House of Commons - The role of the Charity Commission and "public benefit": Post-legislative scrutiny of the Charities Act 2006

The role of the Charity Commission and "public benefit": Post-legislative scrutiny of the Charities Act 2006 - Public Administration Committee Contents

3 The Charity Commission

14. The Charity Commission, first established in 1853, is funded entirely by a settlement from the Treasury, currently set at £25.7 million for 2012/13.[32] It receives no other income. Between 2010 and 2015, the Commission's budget will have reduced by one third, from £29.3 million in 2010/11 to £21.3 million in 2014/15.[33] The former Chair of the Commission, Dame Suzi Leather, has said that the budget reduction will require the Commission of 2015 to meet the same statutory objectives and functions as in 2005, but with only half the number of staff.[34] At the same time, the demands on the Commission continue to increase. Around 20 to 25 new charities register with the Commission every working day—a total of 5,600 new charities between April 2011 and March 2012.[35] Furthermore, the 2006 Act increased the duties and objectives of the Commission.

15. We considered whether the Commission's role was still appropriate and how it should be funded. The Commission's statutory objective were set out in the 2006 Act as:

1. The public confidence objective: to increase public trust and confidence in charities.

2. The public benefit objective: to promote awareness and understanding of the operation of the public benefit requirement. (We consider this objective in chapter four).

3. The compliance objective: to promote compliance by charity trustees with their legal obligations in exercising control and management of the administration of their charities.

4. The charitable resources objective: to promote the effective use of charitable resources.

5. The accountability objective: to enhance the accountability of charities to donors, beneficiaries and the general public.[36]

16. Lord Hodgson did not propose any changes to the Commission's statutory objectives but did recommend that it should focus more tightly on regulation of the sector.[37] The Commission's Chief Executive, Sam Younger agreed with Lord Hodgson that, given its limited resources, the role of the Commission should be more focused on regulation, than, for example, the objective to "promote the effective use of charitable resources".[38] The Chair of the Commission, William Shawcross, believed that the statutory objectives were still appropriate, but added that, while he did not think the Commission "will ever have the budget necessary" to increase its regulatory role, it had reorganised to regulate "as effectively as possible" in the context of the budget cuts.[39]

17. The Commission's focus "on serving the public by doing things only a regulator can do" has meant, for example, that it has scaled back one-to-one advice to charities, and placed greater emphasis on preventing problems before they start, for example by means of as an increased use of spot checks on charities' annual accounts.[40] The Commission has also sought to reduce the demands from charities on its information and advice services, by moving these services online, and also working with the charity sector umbrella bodies "to try to shift some of the things that, historically, the Charity Commission has done to others".[41]

18. Several of the sector umbrella groups argued, however, that they did not have the resources to take on the advisory work that the Commission can no longer afford to undertake. Sir Stuart Etherington, Chief Executive of National Council for Voluntary Organisations (NCVO), stated that the "umbrella bodies themselves are facing financial difficulties" and would not be able to take on tasks previously carried out by the Commission unless they were "resourced to do it".[42] Joe Irvin, Chief Executive of the National Association for Voluntary and Community Action (NAVCA), also highlighted the difference of reach between the Commission and the umbrella groups, noting that the Commission's website received 3.5 million individual users a year, compared to only 0.5 million and 150,000 for the NCVO and NAVCA websites respectively.[43]

19. Witnesses also expressed concerns about other potential effects of the Commission's reduced budget. Sir Stuart Etherington warned that it would be "very difficult" for the Commission to support smaller charities.[44] Other witnesses expressed frustration about the Charity Commission's capacity to investigate complaints about charities from members of the public. The Association for Charities warned of the "danger that the Commission, for understandable budgetary reasons, may fail in attempts to regulate the sector better".[45] Sam Younger accepted that the Commission would not "get it right every time" when deciding which complaints to take on for further investigation, given the scale of contact from the public with the Commission, which he stated was "almost 900 calls, emails and letters every single working day of the year".[46] Deciding which of these complaints to investigate further was, he said, the "most difficult area" for the Commission.[47] The Commission was also unable to take up some complaints received because of its remit, and we consider proposals for handling these complaints in chapter seven.

The Charity Commission and the Cup Trust

In January 2013 The Times reported that a charity, the Cup Trust, was "a front for tax avoidance", alleging that the charity received a total of £176 million in 2010 and 2011, but that "instead of using the money for its stated objective to 'improve the lives of young children and adults', it carried out trades that artificially generated Gift Aid for donors to reduce their tax bills".[48] The Charity Commission registered the Cup Trust as a charity in April 2009, and opened an investigation into its activities in April 2010. The Commission considered whether the Trust "was still, and had always been, a charity existing for charitable purposes under British law, and whether it was working in the public benefit".[49] The Commission found that the Trust had given £55,000 to young people's charities, and was in fact acting inside the law as it stands on charitable status. The fact the Cup Trust was able to carry out its activities without breaching charity law led the Chair of the Commission, William Shawcross, in evidence to the Public Accounts Committee, to describe the issue of the Cup Trust as "a disaster for the charity sector".[50] The Public Accounts Committee has examined the role of HMRC and the Charity Commission in this case. Our inquiry did not include evidence about the Cup Trust, but we have drawn on the evidence taken by the Public Accounts Committee.

20. The core role of the Charity Commission must be the regulation of the charitable sector. The expos of the scandal of the Cup Trust demonstrates that there are shortcomings in the regime for regulating tax evasion involving charities. The Charity Commission was obliged to register the Cup Trust when it was established, but it does not have the means of investigating potential tax fraud, which must be the role of HMRC. Furthermore, the Commission has complained about limitations on its powers to deregister suspect charities.

21. Charities should not be used as a tax avoidance vehicle. We welcome the Charity Commission's statutory investigation into the Cup Trust. We recommend that the Commission follows this inquiry with a review of lessons learnt from this scandal. The Commission should specifically reconsider the legal advice it received on the status of the Cup Trust, and whether it was right not to take its concerns about the Cup Trust further. Having reviewed this case, if the Commission still feels that it was restricted in its legal abilities to prevent such organisations from obtaining charitable status, we would welcome its proposals for a change in the law on the criteria for registering as a charity.

22. The objectives of the Charity Commission, as set out in the 2006 Act, are far too vague and aspirational in character (an all too frequent shortcoming of modern legislative drafting) to determine what the Charity Commission should do, given the limitations on its resources, to fulfil its statutory objectives. The 2006 Act represented an ambition which the Commission could never fulfil, even before the budget cuts were initiated.

23. The Commission's reduced budget means extra tasks, outside of its statutory objectives, are an unaffordable luxury, particularly as it has to use its precious resources to combat lobbying and legal pressure from some well-resourced organisations. Furthermore, by seeking to be an advice service to charities, the Commission also risks a conflict of interest: it cannot simultaneously maintain public trust in the charitable sector while also acting as a champion of charities and the charitable sector. The latter should be, as the Commission and Lord Hodgson have recommended, a role for the sector's umbrella bodies and not its regulator.

24. The Cabinet Office must consider how to prioritise what is expected of the Charity Commission, so that it can function with its reduced budget. This must enable it to renew its focus on regulation as its core task. The Commission is not resourced, for example, "to promote the effective use of charitable resources", or for that matter, to oversee a reappraisal of what is meant by "public benefit", nor is it ever likely to be.

25. Abuse of charitable status to obtain tax relief is intolerable and should be uncovered by HMRC and the Charity Commission working more closely together. We recommend that the Commission should prioritise the investigation of potential "sham" charities but the obligation to investigate and report tax fraud rests with HMRC, recognising that the Commission's financial position will limit their own investigation. Ministers must decide whether they think it is necessary to have a proactive regulator of the charitable sector, and if so, the Government must increase the Commission's budget and ask Parliament to clarify their powers. If funding cannot be found for the Commission to carry out such a role, ministers should be explicit that they accept that the regulatory role of the Commission will, by necessity, be limited.

Charges

26. Lord Hodgson's report raised the prospect of the charitable sector bearing some of the cost of its regulation through "a fair and proportionate system" of charging charities for filing annual returns and for the registration of new charities.[51] He emphasised that such charges "should be set at a level to reflect the activities that they cover" and that funds raised "must be accepted by HM Treasury as being an incremental increase in resources available to enable the Commission to carry out its functions more effectively not merely a reason to reduce its budget by the same amount".[52] Lord Hodgson also recommended that the Government and the Commission should consider the possibility and logistics of introducing late-filing fines for charities which do not submit their accounts on time.[53] The Government's interim response to Lord Hodgson stated that it would need further consideration of the proposals before they could be accepted or rejected.[54]

27. Both the current and former Chairs of the Commission were cautious about introducing charging. Dame Suzi Leather, Chair of the Commission between 2005 and 2012, has suggested that there would be a possible conflict of interest if the regulator was funded by the organisations it regulated.[55] Her successor, William Shawcross, also shared this concern, noting that while the Commission could raise its "£25 million per annum running costs by a £5,000 annual levy on the top 5,000 charities in terms of income", this may mean that those charities "think that they owned the Commission and owned the regulator. That would not be a healthy thing".[56] He also warned that the funding mechanism of the Commission meant that it would not obtain any "financial advantage" from any charges, as additional income would go straight to the Treasury.[57] In addition, Sam Younger, the Chief Executive of the Commission, argued that a levy would not be sufficient to replace Government funding, unless it was set at a "pretty significant" level.[58]

28. The evidence received from the charitable sector was also broadly against any charges for the registration of new charities or annual returns. Sir Stuart Etherington argued that it was the Government's role to fund the work of regulating the charity sector.[59] A working party of the Charity Law Association dismissed any comparison with Companies House, which does charge for registration, arguing that "the idea of private citizens paying fees to the state in setting up an exclusively public benefit organisation is anathema to many".[60] NAVCA argued that such charges would "disproportionately affect small charities".[61]

29. The Minister for Civil Society, Nick Hurd, stated that it was an "extremely difficult time to introduce the concept of additional charging to the charitable sector" and that his "personal view" was that "it would be quite wrong for the Government to move away from the current situation in which, effectively, the taxpayer funds the regulator, to something that is significantly different from that".[62]

30. There was also a more mixed reaction to the idea of fines for charities that submit late returns to the Charity Commission (86% of charities submitted their accounts on time in 2011-2012).[63] The Charity Finance Group reported findings from a survey of its 1,800 members that a "significant number" would not object to fines being introduced to promote compliance, as long as they were not seen as a revenue-generating measure for the Commission, as this could lead to the same conflict of interest as charging for new registrations and annual returns.[64] We heard that the newly formed Australian Charities and Not-for-profits Commission planned to charge for late returns, having studied the experience of other regulators in Australia.[65]

31. Sir Stuart Etherington suggested that a warning system and the ultimate penalty of removal from the register of charities may be a more effective way of promoting prompt filing of accounts than fining charities.[66] Cath Lee, the then Chief Executive of the Small Charities Coalition, concurred, and argued that simply fining charities for submitting late accounts ignored the reasons why charities had been unable to send in their accounts on time. She argued that, if a small charity had been unable to fund an accountant to process their return, a financial penalty "could exacerbate the problems".[67] We note, however, that the Commission has stated that many of the charities which submit late accounts have managed to submit the same accounts on time to Companies House, which does charge for late returns.[68]

32. We do not support Lord Hodgson's recommendation for the introduction of charges for the registration of new charities or the submission of annual returns. To do so would act as a block on the creation of new charities and the dynamism and charitable spirit of the volunteers working hard in their communities. It would be, quite simply, a tax on charities and charitable work. Furthermore, the Commission would also incur substantial administrative cost in a time of austerity, since it does not have the people and systems for invoicing and receiving payments from all 163,000 registered charities once per year. There would be something absurd about a system which would result in the Treasury giving tax relief to charities with one hand, and then clawing back from charities the money to fund the regulator, with the other hand. It is undesirable in principle that a regulatory body should be funded by those that it supervises.

33. There is a case for charging charities for late returns to the Charity Commission. The cost of such a system would be much less than for a full-scale charging system and the income received would not constitute a conflict of interest. The failure to submit annual returns on time is a risk to public trust in the charitable sector and charging will promote increased transparency: members of the public wishing to make a charitable donation should have up-to-date information, proportionate to the size of that organisation, on the charity's income and expenditure, in order to make an informed choice about their donation.

34. We endorse Lord Hodgson's recommendation that the Cabinet Office should work with the Charity Commission to develop a proportionate and flexible system of fines for late returns to the Commission. This is subject to the acceptance of our recommendation on joint registration in paragraph 51.