Response by the Chartered Institute of Taxation to the Cabinet Office Strategy Unit’s report dated September 2002, sent to the Strategy Unit on 20 December 2002.
Introduction The Strategy Unit’s report proposes a radical reform of charities and the wider not-for-profit sector. The Chartered Institute of Taxation welcomes the opportunity to comment on the report. Our comments, which are confined to charities, are set out below.
Redefinition of charities
We welcome the proposed redefinition of charities based on the principle of public benefit by reference to ten specific descriptions. We note that the ten descriptions have been drafted in a manner intended both to reflect the current state of the case law (so that existing charities will not be excluded) and to remove identified anomalies (so that the range of charitable purposes is effectively extended). We also note that the effect of the current case law in relation to charitable purposes is to be retained. While we express no opinion whether the ten descriptions accurately express the current state of the case law, we support the underlying concept.
We support retention of the concept of “public benefit”. We have some sympathy with the view that it should be developed by case law rather than by statutory definition. However, we have some reservations whether the current state of the case law provides a firm basis for developing principles in tune with modern conditions.
The case law indicates that public benefit comprises two elements: there must be a “benefit”, which is a “public” one as opposed to a private one. We consider that the new legislation should make it clear that a two-stage test must be met. This appears to be of particular importance given that the “public” nature of charities is to be tested on an ongoing basis.
The case law suggests that the “public” character of a benefit is less easy to determine than the existence of a “benefit”. In particular, the test of public character is not free from ambiguity and does not apply in a uniform manner to all classes of charity (see Oppenheim v Tobacco Securities Trust Co Ltd [1951] 1 All ER 31, HL and Dingle v Turner [1972] 1 All ER 878, HL). We consider that some broad statement of principle is desirable if the case law is to develop in a manner that meets modern conditions.
Trading activities of charities
Allowing charities to trade (subject to a duty of care) without the need for a trading company is something that will be widely welcomed. However, it gives rise to four issues which deserve more detailed consideration:
- Public confidence in charities might be undermined if it became apparent that donations were being used to finance large-scale trading activities unconnected with the main purpose of the charity rather than being directly used to carry out the main purpose. We consider that any public unease would be lessened by a requirement for charitable and non-charitable funds to be kept entirely separate and for the nature and extent of trading activities to be disclosed in the annual report.
- There is a line to be drawn between (a) a charity that trades in order to raise funds to apply for charitable purposes, and (b) a non-profit-distributing organisation carrying on a business that applies some of its profits for charitable purposes. This suggests a need for the surveillance of trading activities to prevent the trading tail wagging the charitable dog.
- The practical benefit of trading companies is that they provide both a means of protection against insolvency and the means by which charities avoid the restrictive tax rules in TA 1988 s505(1)(e) in order to escape tax on their trading profits. There is clearly a need for new tax rules that confer relief irrespective of the legal structure adopted.
- There is a need to secure a fair balance between the trading activities of charities and similar activities carried on by commercial enterprises. Some charities have no need to make a profit from carrying out their primary purpose (eg the provision of carers) while others have a competitive advantage in carrying out commercial activities for fund-raising purposes by virtue of their dependence on voluntary helpers and (in practice) freedom from taxation (eg charity shops). We are not aware of any widespread concern, but feel that this is something that needs to be borne in mind.
Charitable Incorporated Organisation
We welcome the proposed introduction of the “Charitable Incorporated Organisation” (CIO). We see three advantages:
- The CIO will be tailored to meet the needs of charities.
- The CIO will avoid dual regulation. At present, charitable companies limited by guarantee are regulated by both the Charity Commission and the Registrar of Companies.
- The CIO will reduce the number of charities regulated by someone other than the Charity Commission. At present, charitable industrial and provident societies are treated as exempt charities under Charities Act 1993 Sch 2 para (y).
We note that, in due course, the government intends to review whether alternative forms of incorporation should continue to be available to charities. One option is to allow existing charities to continue under their current constitutional arrangements and make CIOs the sole means of incorporation for new charities.
As CIOs are clearly intended to be the preferred route to incorporation, we consider that there should be a simple mechanism whereby incorporated charities can be converted into CIOs. We feel that charities should be extensively consulted before any element of compulsion is considered. We, for example, would be very reluctant to lose our status as a Royal Charter Company together with use of the professional designation Chartered Tax Adviser for our members.
Charities appeals tribunal
We welcome the introduction of a charities appeals tribunal to hear appeals against legal decisions of the Charity Commission in its capacity as registrar and regulator.
Register of charities
It is necessary to determine whether or not a body is a charity for a number of reasons:
- Charities are entitled to exemption from taxation on certain income, profits and gains. The Inland Revenue clearly need to know whether or not a body is a charity and thus entitled to relief.
- Certain charities are entitled to supply certain goods and services without charging VAT. HM Customs and Excise clearly need to know whether a body is a charity and thus entitled to do so.
- Certain charities are entitled to purchase certain goods and services without payment of VAT. Businesses supplying goods or services clearly need to know whether their customer is a charity in order to determine whether or not VAT is chargeable on their supply.
- Charities have an obligation to provide a copy of their accounts to anyone who requests them. A body needs to know whether or not it is affected by this obligation.
- Members of the public should have a ready means of checking whether a body holding itself out as a charity actually is one.
- The Charity Commission needs to know whether or not a body is a charity before it can act, eg to exercise its powers of investigation.
These factors suggest a need for a single register of all bodies entitled to hold themselves out as charities. The report, however, recommends that three classes of charities should be excluded from registration:
- Exempt charities (ie the bodies currently listed in Charities Act 1993 Sch 2) subject to supervision by an external regulator;
- Excepted charities (ie the bodies currently specified by statutory instrument under Charities Act 1993 s3(5)(b)) whose annual income falls below a specified sum (£50,000 is proposed);
- Small charities, ie charities being neither exempt nor excepted charities whose annual income falls below a specified sum (£10,000 is proposed).
In Scotland and Northern Ireland, the Inland Revenue determine charitable status in all cases. Excluding small charities from the requirement to register with the Charity Commission represents a partial move towards this system. This has a number of consequences:
- Two different bodies will determine charitable status: the Charity Commission and the Inland Revenue.
- Charities approved by the Inland Revenue will prove their charitable status by producing the relevant correspondence. This is what happens in Scotland and Northern Ireland.
- Charities approved by the Inland Revenue will not be identified on any public list unless the Inland Revenue are required to publish a list (as currently happens in Scotland) or a list is compiled by a voluntary body (as currently happens in Northern Ireland) or local authority (under the powers conferred by Charities Act 1993 s 76).
Some small charities may have no contact with the Inland Revenue, eg because they have no taxable income. We feel uncomfortable with the notion that a body can hold itself out as a charity on the basis of its own assessment of its charitable status.
We draw three conclusions from the foregoing discussion:
- Any body wishing to hold itself out as a charity should have its charitable status determined by a third party. We see no point in dividing this responsibility between the Charity Commission and the Inland Revenue.
- We take the view that all charities should be included on a central index to which the public have access. We see no advantage in the Charity Commission, the Inland Revenue and local authorities maintaining separate public indices.
- We agree that the public should not be misled regarding the supervision of charities. However, we disagree with the proposed solution, ie registering those charities that will be supervised by the Charity Commission and leaving the Inland Revenue to approve the remainder. We would prefer to see a central index with individual entries indicating whether the charity is supervised by the Charity Commission, supervised by an identified external regulator, or exempted from supervision.
Taxation The report did not consider how charities are taxed or relieved from tax. Ultimately, this is a matter for the Chancellor. However, the recommendations made in the report clearly affect taxation. In particular:
- The identification of an organisation as a charity;
- The taxation of profits from a trade carried on by a charity;
- The need for businesses to satisfy themselves regarding the charitable status of their customers for VAT purposes.
We are currently exploring the wider taxation issues arising from the report and will be making representations to the revenue departments in due course.
Conclusion
We welcome the main thrust of the recommendations set out in the report. In general, we feel that they make sensible changes to meet the needs of modern conditions, simplify the manner in which charities are identified and remove anomalies whilst at the same time preserving the intellectual merits of a system developed over five centuries.
The Chartered Institute of Taxation
20 December 2002
Technical Department
020 7235 9381
