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Charities could face tax bills that cancel out their relief

How much tax does the charity sector pay? It’s not meant to pay any, in theory. But in practice it pays a lot, it turns out, according to a very informal survey I carried out last week.

Having spoken to a few charities’ finance directors, it appears many operational charities pay around a tenth of their total income in tax – and this could increase considerably if post-election tax rises come in the form of VAT and national insurance.

We haven’t seen it in this Budget, but it’s likely to come in any post-election announcements. In a worst-case scenario, of every pound given to an operational charity, 12 or 13 pence could end up in the pocket of the Government.

In total, it’s possible the sector will end up paying more than £1 billion in VAT – and it could well be facing a similar bill for national insurance. Add on business rates, water rates, and other taxes that the Government hasn’t exempted the sector from and the bill starts to look pretty high.

In comparison, according to HMRC, the sector received £951m last year in Gift Aid, and around £2.3 billion in tax relief overall. Or to put it another way, the tax the sector doesn’t pay looks pretty similar to the tax it might have to.

So what should the sector do about it? Move all its money offshore? Hire a dodgy accountant to cook the books?

One answer – suggested by one of this site’s bloggers, Charles Nall, corporate services director at the Children’s Society – is to focus not on Gift Aid reform, where there is potentially little money to be had, but on tax reform.

Less fashionable, more difficult and less easy to understand – but the rewards are potentially much greater.

Charities’ public image on runners’ online forums is extremely low

A contributor to an online running forum I frequent recently told the tale of someone who’d secured a place in the London Marathon through a gold bond owned by a well-known charity, then pulled out because of injury. But she was being chased by the charity for the full amount she’d agreed to raise.

The thread eventually ran to nearly 300 posts, and threw up a range of issues we’ve all seen before, including pay rates for charity chief executives and the amount charities spend on administration. If we didn’t know it already, these are topics that stir up public passions – and not always in a positive way for the sector.

According to the contributor, the charity later relented and deferred the injured runner’s place: a sensible move that might well have kept the supporter onside.

As with any message board, some extreme opinions were voiced. One poster attacked the fundraising ‘feeding frenzy’ of the London Marathon, claiming charities had taken over an event founded only to improve the quality of British distance running (not entirely true: one founding principle was to raise money for sporting and recreational facilities in London; another emphasised the ‘fun’ element of the event).

It was even suggested that by becoming so charity-focused, the London Marathon was actually driving down standards of British marathon running – a debatable point at best, but sadly not the point of this blog post (unless anyone out there has an opinion).

It was predictable and hardly surprising that a large number of contributors said they would shun the charity involved in future and tell others to do the same, even after it had apparently changed its mind. More disturbing were those who said such indefensible actions as this were why they never ran for charity and rolled out their own stories of perfidious fundraisers attempting to extract money from them in all sorts of ways short of actual mugging. In some quarters it’s clear that the public image of the sector is extremely low.

Of course, some people spend their whole lives being outraged, and naturally I’m in danger of over-emphasising the importance of one tiny corner of the internet, a medium in which the most extreme voices – or, perhaps more correctly, the most negative voices – tend to shout loudest.

We must also spare a thought for the hard-pressed fundraiser. Third Sector‘s top story today shows that organisations with gold bonds have a small but potentially serious problem: runners signing up with no intention of raising any money – or, at least, of not breaking their backs to get even the minimum they signed up for. With so many tens of thousands turned away each year, and more then three-quarters of marathon places reserved for charity runners, it’s not outside the bounds of comprehension that some will see this as a way in to be exploited like any other. And if it IS happening, then charities are surely within their rights to find ways to protect themselves, including blacklists for the most persisent or outrageous offenders.

But it’s vital that charities are perceived to be doing this in the right way. Pursuing someone for money they don’t have over an event they’re not going to do through no fault of their own is an extreme example of how not to do it. But even the most minor of pushing, with the law and the relevant codes of practice on your side, can bring unexpected and unwanted consequences, and in the long run alienate the constituency charities are trying to court.

As we’ve seen with legacies, keeping public opinion on yor side is a precarious balancing act. Being involved in the world’s biggest one-off fundraising event can do wonders for a charity, in terms of both cash and awareness; it stands to reason that getting it wrong can have immense repercussions.

Digitial media: put someone senior in charge

News online doesn’t just travel fast – it’s live. Twitter and other social media mean stories are published and read as they happen, which presents charities with a problem if they want to react quickly to events.

When news of the earthquake in Haiti broke on January 12, the American Red Cross didn’t hang around; it launched an email fundraising campaign three hours after the first story was published online, according to Thomas Gensemer, managing partner of digital media agency Blue State Digital, the company credited with the success of Barack Obama’s online election campaign.

I met him and his colleague, Matthew McGregor, the agency’s London director, last week and they explained why such organisational nimbleness is, for charities, in their words, “absolutely crucial to fundraising success”. Charities, they say, need plans in place to cut through hierarchies of sign-offs and approvals.

So what would a digital media-ready organisational structure look like?

McGregor describes digital media as “a thread that should run through the whole organsiation.” Gensemer suggests a senior member of staff coordinate digital media across all departments, including fundraising, press and so on. That way, he says, it’s taken seriously.

“It’s likely to be where we’ll be in a couple of years time,” he says.

Will senior charity executives take digital media seriously enough to take the tip now?

Six-hour Tory love-in at the Acevo summit

How many ways can you say I love you? That was the dilemma facing members of the shadow Cabinet when they turned out in force yesterday to cosy up to a hundred or so charity delegates at the Conservative Party third sector summit.

Chief executives body Acevo is staging summits with the three main political parties to find out their plans for charities.

This one was held in Millbank, where Labour masterminded its 1997 election victory. Millbank is now the Conservative HQ and, as Acevo chief executive Stephen Bubb pointed out in his welcome speech, home of our dear Charity Commission. This caused some titters.

Shadow chancellor George Osborne got things going by talking about charities running more services. Shadow Cabinet Office minister Francis Maude then criticised Labour’s ‘initiative-itis’, but with a general election probably just seven weeks away delegates could have really done with a few more details.

In the absence of any new policies or initiatives and with six hours to fill, the speakers resorted to ways of saying how inspiring, professional, passionate, innovative and expert charities were.

The last time the Tories were in power, Dolly the Sheep was being cloned and the closest many Conservatives got to the voluntary sector was opening the annual village fete. Who would have thought then that 13 years later the party’s entire top team, bar its leader, would fill a lecture room overlooking the River Thames with humble charity folk?

The Tories have certainly come a long way, but time hung heavy. Engaging is all very well, but at this stage of the electoral cycle something more conclusive is required.

MP ‘sees nothing but a fudge’ on phasing out of cheques

If charities thought cheques being phased out by 2018 was a foregone conclusion, they might have to think again.

The Payments Council proposed the move last year and has been consulting charities and sector umbrella bodies, as well as small businesses and other groups. Many, including Citizen’s Advice and the Institute of Fundraising, had come round to the idea that the end of cheques was inevitable and it was better to help the Payments Council manage the process than to campaign against it.

But the MPs on the Treasury select committee, which met at Portcullis House, Westminster, on Tuesday, were less easily swayed by the idea.

“I want to keep cheques,” John McFall, Labour and Co-operative Party MP and chair of the committee, told Paul Smee, the Payments Council’s chief executive, as he pulled a chequebook out of his pocket with a flourish.

“It’s beyond belief that the use of cheques is in terminal decline,” he said, pointing out that they accounted for transactions worth £1.4 trillion in 2008.

Andrew Tyrie, Conservative MP for Chichester, put Smee even more firmly non the spot. “Your members benefit from the decline of cheques,” he said. “What gives you the right to decide this?” Tyrie criticised Smee for being unable to provide an estimated figure for the how much the move would cost consumers.

Smee said the decision had been taken in a transparent way and in consultation with those affected by the phasing out of cheques. He said there would be a review in 2016, by which time the alternatives would have to be “available, accessible and already being used” in order for cheques to be phased out.

But that wasn’t enough to satisfy the MPs. “I can’t see anything other than a fudge here,” said McFall. Sir Peter Viggers, the Conservative MP for Gosport, summarised his view to laughs from the panel. “You and I are in terminal decline,” he said. “But we wouldn’t welcome the setting of an end date to close us down!”

So, should charities stop worrying about how they’ll live without cheques? The committee has no powers to prevent the move, but it has asked Smee to produce an independently verified cost-benefit analysis and then return to answer more questions. Smee was also warned that Parliament could, if necessary, intervene on the issue.

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.

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.

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.

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.

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.

Fire and brimstone missing at Unite’s mass meeting for charity workers

The mass meeting last night of charity sector workers organised by Unite showcased a side of the Labour Party rarely seen these days.

Labour MPs initially outnumbered charity workers in committee room 11 of the Palace of Westminster, as delegates battled with hordes of tourists and schoolchildren to get through security. The MPs declared themselves only too anxious to be lobbied on the woes of being a charity worker in the era of competitive tendering, while charities minister, former charity worker and Unite member Angela Smith oozed sympathy and concurred with Unite’s assessment that management in the sector needed to pull its socks up and become “more union-friendly”.

Perhaps this friendly, genteel environment accounted for the lack of fire and brimstone from the floor. One delegate from Edinburgh did his best to get the pulse racing by announcing he was “fed up” with cuts in sick pay and pensions, and of being treated as part of a “second-class workforce” by councils.

Another delegate said he was “quite emotional” about his charity’s announcement that unless its workers work four extra hours a week without increased pay the organisation could go under. “A gun is being held to our heads,” he said.   

The Government was also accused of being a “disgrace” for pitting legal charities in direct competition with one another “based on price and nothing else”. But such barbs were spread relatively thinly among reasoned and, in some cases, pre-prepared analyses of contracting culture.

It is also worth noting that while the meeting was addressed by Ben Kernighan of the NCVO and Neil Cleeveley of Navca, Acevo representatives were conspicuous by their absence. Doubtless this is because the chief executives body got itself into quite a squabble with Unite late last year, when Peter Kyle, deputy chief executive of Acevo, accused the union of having a vendetta against the sector.

By a neat coincidence, Kyle was hobnobbing with Gordon Brown at the opening of the new offices of the trade union Community at the same time the Unite meeting was progressing. In his blog, Stephen Bubb, chief executive of Acevo, said: “It’s good to be able to work with the unions, as opposed to having to defend our members from disgraceful attacks on them by unions like Unite”.

So much for civil society solidarity, comrades. 

The mauling of Dame Suzi Leather

Dame Suzi Leather’s membership of the Labour Party has never been a disqualification for her to be chair of the Charity Commission. But it has created an opening for the piranhas of the Daily Mail and other right wing organs to sink their teeth into her. They have attacked her on a political level, suggesting that she has been put there by the Government to destroy public schools, and on a personal level, for her background and the kind of person she is. Quentin Letts of the Mail, for example, included her in his list of ‘fifty people who wrecked Britain.’ The political attacks were so wide of the mark as to be laughable, while Letts was nastily entertaining in his socially regressive public schoolboy style.

You’d be unwise to go into public life if you didn’t have a thick skin. Dame Suzi has always given the impression that hers is as thick as that of the next public-facing public servant. But one always suspects that, when the pressure is on, there is pain beneath the impervious-seeming carapace of public figures – if you prick us, do we not bleed? In her interview this week with Common Purpose, Dame Suzi all but admits that last year was painful for her. In one sense, this makes her more human, and people will warm to her for that. In another sense, it puts her in more danger: once there is blood in the water, the piranhas might return to the attack.

Dame Suzi has led the commission calmly and sensibly through a controversial and turbulent period and was re-appointed last year for a second three-year term. If the Tories form the next government, it will be interesting to see how they get on with her. If the next appointment comes under their watch, no doubt they will appoint someone they consider sympathetic to their approach – perhaps even a Conservative Party member. Would the Daily Mail give that person a similar kicking to that administered  to Dame Suzi? Silly question. And the anti-Tory piranas are a lesser species altogether.

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.

Smith, Hurd and Willott were given an easy ride at the volunteering hustings

At university we had hustings to help students decide which of their peers they should elect to represent them on their college’s governing body.
They were heated events. We crammed a hundred or so people into a small room, gave the candidates a good grilling and scrutinised every word they said, throwing back difficult questions at every opportunity.
Before I went to the volunteering hustings on Tuesday night – the event hosted by Volunteering England at which third sector minister Angela Smith, shadow charities minister Nick Hurd and Lib Dem charities spokeswoman Jenny Willott pitched their thoughts on volunteering to those in the sector – I had wondered how it would compare.
It was different, to say the least.
Any hopes of policy announcements (entirely reasonable in the build-up to a general election) were unfulfilled. Hurd pledged to “create an environment in which more seems possible for people” and reiterated his ambition to cut through a “thicket of regulation” around volunteering. He hinted at a national citizenship service for young people, but when I spoke to him afterwards he refused to comment further on what this might involve, or how it might differ from volunteering charity v.
Willott’s proposals – for Gift Aid reform (she didn’t specify in what way), “thinking imaginatively about capacity building” and creating a “culture of volunteering” – did little to distinguish her party from either Labour or the Tories.
And Smith’s speech was equally low on policy announcements, with the exception of a commitment to hosting a round table with businesses to discuss employee volunteering.
I thought things might heat up when it came to questions from the floor. But the MPs managed to dodge a difficult question about funding for volunteer centres and said they’d be in trouble with their Treasury teams if they made any firm commitments.
The only moment of friction was over the role of v. Hurd asked the audience whether they thought the Government’s £150m spending on the organisation was justified, and Smith accused him of “wriggling” when audience members said they thought it was.
But the MPs were let off too easily. Nobody expected financial commitments, but some sense of the criteria the different parties would apply when deciding where the axe would fall in future third sector budgets would have been welcomed.
We wouldn’t have given them such an easy ride in our student common room.