Give us a break, say hard-up charities

To quiet mutterings of ‘good riddance’ and ‘about time’ from certain quarters of his audience, Richard Fries last week gave a departing address as chief of the Charity Commission – an organisation which, despite good intentions, has been dogged by controversy.

The occasion of his farewell speech – the publication of the commission’s annual accounts – is always a distinguished affair. Dignitaries such as broadcaster Jon Snow, English ICA president Chris Swinson and members of the charity accounting fraternity assembled this year to wish Fries well. But the significance of his departure after seven years was not lost on this throng.

Charities have lost valuable tax breaks in recent years, and those who had pinned their hopes on the recent publication of the charity taxation review consultation document were disappointed, particularly by the absence of any compensation for the £400m irrecoverable VAT burden.

But the government places great importance on the charity sector because it provides services, such as elderly care, which Whitehall would have to fund if charities did not. Put simply, getting people to give money to charity saves taxes.

‘By getting charities to promote this idea, however, it’s the charities themselves that have to spend the money and incur more irrecoverable VAT,’ says Saffery Champness charities director Stephen Burgess.

The situation has sparked an outcry by major charities, including the Royal National Institutes for the Blind and Deaf, whose reaction to the government’s decision to cut disability benefits by £750 a year was to resign from the Disability Benefits Forum.

It is a time of growing frustration in the charity sector. Since the abolition of advance corporation tax, which is estimated to have cost charities about £400m a year, charity finance directors have become increasingly angry.

At the commission’s conference, there were even murmurings of charities relinquishing their charitable status because they felt it failed to offer them enough incentives. Some people hope, however, that fresh blood at the top of the commission will give fresh impetus to the sector’s efforts to get a better deal from the government.

Many hope that the new charity commissioner, John Stoker, former chief executive of lottery regulator Oflot, will be more dynamic and campaigning than Fries, known for his civil servant-like approach.

And, as revealed in Accountancy Age last week, there is a new hope in the sector that the government could be about to soften its hard-line stance on charity taxation and introduce some form of tax break which would help relieve the pressure on charities’ budgets.

The government cannot introduce new VAT reliefs without EU approval. But many FDs hope that a VAT refund scheme could be introduced. This was dismissed by the Treasury for reasons of ‘principle and cost’.

But it is not all bad news. The 1999 Budget introduced an extension of Millennium Gift Aid, abolished the ceiling on Payroll Giving Scheme donations, made a promise to simplify existing VAT reliefs, and committed the government to the harmonisation of tax treatments, particularly for fund-raising events.

Last week, the government gave its strongest hint yet that it is prepared to listen to new ideas providing there is a strong enough will and determination from the sector.

This development is coupled with a £50m pot believed to be earmarked for modernising the VAT regime for charities.

But, while zero-rating charity VAT has never been a viable option, charities can take heart in the possibility of a revamp of the system to enable greater consistency between direct and indirect taxes and trading concessions. This is good news for charities like the National Trust, which pays about £1m VAT a year because it cannot claim relief for work such as building footpaths.

The move would go some way to damping down feeling within the sector.

But, despite their anger, most charities are not prepared to relinquish their status.

As Oxfam FD David Nussbaum explains, there is too much at stake to drop charitable status completely.

‘Public perception is priceless. Being a charity gives an element of reassurance to the public that we are accountable … and it gives donors some reassurance that we are operating within a defined framework,’ he explains.

So, despite the rough financial ride charity FDs are experiencing at present, there are clear advantages to retaining charitable status which most of them would not relinquishwithout a fight.

As Barnados FD Ian Theodoreson says: ‘Although there has been a significant erosion of tax incentives, charitable status makes us a legitimate organisation and gives us some tax advantages.’