Examination of Witnesses (Questions 120
- 132)
WEDNESDAY 9 JUNE 2004
MR STUART
ETHERINGTON, MR
STEPHEN BUBB,
MS MARY
MARSH AND
DR JOHN
LOW
Q120 Mr Foulkes: Maybe I should have
also made it clear for the benefit of doubt that we are talking
about not connected with the principal purpose of the organisation
concerned, trading in other areas.
Mr Bubb: Yes.
Q121 Mr Foulkes: We had an informal
discussion about this in our Committee earlier, so I have been
looking at it. I understand that there was a study in Edinburgh,
if you will excuse a Scottish example, in Stockbridge which showed
that in fact the existence of charity shops did not actually harm
local traders, quite the reverse. By filling up what were empty
shops previously, it reinvigorated the area, brought people in
and they used the small shops that were there as well as the charity
shops. Are there experiences elsewhere of that?
Mr Bubb: Yes and I think there
is a misunderstanding as well because there was a feeling that
charity shops got a particular tax advantage and the rate relief
being cited, but the reality is that many, indeed the majority,
local authorities choose to give rate relief to charity shops
in any case even though they are separate trading companies. It
seems to be a very sensible recommendation and we did not quite
understand why it was taken out and, in terms of the arguments
from the Government, they did not seem to stack up and we strongly
urge you to look at that.
Q122 Mr Foulkes: I understand that
a charity's VAT position can be worse than private shops on occasion
in some respects; is that right?
Mr Bubb: Yes. There is a whole
big argument that we have around irrecoverable VAT but it is probably
not something you want to cope with in this Bill, but you could
if you like!
Chairman: We are open to offers!
Q123 Mr Foulkes: To use the Campbell-Savours
question, is what you have just said the view of all of you, that
you would want to see it reinstated? It was knocked out at the
last minute, you do not understand why; the arguments are strongly
in favour of including trading and you would ask us to make a
recommendation for reinstating it?
Mr Bubb: That is correct.
Ms Marsh: While still allowing,
quite clearly, the separate trading, which is what we would want
to continue to do because it is on a scale of risk basis and the
need under the current VAT regulations to have a trading company
in order to manage that situation when we can legally and we would
want to continue to have that.
Dr Low: We would understand if
there was some limit, some minimum, imposed if that were necessary.
To run an organisation where 90% of its activities were trading
and to consider that as part of the charity may be inappropriate,
so we would understand a limit.
Q124 Ms Keeble: I want to ask a little
more closely about this tax from the opposite point of view. What
do you say regarding the issues around risk to the charitable
fund as a result of trading activity if a charity were not actually
successful?
Ms Marsh: That is why I think
the materiality question is the case. Where it is proportionate
to the charity and is relevant to what the charity is there to
exist to do, then it would be appropriate for them to do it.
Q125 Ms Keeble: But either it has
to be in or out. What was said was that the safeguards around
trustees' duties were inadequate. We had a long discussion earlier
on about the fact that trustees are not paid, they are amateurish,
voluntary and all the rest of it and you then have people taking
business decisions which can impact adversely on the charitable
funds that are given in street collections in all good faith for
clearly understood purposes which are in the public interest.
How do you square that except by separating the functions?
Dr Low: It is a matter of proportionality.
If the trading activity is a dominant part of the charity's income
and turnover, then there is a significant risk. It depends on
the nature of that trading. You can start some very risky trading
activities—and some have in the past—and you would
want those very clearly separated from the charity. Frankly, it
is that balance. If you are running a café with one member
of staff and that is all you are doing and you have to create
a limited company with all that that involves and isolate it from
the rest of the organisation, that is a burden on that charity
which we see as disproportionate to the risk.
Q126 Ms Keeble: But people are very
used to setting up companies limited by guarantee, social enterprise
functions. For example, in running a block of flats where you
have a subdivided house and you want to manage it for people for
all kinds of reasons. People are used to that now. The real point
is, why should funds that somebody gives to, I do not know, run
an educational programme which is clearly charitable be put at
risk because someone else wants to run a café to raise
some money to put through it? Why can they have not separate structures?
Ms Marsh: If you look at the moment,
to take your argument one stage further, in the case of voluntary
income that comes into charities, we contract to do public service
delivery which carries risk with it which could be said to put
the voluntary income at risk. That is a balance that we manage
already. So, I do not see that it is necessarily any different
as long as that issue about proportionality and materiality of
the scale of what you are and fits with the charitable purpose.
Mr Bubb: There are two types of
risk: there is the risk in terms of assets and then there is the
reputational risk. In terms of the reputational risk, it matters
not a jot whether it is a separate trading company because it
is seen as part of the charity. So, that is not an issue.
Q127 Lord Campbell-Savours: That
is an issue.
Mr Bubb: The other issue is around
assets and income base but, in terms of the legal position, that
is not going to be affected. Whether you have a trading company
as a separate trading company or whether you are doing through
a charity, if you are trying to diversify your income streams
and you are going to do some of that through trading because that
actually improves your base as a charity, the fact that you are
doing it within the charity or in a separate trading arm and then
there is a problem on trading, you are affected anyway. Deregulation
removes the administrative burden and the costs and that is particularly
important for the smaller and medium-sized charities.
Q128 Ms Keeble: The example which
you gave was an interesting one but I really wondered if you looked
at the way in which a person's time was allocated and the focus
of what was happening there, it almost sounded as if what you
had was a business that was supporting a small charity. I am sure
that if a number of conferences were held would not be public
interest things, they would be commercial conferences aimed to
support a charity and it is the kind of thing where a big company
might set up a foundation and do good works that way, and I wondered
why it was thought—and I do not want to go into all
the arguments about breakdown—that something that is clearly
commercial and needs all the flexibility that has, where perhaps
80% of the activity was commercial and so on and could be quite
wide ranging, should be conducted within an organisation which
is running a museum and I had great difficulty in trying to work
out why it should be a charity that was doing trading rather than
being a company that had a charitable foundation.
Mr Bubb: It is an interesting
point. In this particular case, in terms of social enterprises,
charities that want to have a particular social enterprise arm,
then actually the separate trading arrangements make a lot of
sense and we would not suggest that that has changed but, for
small charities where absolutely the primary purpose of the .
. . The sole purpose of the National Coalmining Museum is to run
a museum, that is its purpose. It is simply not interested in
trading for trading sake. It is only running the shop and the
conference facilities because that brings in money to enable it
to run the museum and that is its only interest and purpose. If
it decided that it wanted to go into the conference business in
Wakefield in Yorkshire, then it might want to set up a trading
company and trade and make money that way, but actually it is
not interested in that, it is simply doing this because it brings
in some money to support the primary purpose.
Q129 Ms Keeble: In quite a lot of
the discussion today, we have talked about the purpose of a charity
and, if the charity has a trading arm encompassed within it, I
think it creates a bigger muddle about what the charity actually
is. Is it a business? Does it exist to do good work? What is the
point of being a charity? I wondered if anyone has comments as
to what you actually think. If you think that actually being a
business in what most people would understand as being a business,
doing trading, running conferences, catalogues etc etc, if that
does not start to confuse that and the public benefit and the
good works effort, or do you think there is an absolute clarity
about what the charity is as opposed to a company limited by guarantee,
a voluntary organisation or whatever.
Dr Low: Many of the activities
which appear to be trading activities are not. For example, we
sell a significant amount of equipment to help deaf people: amplified
telephones and so on. We run it to cover its costs; it is not
designed to make a profit. We could choose to run it to make a
profit. That operates completely within the charity because it
furthers our charitable objectives which are to improve the quality
of life for deaf people/hard of hearing people. So, many of the
activities are already happening and are quite substantial; they
are quite significant in our case. I am not sure the division
is quite as clear and who looks at the charity and says, "That
is to do with the charitable objectives but selling a cup of coffee
or selling Christmas cards is not." I am not sure that it
is quite as clear in the public mind as your question suggests.
Ms Keeble: The paper on the public view
of charities was fascinating because you obviously have huge support
but I think that, if you poked at it a bit more, you would find
huge support for the kind of notion of charity that Stuart said
previously which was about doing good works and about people helping
other people and the generally sort of decent side of human beings,
as it were. I think you have to be quite careful about how you
then move that forward. In all of your presentations and in what
you said this morning, generally what you have argued for is deregulation
of virtually everything and that is partly why you welcome the
Bill because that is what it does and it is very noticeable that
the one bit that you all say you do not like in the Bill is the
part that does not deregulate, which is this issue about the trading.
I just wondered what you actually see the role of the Bill and
Government and regulations as being and how you see that as moving
the whole nature of charities forward into the 21st century out
of the 19th century which is where you have come from. I just
wondered if you had a comment about that, about what the role
of Government is, whether in fact the Charity Commission should
have a regulatory arm and an advice arm, whether it should be
completely broken down. You have talked about the trustee status.
Q130 Chairman: Can you do that briefly.
Mr Etherington: I think that is
a crucial question, what is the place of charity in the 21st century.
Ms Keeble: And what is the role of Government
regulation and legislation to move it forward.
Q131 Chairman: I think what you might
want to do, for our ease as much as anything else, is that there
are a number of disputes that have been recurring themes throughout
your evidence—your evidence has been remarkably helpful—and
it seems to me that there have been a number of themes that have
emerged. One is the diversity of the sector, small versus large.
The other has been the whole issue of regulation versus advice
particularly in relation to the Charity Commission. I think what
might be helpful and, if it could be done on a collective basis
that is good, if there are different points of view within the
sector, frankly, that is equally good and one would like to know
if there are different points of view within a sector rather than
a monopoly view, so to speak. I would not mind receiving from
you, given the shortness of time, a short note on this particular
point and the broader points that have been raised during the
course of our evidence session this morning, if that is possible.
Mr Etherington: Absolutely.
Ms Keeble: And the specific point about
where regulation should be and where legislation should be.
Chairman: I do think that you need to
answer this point because I think it has been the one unconvincing
thing, if I may say so with respect, that you have said this morning
which this is whole issue of trading because on the one hand what
you want to be able to do, as I understand it, is to better merge
charitable endeavour and commercial endeavour and you want to
make it easier for charities to do mainstream trading as part
of their mainstream activities but, on the other hand, Stuart
argued quite convincingly at the outset it seemed to me that one
of the real public perception problems is, what is a charity?
So, I do think that there is a conflict in your minds and it would
be very, very helpful for us to have this resolved. It seems to
me that if one went down or potentially went down the trading
route, actually you would have more rather than less confusion
in the public mind, notwithstanding all the other points about
unfair competition etc which others no doubt would want to make
to us.
Mr Mitchell: I was just going to make
the point that although George brilliantly got you all on side
on this trading point, it is certainly not my job to defend the
Government but it is all our job to defend the small business
sector, and I think you would have to make a more convincing case
that the level playing field did not matter than you were able
to make when George stitched you all up to support his view on
trading!
Lord Phillips of Sudbury: He did not
mention rates which is a huge issue. You pool your unrelated commercial
activity into the charity under the new law and all the premises,
the factories, the whole lot, no rates. With regard to your wonderful
example of the National Coalmining Museum in Wakefield, I do not
think they have been well advised.
Chairman: He declared his interest!
Lord Phillips of Sudbury: Seriously,
I do not think they need to do what they are doing at all. Do
not forget—and nobody has mentioned it—we have a £50,000
de minimis unrelated trade allowance. I would be staggered
if Wakefield came anywhere near £50,000 worth of teas and
coffees. My big point is this and I am going to make a statement
and ask you to comment on whether you think it is right or wrong.
From where I have sat all these years acting for charities and
their trading companies, the one thing that stands out above all
else I have to say is that the boards of charities are very different
and a more diverse collection of individuals than the boards of
trading companies, commercial entities, for all the reasons that
are obvious. They are, in my view, singularly ill-equipped to
run unrelated trading exercises. We are not now talking about
little operations that are related to the trading—and, Mary,
you assumed that this would be related trade—the exemption
that has been called for would not be related to a related trade,
it would be any trade that the charity thought it could make money
on and what I want to put to you is that having the need for a
separate trading company where every loan that is made by the
charity to it or every equity that the charity subscribes to in
the capital of the trading company, each of those decisions has
to be considered separately and advised upon because there is
this separation, there is this cordon sanitaire between
the charity and the trading company. Even with that process that
has to be gone through and usually these days charities will go
to lawyers or accountants to get advice on, can we make this loan
to the trading company? Should we put in this extra money? If
you take away that process, it becomes too easy and too dangerous
for many of the charities which I know and none of the ones who
are sitting there this morning, and I think you would run into
the most appalling examples of charities getting carried away
with what looked like a good idea at the time but the risks are
never calculable in money terms when you start on a bit of trade
and I put it to the panel that the chaos that would ensue in a
minority of cases would de deep damage to the sector because all
that hard donated and collected money would be lost because there
would not be the separation on paying the trading debts.
Chairman: I am going to wind this up
because we are running out of time. These are very important points
and it would be extremely helpful if we could have a written response
to that particular point. There is one further point about to
be raised and again I would ask you to come back in writing, if
you could, rather than verbally.
Q132 Lord Sainsbury of Preston Candover:
The point I was going to raise is the concern that has been
expressed by the power to dispose of capital and the effect it
has on long-term endowments. Perhaps you could expand on that.
Mr Etherington: Of course.
Chairman: Can I thank you for your attendance.
You have given us a huge amount of food for thought. There are
several other issues we wanted to raise but unfortunately, as
you can hear, we have run out of time. I think that aside from
the specific requests that you have had from me to provide further
written evidence, there are two further areas that you might want
to consider and this is very much an issue for you to determine.
The first is the issue that you were about to raise in relation
to the regulatory powers of the Home Secretary and the current
lack of criteria. If you had views as to the sort of criteria
that you think would be helpful, I think the Committee would welcome
some evidence from you in that regard. The second issue, to take
us back to this extensive discussion we had on the public benefit
issues, was twofold. First of all, how you think it might be possible
to amend the Bill to ensure that the Charity Commission does what
the NCVO was strongly arguing for which is to have an active and
ongoing examination of the public benefit as distinct from a one-off
examination at point of registration and then, secondly, the whole
issue of ensuring that any public benefit test, which I think
you all agree was a sensible and fair way forward, could be indeed
applied fairly across the piece and if you had views on those
two matters, again it is a matter for you, they would be very
welcome. Can I thank you again for your evidence and for your
time. It has been extremely helpful for the Committee and if we
can have that further written evidence, that would be welcome.
Thank you.
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