the Liberal Democrat peer highlights a passage of the review that says those independent schools charging high fees will have to make “significant provision” for those who cannot pay full fees, and then notes that “the majority probably do so already”.

“It's just such a giveaway line,” he reckons. “It passes judgement on criteria that is to be established by someone else and it's the most revealing phrase in the whole document.”Anyone that thought there was going to be a lively debate on public schools and private hospitals is going to be disappointed, as this has been almost entirely kicked into the long grass,” Lord Phillips continues. “I think you'll find that three years from now the Charity Commission will have done a lot of barking but little or no biting.”

Nevertheless, the review, conducted by Number 10's own Strategy Unit, is certainly radical insofar as it dismantles the foundation of charity law introduced in 1601, just before the death of Queen Elizabeth I. It could be good news for prospective law students everywhere because they will no longer have to digest vast reams of case law, as the paper proposes to scrap the old definition of 'charity' with its four 'heads' (advance of education, relief of poverty, advancement of religion and other purposes beneficial to the community).

However, the four heads would be superseded by 10 new 'purposes' (including the promotion of human rights, conflict resolution, the advancement of amateur sport and environmental protection). The paper's proposals also include replacing the Charity Commission with the Charity Regulation Authority, freeing up charities to trade and cutting back on regulation.

According to the former Charity Commissioner Michael Carpenter, who had executive responsibility for legal services until he left earlier this month after a five-year stint, the new definition is not as novel as it might at first appear. “The fourth 'head' had become a very full bag for lots of other heads of charity,” he explains. “They've pulled out of that bag six others and held them up as freestanding heads in their own right.”

Critics argue that the charity law framework is showing its age. Joe Saxton, a former head of communications at deafness charity RNID and who now works at the Future Foundation, argues that organic growth of charity law has left not-for-profit organisations with an “incoherent and unhelpful legal base”. It was Saxton who questioned why Eton could be a registered charity while Greenpeace could not.

He welcomes the new universal public benefit test. “I've always found that it's bizarre that there have been these four restrictive heads of charities, and expanding that to 10 categories is a good idea,” he says. “Having said that, I'm not quite sure why it's necessary to have any categories at all.” He argues that a public benefit test alone would suffice.

The paper has gone down well with the charity sector. For example, the National Council for Voluntary Organisations (NCVO) says that a universal public benefit test plus robust reform of the Charity Commission is “a great boost for the charity sector”. NCVO chief executive Steve Etherington adds: “Simplifying the legal definition in this way will clarify the very meaning of charity and in doing so protect public confidence.”

As to how these reforms might affect public schools, private hospitals and even law schools depends on how they will be expected to demonstrate public benefit. The report does not shine much light on this question, but leading lawyers in the field, such as Lord Phillips, clearly do not expect too much of a struggle. In fact, critics point to Simon Morys, the civil servant leading the review, who earlier in the year dismissed league tables ranking charities by efficiency as “a nonsense”, and who also said that the exercise was not in the business of “taking away charitable status”.

Neither do those who will be subjected to the reforms appear to be particularly worried. “It's all a bit of a non-story as far as I'm concerned,” says Professor Nigel Savage, chief executive of the College of Law. “I wouldn't pretend that we're concerned, but when the paper came out we went to our lawyers and accounting advisers and they told us it wouldn't be an issue.”

According to Owen Clutton, a charity specialist at Macfarlanes, those law colleges offering the City LPC course would have to pass a tougher test. “I would have thought that it would have been more difficult to get charitable status, as such a course might be seen as serving a fairly limited number of large firms,” he comments.

At the other end of the spectrum, the paper also gives hope to those campaigning groups denied charity status because of their political objectives. The Charity Commission guidelines should be looked at “so the tone is less cautionary and outs greater emphasis on the campaigning and other non-party political activities”, the report advises.

While much of the media coverage has revolved around the fate of public schools, there is much to be welcomed by charity law experts. For example, Lord Phillips flags up the possibility of a community interest company (CIC). Such a corporate structure would draw on company law but contain certain modifications suitable for small, community-based, not-for-profit social enterprises. For example, a CIC would be able to protect assets against distribution to members or shareholders, opt for either a 'limited by guarantee' or a shares format and issue preference shares, but it would also impose greater requirements of transparency.

“At the moment there isn't a structure where one can have a non-profit-making body which isn't prevented from distributing profits to its members,” Jennifer Chambers, a charity law expert at Allen & Overy, points out. “If this new body is put in place there will be a lot of interest from people that want to set up self-help groups or groups that benefit the public and aren't charities.”

Plans to free up charities to trade have had a more equivocal reception from lawyers. The paper proposes to amend the law and allow charities to undertake all trading within the charity without the need of a trading company, as is currently required. Alison Paines, head of charities at Withers, anticipates that such proposals might not go down well with mainstream business, in particular retailers, which already compete alongside tax-exempt charity shops on the high street. “But it could also run into problems in terms of the competition law,” argues Paines. “For example, organisations that are regarded as charities or not-for-profit in France and Belgium have restrictions on commercial trading.”

Chris Priestley, a colleague at Withers, points out that the requirement of a separate trading company also “insulates” a charity against commercial risks and so could still be favoured as an option.

It is a point that Lord Phillips also makes, but he also sees such a reform as potentially having a more fundamental and “self-destructive” impact upon the sector. He argues that the big charities are becoming “too like businesses in their ethos, business and functioning”, and such a liberalisation will only continue that process.

Under the proposals, a revamped Charity Regulation Authority would replace the Charity Commission. As Clutton points out, there has been a “duality of roles” in the Charity Commission's functions as regulator and adviser to the voluntary sector. “Fulfilling these roles has been quite difficult, not least since it's had its powers beefed up in the Charities Act 1993, when it received more substantial powers to investigate,” he comments.

The review envisages a new corporate structure with nine commissioners (as opposed to five) and a separate chair and chief executive. The paper also promises to simplify the process by raising the registration threshold for small charities, as well as proposing the creation of an independent appeal tribunal. “If you complain about the commission all you can do is apply for a judicial review, which is cumbersome, or complain to the Attorney General,” Clutton comments. “Having a more direct approach would certainly make life easier.”

Charity law experts complain that the Charity Commission is under-funded and under-lawyered and hope that the Treasury would adequately back any reforms. “There are going to have to be more resources given to the commission if they're going to be able to deliver, because they've been on a pretty restricted budget for a while,” comments Paines. “But it's not something that I can see the Government wanting to put more money into.”

Lord Phillips believes that the stated desire for less regulation for charities sits uneasily with a package of reforms containing 61 recommendations. “There's a terrible tendency to think that number of regulations is a measure of the value of a report like this,” he comments. It is a particular problem in a sector that relies on people giving up their time. “What you never see and you can't measure in this rush to regulation,” he adds, “is what it chokes off by the way of voluntary endeavour and how many hundreds of thousands of would-be charity initiatives are nipped in the bud.”