TFN spotlight on charity status: Is the charity brand tarnished?

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When even bankers are charities, is it time to rethink charity status?

There is widespread confusion about what types of organisations are charities. Is it time to look again at the charity test?

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28th August 2018 by Susan Smith 0 Comments

“Where there is charity and wisdom, there is neither fear nor ignorance,” said St Francis of Assisi in the 13th century. To be fair, this could almost be the motto of Scotland’s charity regulator today – with good governance modern charities have nothing to worry about.

Or do they? The truth is that being good at what you do isn’t always enough, most 21st century marketing gurus would tell you that brand is just as important. And as the line between public, private and third sector blends – the charity brand is what holds the third sector apart.

Susan Smith

Susan Smith

So, how healthy is the charity brand?

A recent survey of 148 TFN readers has found a surprisingly high level of confusion over what is and isn’t a charity, despite nearly four fifths of respondents saying they worked for a Scottish charity.

For example, while 77% of readers said they didn’t think private schools should be charities, only 52% were confident that Prince Charles’ old alma mater Gordonstoun is a charity (see box).

Readers were also confused about the status of colleges and universities, churches, and local authority arm-length external organisations (ALEOs).

If people who work for charities are confused, then where does this leave everyone else and what impact is this having on the charity brand?

Recent surveys from the Office of the Scottish Charity Regulator (OSCR) and the Scottish Council for Voluntary Organisations (SCVO) suggest that trust in charities is still pretty high. More than nine in 10 of us give to charity and 73% of Scots agree or strongly agree that charities are trustworthy and act in the public interest.

The following are all charities, but check what percentage of you didn’t realise that:
Arygll Lomond and The Islands Energy Agency59%
Chartered Institute of Bankers Scotland79%
RC Diocese of Dunkeld45%
Gordonstoun school48%
Jobs and Business Glasgow66%
University of Aberdeen51%

However, OSCR’s latest annual review figures also revealed a 45% increase in external complaints about charities in 2017/18 from 349 to 506.

It seems like the Scottish Government shares some people’s concerns about certain types of charity. Last year, the Barclay Review of non-domestic rates suggested the Scottish Government strip certain charities of their 80% business rates relief. Finance minister Derek Mackay later announced that private schools would lose this tax break, as would future ALEOs.

SCVO believes it’s time for a thorough review of the Scottish Charity Act 2005.

John Downie, director of public affairs at SCVO, said: “We need an open and genuine debate on what a charity is. Part of that is a strategic review of the 2005 Charity Act.

“The conversation needs to tackle difficult questions head on, addressing public unease around exclusive organisations like private schools, or public bodies that are directly answerable to national or local government, being classed as charities.

“The role of the charity regulator is key too – should OSCR focus purely on regulation or should it also support organisations and trustees to do the right thing on mission, leadership, behaviour and effectiveness?

“But the most critical part of the debate is to revisit the charity test. To do otherwise would be a missed opportunity.”

The Scottish Charity Act 2005 was the first ever Scottish legislation to clarify what is a charity, creating the charity test to decide. It also introduced a public body, OSCR, to regulate that.

The charity test includes 15 charitable purposes, and in order to be a charity, organisations must demonstrate that at least one of these is their only purpose.

An organisation must also demonstrate it provides public benefit, so doesn’t restrict access to its services.

The other major characteristic that defines charities is their independence from state. A charity is not supposed to be directed by ministers. However, the act retains a loophole to allow government to choose to exempt certain organisations from this requirement. Forty five Scottish charities are currently exempt from this requirement – including all of Scotland’s further education colleges.

Since 2005, when the Scottish Charity Act was introduced, the income of the Scottish charity sector has more than doubled from an annual turnover of £2.9 billion in 2005 to £5.9bn in 2017.

The makeup of the sector has also changed a lot. Charities are now delivering £1.2bn worth of public services compared to £200 million in 2004. There are now 65 Scottish charitable ALEOs that have been set up by local authorities directly to deliver public services.

The dramatic growth in social enterprises – 73% of Scotland’s 5,600 social enterprises were registered charities in 2017 – has also brought the charity sector closer to the private sector.

Should these types of organisations be charities?YesNoNot sure
Universities315514
Colleges345412
Private schools14779
Local authority run leisure and cultural trusts305812
NHS health board endowment funds464014
Other council services78211
Churches/places of worship523810
Faith-based groups providing services74188

So, is the charity test still fit for purpose in 2018? Does it do enough to establish the difference between a charity, the state, and the private sector?

OSCR chief executive David Robb believes it is time for a review of the 2005 act but stops short of suggesting a review of the actual charity test.

He told TFN: “It’s 17 years since the McFadden Commission proposed setting up a Scottish charity regulator and more than 12 years since the passage of the 2005 Act, which has had only minor changes since then.

“We are aware of a number of areas where the Scottish legislation now lags behind recent improvements made in other parts of the UK, or where loop-holes exist, and as a consequence the Scottish public are less well served and protected by charity law.  We have flagged these up to the Scottish Government and hope there will be an early opportunity to address the priority issues.

“Our suggestions would not however adjust the charity test itself – if that is to be re-visited we think a proper strategic review would be needed.”

A Scottish Government strategic review of the charity test would no doubt focus on the key areas of controversy: private schools, ALEOs, universities and colleges and faith groups. 

However, a Scottish Government spokesperson told TFN: “The Office of the Scottish Charity Regulator has submitted proposals for updating the legislation regarding charities, and the Scottish Government is currently considering these proposals.

“We have no current plans to amend the charity test at this time.”

How to test a Scottish charity
· A charity should have only charitable purposes (a list of 15 charitable purposes is included in the 2005 Act).
· It should provide or intend to provide public benefit.
· A charity’s governing document cannot allow it to distribute its property for non-charitable purposes or allow government ministers to direct or control its activities, and it cannot be a political party.

Should private schools be charities? What do you think?

TFN spotlight on charity status: Is the charity brand tarnished?
SchoolsInfographic
SchoolsInfographic

Scotland’s private schools are easily the most controversial category of Scottish charity. With a collective turnover of £403.4 million in 2015, many people, don’t think they should be charities. It looks like the Scottish Government sort of agrees too as the cabinet secretary for finance, Derek Mackay, announced in the last budget that it would be stripping private schools of £5m of business rates relief.

The schools argue this decision undermines their charitable status and will lead to an increase in fees or a decrease in bursaries.

John Edward, director of the Scottish Council for Independent Schools, said: “In 2005, a charity regulator was set up to determine which bodies that held charitable status should continue to operate as such. Their conclusion was that independent schools in Scotland were to remain as charitable businesses.

“Since then, means tested bursaries provided by independent schools in Scotland have tripled and the sharing of facilities and resources with the local community have been consistent.

“The charity regulator confirmed with the government that the independent sector deserved charitable status, but now the Barclay Review is saying independent schools must be treated differently to the country’s 24,000 other charities. If the review in 2005 determined that charitable status should be awarded to our independent schools, then why should this change now?”

Decreasing bursaries would be a dangerous move for private schools as this is one of the elements of their work OSCR considers a public benefit and qualifies them for charitable status. With the financial benefits of charitable status far exceeding the £5m business rates bill, schools will not want to rock the boat further.

OSCR carried out a complete review of the charitable status of 52 private schools in Scotland between 2009 and 2014. Ten schools failed the charity test because the regulator determined they didn’t provide enough public benefit. They then took corrective action, including expanding their bursary programmes, and later passed.

According to SCIS, 24% of all private school pupils receive some sort of financial help, with 3% of senior school pupils receiving 100% fee assistance. This amounts to a contribution of £47m a year.

Is this enough to justify charity status?

Charity tax breaks
Charities don’t pay tax on their income as long as it is used for charitable purposes.
This includes tax on:
· Donations
· Profits from trading
· Rental or investment income, eg bank interest
· Profits when selling or disposing of an asset, like property or shares
· Buying property
Charities do pay tax on:
· Dividends received from UK companies before April 2016
· Profits from developing land or property
· Purchases – but charities don’t pay VAT on some goods as services
· Business rates on non-domestic buildings – but charities get an 80% discount

Should ALEOs be charities?

TFN spotlight on charity status: Is the charity brand tarnished?

Another area of confusion is the once local authority run service that has been transferred to an apparently independent charity. The arms-length external organisation, or ALEO, is not a legal entity in itself and is at times a charity, a Community Interest Company, a limited company, a limited liability partnership or a trust.

ALEOSinfographic
ALEOSinfographic

There’s a fair amount of scepticism within the charity sector over whether or not ALEOs should be charities, as TFN’s survey responses suggest. A number of readers, however, objected to the use of the phrase “local authority run leisure and cultural trusts” in the survey, highlighting that trusts are independent of local authorities.

But are they? Strictly speaking, they must be in order to qualify as charities. The 2005 Charities Act highlights that charity trustees must put the interest of the charity first.

However, a report from the Accounts Commission in May this year highlighted the good work that ALEOs are doing providing best value for local authorities.  The commission said it will continue “to examine councils’ use of ALEOs in our audit work in councils” – a clear indication that Scotland’s financial watchdog considers them part of the public sector.

OSCR has a slightly different take, it has come down hard on ALEOS that it considers to be too close to councils. Shetland Charitable Trust, for example, was forced to change its governing documents to reduce the number of trustees connected to Shetland Islands Council from seven of 15 to just four.

And an OSCR review of ALEOs carried out in 2015 concluded they do provide public benefit and did meet the charity test.

The status of these hybrid bodies, however, have been thrown into further confusion by the decision of Glasgow City Council to take several back in house earlier this year. The council was a firm backer of the ALEO, at one point distributing nearly 25% of its budget through them. However in April it announced that Cordia, its social care body, and Community Safety Glasgow, a registered charity, would become parts of the council again. 

If councils are able to simply take over ALEOs again, can they really be considered independent?

This year’s Accounts Commission report also suggested a key motivator for councils to set up ALEOs as charities was business rates relief. The 2017 Barclay Review of Business Rates went so far as to call this “tax avoidance” and recommended that, like private schools, ALEOs have the rebate removed.

Intense lobbying from Sporta, the national association of leisure and cultural trusts, persuaded the government not to go ahead with this for existing bodies. It argued that the £45m bill sport and leisure trusts would face would lead to the closure of swimming pools, museums and other facilities.

However, Aberdeenshire, which had spent two years preparing to move its sport and leisure services to an ALEO, has now cancelled the plans.

Ian Murray, the chair of Sporta Scotland, told TFN: “There is a common misconception that because leisure and cultural trusts were formed, in the main, by local authorities that they are not genuine charities. In fact, our members are strong charitable organisations, even if we don’t all make a song and dance about it, who work hard on governance, ensuring we are fit for purpose and pass the OSCR charities test.

“OSCR carried out an in-depth review into many of our members recently and stated that all were genuine charities, but we keep working with them to improve every way we can.”

ALEOs explained
• There are 65 charitable arms-length external organisations in Scotland, half of all ALEOs. 26 charitable ALEOs are sport and leisure and/or cultural trusts
• Other ALEOs include urban regeneration bodies, housing support services, employment services and community safety.
• OSCR states: “Charitable trustees should put the interests of their charity before their own interests, or those of any other person or organisation. They must actively work towards the achievement of the charity’s purposes. This is set out in Section 66 of the 2005 Charities Act.”

Should universities and colleges be charities?

TFN spotlight on charity status: Is the charity brand tarnished?

Just like private schools, universities and colleges are classed as charities because they are not for profit and are set up to provide education, one of the 15 charitable purposes mentioned in the Scottish Charities Act.

Uni&CollegeInfographic
Uni&CollegeInfographic

However, they are controversial because of the sheer size and complexities of some of their operations, the level of public funding and the extent to which Scottish ministers are involved in their operation.

The question of the charitable status of universities in Scotland came up in the Scottish Parliament during the debate around the 2016 Higher Education Governance (Scotland) Act. The act aims to ensure that universities, which received over a billion pounds in public funding every year, are more democratic and linked to the communities they serve.

The wider question about whether and why universities are charities was discussed with widespread support from Holyrood to protect the charitable status of universities.

University incomes generally consist of a combination of tuition fees and educational contracts, government funding, research grants and other income such as donations. Charitable status allows universities to claim Gift Aid on public donations.

A recommendation within the Barlcay Review of Business Rates that Universities pay full business rates on properties used for commercial purposes outside of the academic year – for example, Edinburgh University buildings used as Edinburgh Festival Fringe venues – was not carried forward by Scottish ministers.

Alastair Sim, director of Universities Scotland, said: “Scotland’s universities exist for the advancement of education and knowledge through their teaching and research. They also make very strong contributions to the advancement of so many other charitable purposes including the advancement of health, the arts and environmental protection.

“Charitable status allows universities to work with governments, industry and other third sector organisations but to be independent from them. This is vital to the quality and integrity of what universities deliver; education and research without influence which is a hallmark of any free society.”

Despite their size, universities may have a stronger case for charitable status than Scotland’s colleges, which ultimately come under the responsibility of the Scottish Government and aren’t independent.

Under the Charities Act, Scottish ministers can disapply the charitable condition of independence from government. Scottish colleges make up the majority of the Scottish charities in this category.

This means the chairs of college boards are appointed by ministers like any other public appointment and the majority of funding for colleges comes from the state.

There’s no doubt that colleges, which provide vocational training courses as well as more academic courses, provide an important public benefit, but should they really be charities?

Shona Struthers, chief executive of Colleges Scotland, believes so.

She said: “The college sector in Scotland plays an important role in widening access to education and embraces diversity with a growing proportion of students from ethnic minorities, with care backgrounds, disabilities, and from deprived areas.

“At a time of tight public finances in the UK, charitable status is important for colleges as it allows them to invest more in students’ experiences and in providing a skilled workforce, so it was encouraging and entirely appropriate that last year’s Barclay Review did not propose any changes to the business rates relief for colleges.”

Should places of worship be charities?

Of the 15 charitable purposes outlined in the charities act, the advancement of religion is the one that is most criticised.

ChurchInfographic
ChurchInfographic

In a modern secular society is there really a place within the charity sector for organisations with the sole purpose of advancing religion?

There are 4,740 charities registered in Scotland with advancement of religion as their purpose. They are not all Christian churches but include Muslims, Buddhist, Hindus and Sikhs amongst others.

Richard Frazer, convener of the Church and Society Council of the Church of Scotland, told TFN why he believes churches should be classed as charities: “There are congregations providing breakfast and after school clubs for children, opening their doors as night shelters and offering other forms of support to vulnerable groups.

“The list is remarkable and very long of congregations, even though they might be small and struggling financially, doing profoundly useful work.

“It is hard to imagine what our communities would look like if it weren’t for the work that goes on organised by the churches.”

However, not all religious organisations provide community services; a total of 2,558 charities have the advancement of religion as their only purpose. Is this right? Thirty-eight per cent of TFN readers don’t think so but, interestingly, 52% do.

The promotion of religious or racial harmony is another recognised charitable purpose under the Scottish Charities Act, and one people seem to be more comfortable with. In fact, 74% of TFN survey respondents were happy with the charitable status of faith-based groups providing services beyond worship.

Perhaps this has to be part of a much wider debate about the role of religion in society.