Posts By: David Ainsworth

Many charities don’t realise how bad their pension problems really are

A few recent stories highlight the impact of the wider pensions crisis on the charity sector.

The combined pensions deficit of the 20 largest charities is around £720m, according to a study by Alexander Forbes.

And
last week, two pensions specialists who advised charities in the
Scottish Voluntary Sector Pensions Scheme – a multi-employer scheme for
small charities – came out and said they believe the scheme presents a danger to many of the charities involved.

A
year ago, an expert predicted to me that at least one major charity
would go under because of its pensions deficit – and it’s certainly
true that there are some out there with major deficits to worry about.

But
in truth, it’s likely to be the smaller organisations, such as those in
the Pensions Trust scheme, that really suffer. They can’t access good
professional advice, they can’t use their reserves to ride out
financial volatility and they haven’t got the in-house expertise to
know if they’ve made the right decisions. Many have signed up for
schemes on the advice of partner or parent organisations that will
prove wholly unsuitable.

The key question is how many other
charities up and down the country are enrolled in local authority and
other multi-employer schemes that are totally unsuitable for them, and
as a result have deep problems that they are totally unaware of.
Probably a lot.

Many of the charities in the Scottish scheme were not aware of the pensions problem they had on their doorstep, according to this blog by David Davison, a pensions consultants who has advised several of them, and this seems to be a common problem.

Many
small charities discover too late – often when merging or shutting down
– that a six or seven-figure debt, larger than their annual income, is
to fall due any moment.

It’s a particularly serious problem for
the trustees of unincorporated charities. They are personally liable
for the debts of their charity.

And, like this trustee, they can find themselves owing an awful lot of cash.

Read more on Many charities don’t realise how bad their pension problems really are…

Tories hint at tax breaks for social investment

In the run-up to the election there have been lots of promises from political parties about what they will do to improve the lot of social enterprises. This week Nick Hurd, shadow charities minister, suggested the Conservatives were thinking of using tax breaks to boost the social investment market.

If this is the case, it is good news. But where to apply it, and what form should it take?

There’s a very interesting illustration of the social investment space, produced by the social lender Venturesome, which seems to offer some clues (you can find it on page seven of this report). It shows a continuum between private, wholly-for-profit business, and wholly not-for-profit charity, with social enterprise occupying a space in between.

On one side, a tax-free legal form – the charity. On the other, a legal form with no tax reliefs – the plc. The space in between is crying out for a reduced-tax legal form which can make some profit, but is required to recycle most of its profit into the community.

There is an obvious candidate, in an existing but currently under-utilised legal form – the community interest company (CIC). At present, five years on from the creation of the CIC form, it’s not really clear what its purpose is. It seems to offer many limitations, and few opportunities.

Notoriously, the form had trouble attracting investment, thanks to the strictness of its asset lock and the fact it offers investors no advantage over other legal forms. Many people who have formed one say they regret it, because they cannot attract outside finance.

The strict asset lock, which acts as a guarantee of social purpose, ought to be good for attracting preferential funding from people with a strong social conscience. But there is little publicity about the model to make that clear, and little good information for potential investors, making it a very hard sell, even to the ethically committed.

The situation became marginally better earlier this year after the CIC regulator announced it was loosening the dividend caps that govern how much profit you can take out. But it is still too hard for investors – and social entrepreneurs themselves – to construct an exit strategy. Other social forms remain more attractive.

All of this would change with a tax break. A reduced-tax regime seems to have been the original intention behind the CIC, given in exchange for its strict asset lock and limitations on what business it can pursue. But that part of the model died the death of a thousand cuts during the journey through Parliament, and the CIC came into existence neutered, with the reason for its creation removed.

It ended up with all of the disadvantages of greater regulation and none of the advantages of lesser taxation. Its existence has been an embarrassing curiosity ever since. Whoever wins the election should provide a sensible tax incentive for the CIC and restore its potency.

Read more on Tories hint at tax breaks for social investment…

Cancer Research UK’s proposal on Gift Aid reform is by no means perfect

It is good to see Cancer Research UK taking the lead on Gift Aid reform by supporting a 30p composite rate.

It’s an idea that means charities would receive 30p in Gift Aid on every £1 given by a taxpayer, and higher-rate taxpayers would lose the right to claim any personal tax relief on donations.

Progress was needed. Before there can be a sensible debate with the Treasury over reform, there needs to be something to discuss, and the plethora of different options that existed at the start of the year simply weren’t tenable.

However introducing a 30p composite rate would still raise problems. It’s difficult, for instance, to justify labelling a composite rate as tax relief rather than public expenditure.

That’s because the system would mean that if a donor gave £1 to charity, that charity would get an additional 30p even if the donor originally only paid 25p tax to get that £1. Can a tax relief give back more money than the donor originally earned and paid in tax? Or would it have to be called public expenditure?

At present, charities receive 25p as a tax relief on every £1 donation, and then another 3p in public expenditure – transitional relief. That public expenditure can easily be taken away, and in fact it will be in just over a year’s time.

Tax relief, by contrast, is much harder to withdraw, which means that any decision to reclassify Gift Aid as public expenditure would leave the sector vulnerable – and has been ruled out by third sector minister Angela Smith.

It may be possible to label a composite rate as tax relief – an argument between the Treasury and the ONS is going on over this at the moment – but it would not be an easy battle.

It’s also not clear how a composite rate would sit alongside payroll giving. Would payroll giving continue to roll on independently, offering a different system of tax relief to Gift Aid? Or would a giver receive an extra reduction in tax, above and beyond what he paid? Or would it be scrapped altogether? None of these options sound good.

Read more on Cancer Research UK’s proposal on Gift Aid reform is by no means perfect…

Charities should be more than an afterthought when politicians talk tax

Among the ideas
in the Charity Finance Directors’ Group’s election manifesto is one for establishing a
review panel to scrutinise new legislation
at an early stage and find out whether it will throw a giant spanner into the works of
the charity sector.

Read more on Charities should be more than an afterthought when politicians talk tax…

Let more public bodies join British Waterways in the voluntary sector

Last week, British Waterways said it wanted to leave the embrace of Government, and set up as a charity. Inspired by the National Trust, it said it could stand better on its own two feet.

This started me wondering. How many quangos would be better off if they followed British Waterways’ example, and set up as third sector organisations?

An awful lot, probably. In fact, the more services which can be moved out of a bloated public sector, the better.

Skeptics might say this has been tried before. The Government has often tried to slough off services through privatisation, and has had very mixed success. Why should this be any better? What are the advantages of charitisation? Or social enterprisation?

The third sector’s advantages over the public sector are obvious. It can cut costs, introduce innovations, and respond to change much more quickly. And a charity can attract more publicity, more trust, and more goodwill than any Government organisation.

But it has advantages over the private sector, too. A not-for-profit organisation will remain focused (indeed, often becomes more focused), on the end-user – the beneficiary.

This isn’t always true of the private sector. Sometimes the best way to make money is to hire expert negotiators, run rings round public sector officials at the contracting stage, then sit on your hands while the cash rolls in.

It isn’t just quangos that could benefit from being charitised, either. Other areas would also benefit – the water, electricity, gas and rail monopolies, to name but a few.

The most obvious example is Welsh Water, which aims to bring benefits to the people of Wales – around £21 a year off the water bill of everyone in the principality, the company says, because of its lack of shareholders and its greater efficiency.

NHS trusts and local government departments could also benefit.
It’s an amazing experience hearing people like Jo Pritchard, of Central Surrey Health, talking about the difference that moving out of the NHS and into an independent company has made for health workers.

Instead of sitting and waiting for instruction from the top, she says, CSH’s employees introduce innovation on an almost daily basis, strive to reduce inefficiencies, and enthusiastically spread best practice throughout the organisation.

When the Government first introduced the ìright to requestî initiative, which aimed to move NHS services out of the public sector and into social enterprises, it seemed that it had finally understood this idea.

Sadly, this idea seems to have hit the buffers very quickly – partly thanks to opposition from unions, legitimately worried that this was a Government attempt to do things on the cheap – and the NHS has been named ìpreferred providerî for all health contracts. The right to request concept hasn’t caught on elsewhere in the public sector, either, where examples are sporadic at best.

In my view it’s time for Government to change this. Anywhere there is a quango, a privatised industry, a local authority department, which could stand better on its own two feet, it should be allowed to do so in the third sector.

Read more on Let more public bodies join British Waterways in the voluntary sector…

Gift Aid reform: here’s one reason why progress is slow

What is the charity sector trying to get out of Gift Aid reform?

Many systems have been proposed, but none have gained much traction with either the Government or the sector. Should we have an amended opt-in system or an opt-out system? What about an accounts-based system? Or a composite-rate system? Or a system whereby higher-rate relief is transferred from the higher-rate taxpayer to the charity, with a portion of tax retained by the Government?

I suspect progress is slow because charities are seeking two different benefits. One is a reduction in the administration costs of each donation, and that seems achievable. The other is a system that would make Gift Aid payments easier for charities to claim, which would mean the Government would have to pay out more cash on more donations. That seems unlikely.

The Treasury says it is keen on a ‘revenue-neutral’ solution to the problem, according to the academics who drew up its most recent report. It’s unlikely that the agenda would include anything that cost the Government cash – certainly not in the middle of swingeing public spending cuts.

Some of the wider-ranging proposals for reform, such as a recent Treasury model for scrapping the current higher-rate relief and replacing it with a new benefit, are beginning to look like a dice roll.

This suggestion involves getting rid of the 25p benefit to taxpayers and replacing it with a 25p benefit to charities. The move looks neutral, but it could reduce the total tax rebate on the donation, which would hurt donors more than it helps charities.

Would the reduction in the total value of the donation be compensated for by the fact that more cash ends up in the pockets of charities? Who knows? The only way to find out who would win would be to implement the new system and see.

And there is an added corollary: even if reform does work in favour of charities, the sector faces a large and expensive headache in the form of endless legal quibbles, new auditing procedures, reprogramming every fundraising database, and extensive in-house retraining.

All this suggests that charities should concentrate on cutting down administrative costs. One way to do this would be for the Treasury to implement an accounts-based system that would measure how much money charities receive, then to pay out a percentage.

But the Government hasn’t looked keen on this – possibly because it wouldn’t really be tax relief at all, but rather a donation from the public purse. It would be hard to measure reliably how much money charities actually receive in donations, which could open the door to creative accounting or even outright fraud.

But I do think this idea could work if it was confined to smaller charities which aren’t claiming large sums in Gift Aid and which would benefit most from reduced administration.

They could be allowed to claim a flat rate percentage of their donations as Gift Aid. A similar system has already worked with other tax reliefs; VAT rebates for small businesses are handled in a similar way.

Such a system would be easier to negotiate if the flat rate was set at a level no higher than the current average reclamation rate – just over 8p in every pound donated. It would save a lot of time and effort.

Perhaps larger charities should concentrate on streamlining the current system, rather than venturing into an uncertain world of wholesale reform.

Read more on Gift Aid reform: here’s one reason why progress is slow…

Consolidating NHS charity accounts into those of trusts is a terrible idea

I have spent a lot of time recently listening to charity finance specialists talk about the concept of consolidating the accounts of NHS charities into those of NHS trusts, and they’re pretty much united in describing it as one of the worst ideas they’ve ever heard.

The first thing to say about this debate is that it looks at first glance to be an obscure point of accounting doctrine, but it actually sets a very worrying precedent that the sector must fight hard to avoid.

The second thing to say is that, as far as I can tell, consolidation seems to have only one possible positive benefit to anyone, and it’s got nothing to do with the intentions of those who dreamed it up.

The idea, due to come into force this year, is an unforeseen consequence of an obscure accounting regulation called IAS 27, which says that if a public body ‘controls’ another body, it should list all that body’s assets on its balance sheet.

It applies to NHS trusts because in most cases, they act as sole corporate trustees for their associated charities. And according to IAS 27, if you can appoint and dismiss the trustees of an organisation, you control it. Ipso facto, the assets of hospital charities belong to those hospitals, and ought to be on those balance sheets.

This sets a worrying precedent because it suggests public bodies could use charitable funds as a substitute for public funds.

In fact, it could make it appear as if approximately £2bn in charitable funding is actually Government money, and could offer plenty of scope for fiddling the books in the boardrooms of NHS hospitals.

Curiously, however, despite the fact that this rule appears to be rolling inevitably into existence, none of the parties involved seems to particularly want it: the NHS and the Treasury don’t seem to really care whether trusts consolidate or not, while the trusts themselves are almost as keenly opposed to it as the Charity Commission.

One obvious answer is for the NHS trusts to stop being sole trustees. In fact, trusts have already formed a queue asking for permission to change their governance arrangements.

The commission, however, is lukewarm on this solution, largely because, while it would solve an immediate difficulty, it wouldn’t resolve the real problem – that the Government believes charitable cash can be recorded on a public body’s balance sheet.

Notwithstanding the commission’s view, I think changes in sole trustee arrangements at NHS charities are the one real benefit to come out of this whole thing. I don’t trust NHS trust managers to act impartially as trustees of associated charities.

It’s a job that could easily require them to act against the best interests of their employers. And having a government servant running a charity could reduce public trust in it.

If a better governance structure for hospital charities is the unforeseen consequence of this unforeseen consequence, it can only be a good thing.

Read more on Consolidating NHS charity accounts into those of trusts is a terrible idea…

Sole trustee arrangements: a recipe for trouble

Public bodies that are sole trustees of charities have cropped up many times in Third Sector and on Thirdsector.co.uk in the past few months. Most recently, the Charity Commission and Department of Health have continued a year-long argument over NHS charities controlled by the hospitals and primary care trusts they are attached to.

Read more on Sole trustee arrangements: a recipe for trouble…