Memorandum from the Charity Finance Directors'
Group
The Charity Finance Directors' Group welcomes
the Public Administration Select Committee's inquiry into the
role of the voluntary and community sector in public service delivery
and has developed the enclosed submission as part of the consultation
process.
The Charity Finance Directors' Group (CFDG)
was set up in 1987 and is an umbrella charity that specialises
in helping charities to manage their finance-related functions.
Visit www.cfdg.org.uk
for further information. CFDG's almost 1,300 plus members are
responsible for the finances of charities with a wide variety
of income levels. Between them our members manage some £11.3
billion in charity income per year. CFDG is working to promote
public confidence and good management within charities.
EXECUTIVE SUMMARY
In consultation with our members we have identified
the following barriers to a proper relationship between government
as a commissioner of services and the voluntary sector as a service
provider.
Funding
There is a need for real change in the funding
relationship between government and the voluntary sector particularly
at local government level. CFDG would like to see contracts between
government and the voluntary sector that incorporate full cost
recovery rather than imposed pricing budgets and which are more
appropriate in length to the service being provided. In addition,
there needs to be more adequate risk sharing in contracts between
the government and voluntary sector. We look forward to the incoming
independent Compact Commissioner implementing these principles
in the Compact Plus and undertaking work to ensure that all statutory
bodies adhere to them. We would hope to see the Compact Commissioner
given real power to provide charities with a line of recourse
where necessary. Much of the problem with the funding relationship
between the voluntary sector and government lies in central government
putting in place policies supportive of a balanced relationship
which aren't being understood and implemented at a local level
where much of the funding and contract awards are taking place.
There is a need for understanding of charities and how they are
structured at local level so funders understand the importance
of full cost recovery, the need for timely payment of services
delivered and an appropriate level of risk sharing.
Creating a level playing field
The voluntary sector is uniquely disadvantaged
because it operates in an environment where there is no level
playing field on issues such as pensions and VAT. Voluntary organisations
find themselves competing against private sector and other government
bodies for the same contracts but without the same terms and conditions.
If government wants to see the voluntary sector take on more public
service delivery then it must ensure that there is a level playing
field and the voluntary, public and private sector are able to
compete on equitable terms.
Regulation
For many charities the issue of regulation is
a real concern and there is a need for action from government
to address this point. There is a clear balance to be struck in
requiring a charity to show that it is accountable and transparent
and thereby building public confidence without being overly burdensome.
Many charities are finding that they have to divert resources
away from their charitable objectives in order to deal with the
increasing amount of regulations imposed on them. CFDG would like
to see a reduction in the number of regulatory returns giving
duplicate information. Funders need to be persuaded of the effectiveness
of regulation by the Charity Commission, and not require in a
different form, information that is already in the Trustees Annual
Report or other available statutory documents. Funders should
consider what they really require rather than what they think
they require; the extra work and resources required by charities
to meet funders differing and often excessive requirements can
be significant. A best practice for information requests and reporting
standards should be agreed and implemented within the sector.
Recommendations
1. That the potential Compact Plus commitments
for statutory bodies and charities recommended in Strengthening
Partnerships: Next Steps For Compact are implemented and delivered
with immediate effect.
2. That the role of the Compact Commissioner
has real teeth and can provide charities with recourse when statutory
bodies do not deliver their side of the compact.
3. That appropriate funding models are in
place to enable local authorities and primary care trusts to deliver
their obligations under the compact.
4. That the demands of the Charities' Tax
Reform Group on unrecoverable VAT are implemented by the Government.
5. That government works with the sector
to address the barriers in protecting the pension arrangements
of staff transferring from statutory bodies to voluntary organisations
taking on service provision.
6. That the recommendations of the Hampton
review on regulatory inspections and enforcement are implemented
and adhered to by statutory bodies in their dealings with the
voluntary sector.
7. That a best practice model for information
requests in the bidding process and performance reporting are
developed by the sector and implemented by all funders.
CONTEXT
The sector consists of 168,115 primary charities
in England and Wales (Charity Commission quarterly facts and figures
September 2006) over half of which have an income under £10k.
Based on the recently published survey results produced by the
Charity Commission entitled Stand and Deliver: the future for
charities providing public services circa 20% of all charities
are engaged in delivering public services. However it is charities
in the higher income bands that are more likely to deliver public
services with 67% of charities with incomes over £10 million
reporting that they delivered public services and obtained 80%
of their income that way. In contrast 46% of charities that deliver
a public service with an annual income below £10,000 obtain
less than 20% of their income that way. Later on we discuss some
of the reasons why smaller charities are less likely to be engaged
in public service delivery.
The Government is committed to working in partnership
with the voluntary sector and sees the sector as having a key
role to play in the reform of public services. The HM Treasury
document The Role of the Voluntary and Community Sector in
Service Delivery 2002—A Cross Cutting Review identified
the following conclusions: a need to commit and implement Compact,
to get the funding relationship right and to build capacity in
the sector. The document also provided a template for the Government
and the sector to work together with a detailed action plan. Recommendations
within the action plan included:
1. Funders should recognise that it is legitimate
for providers to include the relevant element of overheads in
their cost estimates for providing a given service under service
agreement or contract.
2. HM Treasury should issue clear guidance
to funders: (i) on the scope for making payments in advance of
expenditure; (ii) ensuring the right balance between service providers
and funders; and (iii) the potential use of profile funding.
3. HM Treasury guidance to funders should
underline the opportunities for moving to more stable funding
relationships and to include examples of where, subject to performance,
this has been done.
It is clear that at least on full cost recovery
there is still much to be done. The Government deadline that as
of April last year all statutory funders should implement full
cost recovery has largely gone un-noticed and a quick survey of
our members showed that 60% don't expect to achieve full cost
recovery on the services they provide.
Considerable concern has been raised in the
sector about the Government's commitment to full cost recovery.
The NAO released a report in June 2005 which highlighted that
although many of the issues raised in the Cross Cutting review
have been addressed, further steps are needed to improve the funding
relationship between government and the sector which has so far
showed little noticeable improvement. The NAO felt that there
had been little progress on full cost recovery and in particular
there was a lack of agreement on which costs should be funded
with both the funders and voluntary organisations unclear on what
costs should be included. In addition, there was inconsistency
in practice at local level with NAO evidence suggesting that local
authority funders are even less likely to allow full cost recovery
than central government given that their main focus is to keep
down costs and remain within budget.
CFDG in collaboration with the CIPFA Charities
Panel undertook a quick survey of CFDG members last year to understand
the challenges charities face in contracting with government to
provide public services and to see what progress there had been
on full cost recovery.
CFDG and CIPFA Charities Panel findings showed
that over half of those charities surveyed recover only 85% or
less of the cost (including overheads) of delivering the service
to the funder. Charities are increasingly being seen as playing
a key role in delivering public services and strengthening local
communities through innovative ways of working yet it seems funders
aren't prepared to pay for the high quality service they receive.
In addition funders are requiring greater levels of financial
detail such as office and staff costs rather than agreeing a price
for a quality service that ensures best value for money. One of
the main challenges charities have faced in building full cost
recovery into their processes is equal risk sharing, Over 60%
of charities believe they aren't adequately compensated for the
risk they undertake in delivering the service. Reasons given for
this are greater risk transference without additional payment,
short-term contracts that cause difficulty in resource re-deployment
when a contract ends, and funder/provider relationship weighed
in favour of the funder. In addition, charities find that contract
lengths are often inappropriate to the service they are providing
and instead of long-term contracts that reflect the nature of
the service they are providing they are engaging in "long
term relationships with short term contracts".
It is clear that two types of charities are
emerging; those that raise significant income through government
funding (public sector service handover) and those operational
charities that raise a majority of their income through voluntary
donations. These two types of charities have differing needs and
there is clearly a requirement for greater understanding of how
these charities operate. In a society where public confidence
and trust are becoming more important, two further issues are
developing:
1. Independence v public service. Is the
sector becoming an agent of the Government.
2. Public trust—charities v government.
The independent nature of a charity is a core
part of its identity. Charities should not allow their independence
to be compromised in pursuit of government funding and should
only enter into contracts where there is a clear link to their
charitable objectives. Reliance on one form of funding can hinder
a charity's independence and their ability to speak out for change
or be critical of a funding organisation's policy.
Trust in charities is currently linked to support
for a particular charity or to an inherent belief that a charity
will act wisely and for the benefit of the beneficiary using the
funds available to deliver the best outcome at good value. However,
most of the public have no evidence to back up this view and very
few people have any real idea of how charities are run and the
funds distributed. The public also have a narrow understanding
of charities and the work they do and do not fully appreciate
the benefits they receive. On the other hand trust in government
is at a low ebb. Charities need to ensure that trust in them is
maintained and not diluted by increased involvement in government
activity, as this will severely diminish the sector's ability
to help those in real need. Charities need to proactively protect
and preserve public confidence and thereby maintain their brand.
Charities have reacted to this by increasing
transparency and accountability through greater disclosures in
accounts. A true judge of a charity's performance is the impact
they make. Impact reporting is currently underdeveloped within
the sector however progress is being made and there are good examples
such as RNID and Help the Aged.
Larger charities are professionalising to respond
in this environment whilst smaller charities struggle to do so
as they cannot afford the resources. They are hit hardest by the
current issues around government funding of contracts delivered
by the sector.
The current funding situation for charities
needs to improve and the voluntary sector wants to see more than
lip service on issues such as full cost recovery. Government needs
to work in partnership with the voluntary sector and engage in
contracts that are supportive of an adult relationship between
government and the third sector. At the minimum there needs to
be better risk sharing, no imposed pricing budgets and timely
payment for service delivery. These are all issues that have a
direct impact on a charity's finances as is illustrated by the
example a member gave where late payment for service delivery
resulted in £7,000 in lost interest for the first quarter.
The current funding arrangements do not generate trust and there
are countless examples of an un-level playing field between the
Third Sector and other organisations competing for the same contracts
on issues such as pensions and VAT—which are developed later.
Relationships should be outcome based and not require rafts of
data to be processed; this does not increase control but instead
makes compliance onerous and diverts valuable resources away from
service delivery, which does little to build an atmosphere of
trust and only causes public services to suffer.
However, there are some good examples of funding
relationships between government and voluntary organisations and
we are keen that these are recognised and promoted wider. One
such example is Action for Blind People where the local authority
has commissioned a clear service that is fully funded with a built
in profit incentive for the organisation. Another example is WWF-UK
(formerly known as the World Wildlife Fund), which has a partnership
arrangement with the Department for International Development
providing (a block grant) strategic funding based on outcomes,
that is subject to review every three years.
The Home Office, in March of last year, published
Strengthening Partnerships: Next Steps for Compact, which
included ideas for a "Compact Plus" standard and potential
commitments for public sector bodies which include the following:
— When seeking to deliver public services
through the voluntary and community sector, use procurement rather
than grants, do not seek information about management fees and
overheads, and agree outcomes which capture the additional quality
of services which may result from delivery by the voluntary and
community sector.
— Implement multi-year funding models
and make payments promptly, offering payments in advance of expenditure
to organisations wherever appropriate.
— Share risks fairly between funder
and provider, ensuring they fall on those best able to bear them.
— For projects funded by grants, give
a legitimate proportion of funding for overhead costs.
CFDG would like to see these potential commitments
verified by the Compact Commissioner as part of the "Compact
Plus" and work is undertaken to ensure that all statutory
bodies adhere to them thereby bringing stability to funding relationships
with the voluntary and community sector.
OPERATIONAL ISSUES
Regulation
For many charities the issue of regulation is
a real concern and there is a need for action from government
to address this point. There is a clear balance to be struck in
requiring a charity to show that is accountable and transparent
and thereby building public confidence without being overly burdensome.
Many charities are finding that they have to divert resources
away from their charitable objectives in order to deal with the
increasing amount of regulations imposed by government.
The first major report into regulator inspection
and enforcement was the Hampton Review published in March 2005
that recommended a light touch approach to regulation. This included
reducing the number of inspections, requests for information and
form filling and instead made a shift towards risk based regulation.
Building on this report, the Better Regulation Taskforce issued
a publication on excessive red tape faced uniquely by the voluntary
sector entitled Better Regulation for Civil Society. The
report published, in November 2005, recognised that the current
regulatory climate can stifle innovation within the voluntary
sector through its desire to impose a one-size fits all approach.
The report recommended that regulation of the sector was proportionate
and targeted so that charitable organisations and particularly
smaller ones aren't swamped with regulation but able to free up
their time and money for those most in need.
CFDG members would like to see a reduction in
the number of regulatory returns giving duplicate information.
One clear example of this is the duplication of information requested
by the Charity Commission in the Summary Information Return (SIR)
most of which can be found in the Annual report and Accounts as
prescribed by the Statement of Recommended Practice (SORP). The
SIR was recommended first in the Cabinet Office report Public
Action, Private Benefit in order to provide increased transparency
on Charity affairs following a failure in the sector to fully
implement the requirements of SORP2000. The majority of information
required in the SIR duplicated that required by SORP2005.
Another type of regulation faced by charities
is the hidden regulation involved with adopting best practice
in areas such as procurement, health and safety, environmental
concerns etc that is encouraged by government funders but is not
recognised as needing additional funding. Whilst we would fully
support the need to strive for excellence in all areas, the increased
cost is a real issue for charities. One member explained that
they have to employ and train a Health and Safety officer which
costs in excess of £25k a year as well as the added the costs
of time spent by medical staff, shop personnel etc in liaising
with the Health and Safety officer, and ensuring compliance. Another
example given by members is that more and more local authorities
are expecting voluntary organizations to comply with and provide
evidence of compliance for regulation which they aren't technically
subject to. A recent example given by a member was with one of
their local authorities who would only award an inflation uplift
this year if, inter alia, the organisation could demonstrate to
them what kind of Gershon/efficiency saving initiatives they were
currently committed to, to ensure that as much of the fees as
possible go to front line care, and aren't "wasted"
on back office functions. As a charity and not a government body
this member's organisation is not subject to the Gershon targets,
but nevertheless had to invest a significant amount of management
time and effort researching the subject and presenting back to
them some of the initiatives they had underway to satisfy this
point to their satisfaction, and to ultimately secure the fee
uplift they needed, and which they are entitled to under full
cost recovery principles, without having to jump through such
hoops.
Commissioning Process
CFDG members have identified the standard of
the commissioning process employed by the state as varying widely
on a national, regional and local basis. A key point seems to
be the lack of experienced staff with expertise in this area and
the desire from funders to impose a one size fits all approach
on all service providers that is inappropriate for charities and
third sector bodies and is not in line with Compact. Other issues
are the lack of clarity from the outset about the commissioning
process and the contractual obligations for a charity, duplicating
requirements and very short notice on bids ie the deadline is
very shortly after the announcement. This can present real challenges
for smaller charities that invest a significant amount of resource
into the tender process and can often be overwhelmed with the
paperwork required. In addition they may lack negotiation skills
and the financial strength to say no to impossibly tight margins.
VAT
VAT maybe an effective form of taxation for
the commercial world but is inappropriate to the core activities
of charities: the provision of services to beneficiaries who may
not be in a position to pay for the services they receive. A lot
of the services provided by charities are either exempt (ie they
cannot charge VAT and so cannot recover the VAT that they pay
on their purchases) or they are non-business supplies (because
the charity does not charge for the service or heavily subsidises
it) and are outside the scope of VAT. In either case, the charity
ends up with a substantial irrecoverable VAT bill. Charities are
almost uniquely penalised by the VAT system. As Government officials
have long acknowledged, they are exposed to the most complicated
VAT regime facing any sector because they provide a mix of fully
taxable business supplies, exempt business supplies and non-business
supplies. The administration involved in calculating which bit
of VAT relates to which type of service is complicated and onerous.
Commercial organisations providing services do not have a problem
recovering the VAT as they almost exclusively provide taxable
services and local authorities receive an automatic refund of
the VAT that they pay on providing services—many of which
are identical to those provided by charities. This refund is permitted
under section 33 of the 1994 VAT Act.
The Charities' Tax Reform Group (CTRG) estimates
that irrecoverable VAT costs charities in excess of £400
million a year. This money could better be spent on providing
charitable services, particularly as it widely accepted charities
spend their money more cost-effectively than government. A MORI
research study commissioned by the Charities' Tax Reform Group
found low public awareness that charities paid tax and overwhelming
support for a matching grant scheme to compensate charities for
the irrecoverable VAT they incur. 8 in of 10 people surveyed agreed
that government should compensate charities in full for the 17.5%
VAT which charities have to pay. CTRG have identified four priority
areas where a matching grant scheme is needed. Those four areas
are: VAT on social welfare services where charities are complementing
or substituting for state provision, VAT on fundraising costs,
joint ventures and shared services and repair, construction and
maintenance of social welfare housing and all charitable buildings.
Pensions
Under TUPE, a receiving employer is required
to provide a good quality pension provision where staffs coming
to them have pre-existing pension rights—defined as being
one where the employer contributes at least 6% (sections 257 and
258 of Pensions Act 2004). However best practice guidance issued
by the ODPM (Circular 03/2003) requires organisations taking staff
from the public sector to provide a pension scheme with the same
level of benefits as are currently enjoyed and which is fully
transferable.
This has a number of major consequences and
charities (and those they contract with) are left with some pretty
unpalatable options.
On the one hand charities can seek admitted
body status which means they take on a corner of the pension scheme
from where the staff are coming (paying contributions at whatever
rate is determined by the local authority). When the charity subsequently
loses the contract and therefore admitted body status, it is required
to make up any shortfall in funding in full, including any deficit
built up prior to the staff members transferring across into the
charity (which as one major charity at least has found can run
into many £millions).
The alternative is that the charity sets up
either a separate section within its own pension fund or with
a third party provider such as the Prudential. The problem of
the crystallisation of past service deficits remains and, in order
to reduce risk, the contribution rates required to fund these
scheme are typically around 28% or more per annum depending on
the staff transferring.
In order to protect themselves charities will
be forced to write contracts which require the transferring employer
to pick up the full pension costs for future service accrual and
to make good any past service deficits if the staff transfer across
their accrued service (which could run into £100,000's even
where only a few staff are involved). It is likely that it will
become uneconomic for the statutory body to transfer staff to
the voluntary sector on that basis and the Government's partnership
plans will be frustrated.
A member recently gave an example of not entering
into a contract with a statutory body because the contract would
have meant a transfer of 60 staff from the statutory body to the
charity. The charity could not afford to fund the pension contributions
enjoyed by that statutory body and there was no additional funding
in the contract to cover the additional costs so consequently
the charity could not enter a contract that could potentially
have benefited circa 250 beneficiaries.
One possible solution to this pensions issue
would be to develop pass-through arrangements. The Department
for Communities and Local Government is currently consulting private
sector service providers on this subject. Pass-through would effectively
remove pension risk from the equation. The contractor would pay
contributions at a rate specified at the outset of the contracting
process, with subsequent variations only for common factors (eg
changes in mortality assumptions) or those within their control
(eg abnormal pay movements), and the letting authority would retain
and meet the actual cost of all the investment risk. Contractors
would contribute only for membership accrued during the contract
and would have no past service liabilities, nor ongoing liability
at the end of the contract. The letting authority would effectively
meet the actual cost of pensions rather than the cost inflated
either by over-cautious risk assumptions or by the price of contractor
failure in terms of quality delivery or financial performance.
However, it would deprive authorities of the potential benefit
of a lower bid, where the contractor has priced the pensions element
at less than the true cost.
March 2007
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