DCH 119 Save the Children
Save the Children
Francene Graham
Committee Assistant to
the Joint Committee on the Draft Charities Bill
Scrutiny Unit G10
7 Millbank
London SW1P 3JA
17 June 2004
Dear Ms Graham
Re: Draft Charity Bill
Save the Children welcomes
the opportunity to submit a short response on the Draft Charities
Bill.
Save the Children works
with vulnerable children in the UK and world-wide to create real
and lasting change in their lives.
1. We welcome the broad
thrust of the draft Bill and feel that, overall, it builds on
the good work carried out by the Strategy Unit in the report "Private
Action, Public Benefit". We will restrict our response to
areas of particular interest to Save the Children.
2. Public Charitable
Collections
We appreciate the need
to overhaul the current arrangements, and introduce a unified
system of collection. We feel however that further work needs
to be done before we have a system that is workable and light
on its feet - specifically:
2.1 A two-tier process
comprising a Certificate of Fitness (CoF) and a license
application is an excessive burden. Charities generally are already
subject to registration and audit or independent examination;
furthermore this appears to be mainly about stopping those who
have committed an offence or are ineligible or have behaved inappropriately
in the past. This would be achieved more simply and effectively
by some form of listing of those ineligible, against which applications
for licences could be checked. If CA 1992 69 (1) (e), (f), (g)
are the only items considered before issuing a certificate, then
we would contend that the CoF process is a bit of a sledgehammer
to crack a nut.
We would be particularly
concerned about potential bottlenecks, especially in London, in
issuing CoFs and the resource cost for the charity, which appears
to have been overlooked in sections 9.4.15-9.4.17. Finally it
would appear to contradict the spirit of self-regulation.
2.2 It is acknowledged
in section 9.4.17 that there will be an impact for collections
in London in terms of the transfer of requests for licences from
the Metropolitan Police to 32 London boroughs. This is clearly
a significant extra burden on the charities and the London boroughs
and we are concerned that this has been underestimated, and may
turn out to be impractical.
2.3 The issue of licences
not more than 6 months in advance is not workable for those charities
that have annual collection 'weeks" and have to plan at least
a year in advance.
2.4 Conversely, for short-notice
emergency collections, 14 days or one month may be "too late"
and short-notice for emergencies will need to be allowed.
3. Trading
A specific question has
been raised by the Joint Committee. "Is it right that the
draft Bill does not include the recommendation in the Strategy
Unit consultation paper that charities should be allowed to trade
as part of their normal activities without the need to set up
a trading company?" Our view is that this is not right for
the following reasons:
3.1 The current rules
and guidance governing which transactions should be routed via
trading subsidiaries are complex, inconsistent and very difficult
for charities to get right.
a. Corporate promotions
that are commercial in nature should be routed via the subsidiary.
The Inland Revenue has recently updated its guidance governing
when use of a charity logo by a company constitutes trade, and
when display by a charity of a company logo is trading. This means
that the use of charity name and logo by company X, not promoted
by the charity should be routed via the charity (because it is
not trading) and the use of the charity name and logo by company
Y, promoted by the charity, should be routed via the subsidiary
(because it is trading). As another example, if a charity acknowledges
a donation from a company by displaying the corporate logo, the
size of the logo used will determine whether or not the activity
is "trading".
This is further complicated
by the fact that the VAT rules governing use of name and logo
and sponsorship contradict the direct tax rules, and this can
further confuse the charity in terms of which entity it should
be using for any given corporate promotion.
b. For affinity credit
cards, the rules are that 20% of the initial donation should be
routed via the subsidiary and 80% of the initial donation and
all the subsequent donations should be routed via the parent charity.
c. Fundraising events
can for tax purposes be routed via either entity, but the Charity
Commission has suggested that some should be routed via the trading
subsidiary.
3.2 The Charity Commission
has suggested that charities should fund trading subsidiaries
by way of secured debt. This is impractical given that subsidiaries
covenant or gift aid taxable profits in total back to the parent
charity each year. This is done in order that trustees of the
charity can maximise the income received by the charity. In reality
therefore, few assets remain in the balance sheet of the subsidiary
at each year-end.
3.3 Further complications
could be on the horizon for charities with trading subsidiaries
in the areas of transfer pricing and thin capitalisation following
the 2004 budget announcements.
3.4 The resource and financial
costs of setting up and maintaining a separate trading subsidiary
can be significant especially given the complexities referred
to above.
The Government response
to the Strategy Unit report stated that conducting trading activities
within the tax-exempt structure of charities would offend the
principle of a level playing field with private sector business.
3.5 The reality is that
charity trustees ensure that the charity maximises its incoming
resources by arranging for trading subsidiaries to covenant or
gift aid their profits to the charity in total, maximising the
tax effectiveness. So no extra tax benefit would be achieved by
routing the transactions through the parent charity.
The only other relevant
tax is rates, and local authorities can continue their current
policy of allowing charitable rate relief subject to the percentage
of donated goods sold through charity shops. The legal entity
through which the transactions are routed is therefore not relevant
Other objections to trade
being conducted by charities that have been raised are:
a. This will allow expensive
or "improper" activities to be carried out within the
charity.
b. Risky ventures will
be carried out within the charity.
3.6 Charity Trustees will
be expected to carry out a "duty of care" and have specific
obligations in respect of activities carried out by the charities.
3.7 Fundraising ventures
far more "risky" than say the buying and selling of
Christmas cards are already carried out within the charity.
3.8 Additional safeguards
can be introduced as necessary to ensure Trustees control and
manage the activities conducted within the charity.
3.9 In summary, we believe
there is no compelling reason to reject the Strategy Unit recommendations.
The current complexities, anomalies and costs involved in the
running of trading subsidiaries are in urgent need of attention.
The easiest way of achieving this would be by allowing trade as
part of the charity's normal activities.
We trust this submission
is helpful and wish the Joint Committee every success in its deliberations.
Yours sincerely,
~
Nick Kavanagh
Finance Director
tel. no:
0207 012 6485
email: nkavanagh@savethechildren.org.uk
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