Posts Tagged: charity finance

Fundraising and finance: the oddly successful couple

A while ago, I interviewed a finance director who claimed
she could tell which department of a charity she was in, just by looking in the
fridge.

Go into the finance department in her organisation, she
said, and the fridge was full of sensible sandwiches: ham and cheese on plain
brown bread. The fundraising department fridge, on the other hand, contained
only tofu, humus and sushi. The PR department fridge was always empty apart
from a bottle of sparkling wine.

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Amalgamating dormant funds is sensible, even if it means Aberdeen’s aged virgins lose out

Last week, Aberdeen City Council announced plans to amalgamate 41 charitable funds, including one established in 1634 for the benefit of “aged virgins” and another set up in 1718 to aid “persons deprived of the use of reason” – a brilliant phrase indicating that political correctness was alive and well in the 18th century.

These funds, all of which hold less than £20,000, will be amalgamated into a fund worth around £130,000, which will be spent for the good of the people of Aberdeen.

It’s not a huge amount, but it’s a lot better than nothing, and there’s every reason to suggest that similar funds are out there, held in trust by every council in the UK. If Aberdeen is typical, there could be many thousands of charitable bequests like this that could be hoovered up to be used for the good of the people.

Decisions like Aberdeen’s are increasingly common in Scotland, but are unlikely to be replicated south of the border, because of a difference in charity accounting. Every charity in Scotland, no matter how small, has to submit accounts to OSCR, meaning that suddenly, councils have discovered a responsibility to submit accounts for scores of charitable trusts with negligible assets and wholly outdated objects, such as the preservation of horse troughs, the provision of fish on Fridays to the deserving poor, and the upkeep of elderly virgins.

In England, these charities are exempt from submitting accounts, and this money is likely to remain unused, and in the hands of councils who do not even know about it.

It has not just affected the smaller funds, either. In other cases, the OSCR says, it has reminded councils of their duty of trusteeship of much larger charities, and has allowed OSCR to suggest to them that a more effective model of governance would serve those funds better.

While it seems over the top to change charity accounting practices just to encourage good trusteeship on the part of councils, the effectiveness of this by-product of OSCR’s policy suggests it might be worth looking at how to encourage councils in England to put the resources they hold in trust to better use.

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HMRC doesn’t trust charities

It is difficult to believe that HM Revenue & Customs likes charities very much.

Looking at the sector through the eyes of the taxman, charities are walking liabilities, profiting from generous tax breaks, but poorly-regulated and badly in need of a firm hand.

The taxman has glimpsed in the current laws potential for charities to perpetrate vast and shadowy tax frauds, and as a result has lobbied for increasingly arbitrary powers to ensure that charities cannot acquire any benefit without running it past HMRC first. Even though there is no evidence that fraud is rife in the sector, HMRC appears worried that it could break out, at any second, like measles.

The lack of trust in charities, and in the Charity Commission as their regulator, was made evident four years ago with the introduction of substantial donor legislation, a laughably ill-considered and wholly unenforceable scheme requiring charities to ensure they did not make any payment to any family member or business partner of any major donor for a 17-year period.

It has been seen again in two new pieces of legislation. The first is the fit and proper person test, which gives HMRC carte blanche to refuse tax breaks to a charity if it feels any trustee or senior manager is unreliable. The second is a rule giving it the power to declare any expenditure abroad by any charity to be non-charitable, and therefore subject to tax, if it believes proper steps have not been taken.

All three pieces of legislation have several things in common: they are wide-ranging and could affect any charity; they require lots of work from the sector; and they lay the burden of proof squarely at the door of charities, who must show they did nothing wrong.

The taxman will defend all this as reasonable and necessary to prevent crime. HMRC says that it will use its new powers fairly, honestly and transparently, and that those powers will have no effect on the law-abiding.

The question, in the end, is whether we trust them.

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Can Gift Aid reform break out of this Sisyphean state?

When I was at school, an enthusiastic teacher decided to educate us in the Greek myths. One was the story of Sisyphus, who irritated Zeus, the king of the gods, and was condemned in return to push a rock up a hill for all eternity. Once the rock got to the top, it would always roll down the other side, and off he went again.

This piece of classical trivia has given rise to one of my favourite words, Sisyphean, describing a long and continuous labour with no obvious end in sight. It’s a word that could be used to describe Gift Aid reform, a process which has been going on in one form or another ever since this tax relief was first granted, and appears no closer to its conclusion.

The new government has said it will present a general plan for reform in September, and has pledged to “make an announcement about Gift Aid in the next Budget” – although it’s vague on what that announcement will be.

It’s doubtful that this will be an end to the process, but there may be some progress. However, none of the more radical proposals suggested last year – such as opt-out, accounts-based or higher rate relief for charities – look like they will be considered.

The sector seemed to be moving in favour of a composite rate – a single rate of Gift Aid for all donations below £10,000, with a corresponding loss of relief for higher-rate taxpayers but with an exemption for big donors who really care about their tax relief. It doesn’t look likely that this will happen, either. The Treasury is worried about its cost; HMRC is worried about the potential for fraud, and in any case both departments have bigger fish to fry.

What we’re likely to get is a promise to streamline the system, which may be a better deal for the sector as there are some real victories to be won here.

First and foremost is a promise to allow charities to file and store Gift Aid claims online. Second is a donor database, which would allow donors to confirm that they agree to Gift Aid on all donations they make to any charity in the future. Unsurprisingly, however, HMRC has shown little enthusiasm for keeping such a database.

There are other possibilities, too, but there is also one certainty: there is a still a long way to go.

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Small charities and staff pension schemes do not mix

Small charities and staff pension schemes do not seem to go well together. Too often, when combined, they lead to disaster, particularly for the trustees.

A good example of this is Hirwaun YMCA, a small charity which, many years ago, hired two people without realising it was opening itself up to a large future pensions deficit. When the last member of staff left, the charity’s liability crystallised and it was required to pay off its debt immediately.

Hirwaun said it couldn’t afford to pay, and as a result the chair of the trustees has been sued personally for the money.

Hirwaun is by no means the only unincorporated charity to face closure because of a large and unexpected pensions bill for which the trustees are personally liable. And it is not the only charity where the pension plan trustee is considering suing trustees to get its money back.

In a way, the chair of Hirwaun is lucky. He can sell his charity’s building, close the YMCA down, and pay the debts. Others may not have the luxury of valuable fixed assets to help them out.

The problem is potentially widespread. Small charities up and down the land have signed up to unsuitable pension plans which they will find difficult to get out of, and will leave them with enormous bills when the last employee leaves. Incredibly, small charities are still signing up today to highly risky defined benefit pension plans, while at the same time large corporations are desperately shutting theirs down.

Why do trustees get themselves in these situations? Often because they don’t know what they are signing up for. It takes a lot of work and plenty of technical knowledge to find out your potential worst-case pensions liability, and anyone without a background in finance stands little chance.

Volunteers should not have to take on such risks. But they do, often without realising. And there is little by way of a safety net to help them.

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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.

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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.

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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.

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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.

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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.

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