Stronger charities for a stronger society Contents

Chapter 2: The history and shape of the charity sector

Charities and charity law

23.Until relatively recently, legislation governing charities was limited. Before the passage of the Charities Act 2006, the only statutory definition of a charity in England was contained in the preamble to a 1601 Statute. The definition of ‘charitable purposes’ was developed entirely through case law with reference to this preamble.12

24.Systems and processes for management and oversight of the charity sector are also relatively young. While piecemeal attempts were made over the centuries, the appointment of a permanent board of Charity Commissioners in 1853 was the first attempt to provide formal supervision of the sector. This was followed over a century later by the Charities Act 1960, which was the first truly modern system of oversight.13

25.The Charities Act 2006 provided statutory definitions of a charity and of a charitable purpose for the first time. A charity is defined by the Act as an institution which is established for charitable purposes only, and is subject to the jurisdiction of the High Court. A charitable purpose is defined as such if it falls within a list of 12 purposes including poverty relief, the advancement of education, advancement of the arts, advancement of religion or advancement of health. A purpose may be deemed charitable if it is already recognised as such in existing charity law.14 In addition, the Act also introduced the Charitable Incorporated Organisation (CIO) structure, though this did not come into effect until early 2013. The structure enables charities to have corporate body status without becoming companies. The Charities Act 2006 was consolidated along with other legislation relating to charities in the Charities Act 2011.

26.The 2006 Act further modernised the role of the Charity Commission and its oversight powers. Most notably, it introduced a “public benefit requirement” to be met for charities in order to be registered by the Charity Commission. While charities have always been required to work for the public benefit, previous law deemed that charitable purposes were by definition for the public benefit. The 2006 Act essentially reversed this assumption, stating that “it is not to be presumed that a purpose of a particular description is for the public benefit.”15

27.The specific interpretation of public benefit is not set out in legislation but is left to the Charity Commission and, where necessary, the courts. The Charity Commission has published guidance detailing its interpretation of public benefit, and requires registered charities to explain how they have carried out their purpose for the public benefit in their trustees’ annual reports.16

28.The 2006 Act was criticised by the House of Commons Public Administration Select Committee in its 2014 post-legislative scrutiny report for introducing a “critically flawed” approach to the issue of the public benefit requirement. Noting that the Commission’s public benefit guidance had resulted in “costly legal battles” with the Independent Schools Council and with the Plymouth Brethren Christian Church, it argued that Parliament should revisit the legislation and explicitly set the criteria for public benefit rather than delegating it to the Charity Commission.17

29.Shortly afterwards, Lord Hodgson of Astley Abbotts undertook a review of the operation of the 2006 Act as set out in the original legislation. This review, Trusted and Independent: Giving charity back to charities, published in July 2012, covered a range of areas including statutory public benefit tests, the Charity Commission and charity regulation, exempt charities, complaints about charities, fundraising and social investment.18

30.Key recommendations of Lord Hodgson’s review included that:

31.The Government did not accept all the recommendations of Lord Hodgson’s report. In particular, it rejected his proposals to introduce powers of automatic trustee payment for large charities, for recommended limits to trustee terms, and to raise the income threshold for Charity Commission registration.20

32.Some recommendations were, however, incorporated in the Charities (Protection and Social Investment) Act 2016. The Act granted the Charity Commission new powers to remove and disqualify trustees in certain circumstances, as well as powers to direct winding up, to apply property to another charity, or to specify that certain actions not be taken. The Act also granted charities a general power to make social investments.

33.Separately, following the 2015 charity fundraising concerns, an independent review led by Sir Stuart Etherington of the National Council for Voluntary Organisations (NCVO) proposed a range of changes to the way that fundraising regulation operates.21 These included:

34.These proposals were accepted by sector bodies and Government, and a new Fundraising Regulator was established in January 2016 with the powers set out above. The House of Commons Public Administration and Constitutional Affairs Committee described the body as the “last chance” for fundraising self-regulation,23 and the Charities (Protection and Social Investment) Act 2016 granted the Government a reserve power to direct that fundraising regulation be carried out by the Charity Commission in the event that the new regulator failed to perform adequately.24

35.Other recent legislation relating to the sector has included the Public Services (Social Value) Act 2012 and the Transparency of Lobbying, Non-party Campaigning and Trade Union Administration Act 2014.

36.The former Act, often known as the Social Value Act, requires public sector commissioners to consider how contracts might provide additional social value beyond that specified in the terms of the contract itself, for example by supporting employment in a local area or by improving access to services. The Act has been considered favourable to charities and social enterprises on the basis that they are established for the public benefit and so can deliver additional social value as part of their mission.

37.The latter Act, often known as the Lobbying Act, introduced new regulations in relation to the activities of registered “non-party campaigners” (including charities engaged in campaign activity) in the run up to General Elections. The Act introduced constituency limits on campaign spending, expanded the list of ‘qualifying matters’ to be counted towards spending limits for non-party campaigners, and lowered the expenditure thresholds above which bodies undertaking activity in an election period would have to register with the Electoral Commission.25

38.The Act received some criticism in the charity sector and elsewhere for its perceived ‘chilling effect’ on the work of charities,26 and was also the subject of a review by Lord Hodgson of Astley Abbotts, published in March 2016. The review recommended a number of technical changes to the operation of the law, including changes to the definition of campaigning, reduction of the regulated campaign period to four months before the election, and changes to rules on joint campaigning.27

Regulation and the role of government

39.Charities set up in England or Wales must register with the Charity Commission unless they are specified as exempt28 or excepted29 from registration or their income is below £5,000 a year.30 There are around 75,000 excepted charities, and around 14,000 exempted charities in England and Wales.31 Further detail about exempt and excepted charities is set out in Box 1. Charities in Scotland and Northern Ireland are regulated respectively by the Office of the Scottish Charity Regulator (OSCR) and the Charity Commission for Northern Ireland (CCNI) and all charities in their jurisdictions are required to register.

Box 1: Exempt and excepted charities

  • “Exempt charities” are institutions which cannot be registered with the Commission and are not subject to its direct regulatory jurisdiction. They were initially granted the exemption because they were considered to be adequately supervised by another body or authority. The exempt charities are those institutions that are comprised in Schedule 3 to the Charities Act 2011. Examples of such charities are most universities in England and the boards of trustees of various specified museums and galleries.
  • “Excepted charities” are charities that have been excepted from the requirement to register with the Charity Commission and have an annual income of less than £100,000. Such excepted charities do not have to meet the requirements that flow from registration such as filing annual accounts, but do come under the Commission’s regulatory jurisdiction. Types of charities that are excepted include scouts and guides units, non-public facing armed services funds, Parochial Church Councils and certain Christian religious denominations. Small charities with an annual income of less than £5,000 are excepted.

40.All registered charities must send an annual return to the Commission, must inform the Commission of changes to governing documents or trustees, and must report any serious incidents in their charity to the Commission as soon as possible. As well as charity registration, the Commission is responsible for taking enforcement action, ensuring charities meet their legal requirements, making available information about all registered charities, and providing online advice and guidance.32

41.The operations of the Commission have received scrutiny in recent years, most notably from the National Audit Office and the House of Commons Public Accounts Committee. The Committee published a report in January 2014 stating that the Commission had “not regulated the charity sector effectively” and had placed “insufficient emphasis on the monitoring and investigation of charities.”33

42.The National Audit Office made similar criticisms in its 2013 report, stating that the Commission was “reactive” and made “little use of its statutory enforcement powers.”34 Its follow-up report in 2015 was more positive, stating that the Commission had developed a new business model with the intention of using risk assessment and data analysis to guide its work, that it was updating its approach to assessing regulatory risk, and that it had improved its follow-up checks but was not addressing all issues that might be expected.35

43.As well as the Charity Commission’s regulatory oversight of charities, the Government retains a role in overseeing and supporting the sector, as well as administering grants and contracts. The Office for Civil Society (OCS) is responsible for areas of policy including social action, civil society sector support, social enterprise and social investment, and the National Citizen Service and youth policy. Previously part of the Cabinet Office, the OCS was relocated to the Department for Culture, Media and Sport in July 2016.

44.The Government has been particularly supportive of social investment as a means of diversifying the income of the charity sector, and has introduced initiatives including Social Investment Tax Relief and Social Impact Bonds. The Government has also established the independent social investment institutions Big Society Capital and Access: The Foundation for Social Investment, the latter intended in particular to improve the accessibility of social investment to small- and medium-sized charities and social enterprises.

45.In 2016 the Government attracted controversy by proposing that an “anti-advocacy clause” would be included in all future government grants, forbidding any use of public money for advocacy work on the part of charities.36 Just before our inquiry began, the Government chose to ‘pause’ the proposals for further consultation,37 and subsequently amended their plans.38

The shape and funding of the charity sector

46.There are currently 167,000 registered charities in England and Wales.39 Organisations with an annual income of less than £100,000 make up almost three quarters (73%) of the sector, while the largest charities, with an annual income of £5m or above, make up just 1% of the sector. However, the largest charities account for 72% of the income for the sector (see Figure 2).40 An NCVO study in 2013/14 found that charities with an income of over £1 million were 3% of the sector numerically but accounted for over 80% of the sector’s income.41

Figure 2: Proportion of charities by annual income and proportion of the income of the sector that they receive

Source: Charity Commission, Recent charity register statistics, [accessed 14 March 2017]. Charities where the annual income bracket is not yet known have been excluded.

47.Organisations delivering social services accounted for almost a quarter of the voluntary sector’s spending in 2013/14. This was followed by culture and recreation (12%) and health (11%).42 The most common recorded beneficiary group of charities is children and young people (with 28% of charities specifying this group), followed by the general public (21%), the elderly (14%) and people with disabilities (13%).43

48.Many of our witnesses emphasised the considerable diversity in the size of charities, the areas they focus on and the types of work they undertake.44 We also heard about the variety of organisational structures, such as community groups, social enterprises and Community Interest Companies, that form part of the voluntary and community sector.45

49.We recognise and celebrate the enormous range and variety within the charity sector. The large charities, that raise the most money and are most widely known, are only a tiny fraction of the 167,000 registered charities in England and Wales, let alone the many social enterprises, small voluntary bodies and community groups besides. We acknowledge that the issues raised in this report may affect different parts of the sector in different ways and that while there are common principles for charities, practices may necessarily diverge.

50.Government income to the charity sector has fallen in absolute terms since the financial year 2009/10, with central government income peaking at £7 billion and local government income at £7.9 billion that year. Central government income then fell in absolute terms in each of the subsequent three years before a slight increase to £6.8 billion in 2013/14. Local government income saw a similar picture, reaching a low point of £7.2 billion in both 2011/12 and 2012/13 before rising to £7.4 billion in 2013/14.46

51.The form of income from government, local and national, has also changed significantly. In 2003/04, income for the sector from government grants (£6.1bn) and contracts (£5.8bn) was roughly equal. Since then, however, the value of grants has declined and in 2013/14 was £2.8bn. By contrast, income from contracts has grown, up to £12.2bn in 2013/14.47 The current Government and its coalition predecessor have also placed a particular emphasis on the ability of charities and other voluntary organisations to demonstrate positive and measurable outcomes from their work, notably by the increasing use of ‘Payment by Results’ contracts (whereby all or part of the payment depends on the provider achieving outcomes specified by the commissioner).48

52.The effect of this transition to contracts, and of the government’s policy priorities, have been that the largest charities (those with an income of over £100 million) have benefited most from the recent increase in government income, owing to their ability to bid for the large-scale contracts offered by central and local government. Conversely, the NCVO notes that “small and medium sized charities did not recover income lost from government since 2009/10”, perhaps owing to difficulties with bidding for larger contracts with a reduced focus on quality and an emphasis on Payment by Results.49 These issues are explored further in Chapter 4.

The contribution of charities

53.During our inquiry we heard about the wide variety of contributions that charities make and about the values they contribute to society. In different parts of the sector, different causes and campaigns are championed, such as: cultural charities, providing access to the arts; sporting charities, engaging people in sporting activities; animal welfare charities caring for pets and wildlife; social services charities supporting people at home; and international aid charities helping people abroad. (See Figure 1 for a breakdown of voluntary organisations by area of activity).

54.We were told that charities provided scrutiny and challenge and represent the views of those less able to be heard on their own.50 Charities were described as catalysts for change.51 Action Against Hunger said that charities “play a crucial role as a non-partisan watchdog of government actions and the actions of any individual or corporation that may have negative impact on communities.”52

55.Charities can also inspire collective action and philanthropy, and build social capital.53 Matthew Taylor from the Royal Society of Arts (RSA) said the sector was “committed in one way or another to social benefit” and that it “seeks to achieve that in part by mobilising the voluntary efforts of people.”54

56.We heard that charities played an important role in community cohesion with a valuable convening power to bring people from different backgrounds together.55 We also heard that charities had intimate knowledge of the communities and areas in which they operated and that, along with their values, made them more likely to be trusted.56 Locality said that:

“In increasingly uncertain times, the role that community anchor organisations play is more important than ever. They stimulate active citizenship and civic participation through volunteering and community organising, and act as a catalyst for community cohesion, bringing together diverse groups to work together for the local neighbourhood. Community anchors build and harness a huge amount of social capital in their local communities. Through their strong relationships with vulnerable and excluded groups locally, they support people to have a voice in their local community and shape neighbourhood priorities. Community anchor organisations also often play an important role in reinvigorating common assets locally, which ensures that communities can directly control the important activity in their neighbourhoods.”57

57.Asheem Singh from the Association of Chief Executives of Voluntary Organisations (ACEVO) noted the role of faith charities in social cohesion:

“That is one of the great under-explored areas by the secular bit of the sector. Sometimes it feels that ne’er the twain shall meet, but one of the things we want to do over the course of the next year is to investigate the social capital-building capabilities of the faith sector in this country, because they are considerable.”58

58.Aamer Naeem from Penny Appeal said that faith organisations could “leverage the faith conversation as well as the humanitarian conversation.”59 Both he and Paul Hackwood, from the Church Urban Fund, talked about the social cohesion work undertaken by the Near Neighbours programme, engaging multi-ethnic, multi-faith civil society.60

59.We also heard that charities were the framework for philanthropy and civil society values.61 Many of our witnesses emphasised the unique altruistic values of charities to society.62 Paul Hackwood spoke about charities being “values led”, something that was particularly prominent for faith-based charities.63 Common Vision talked about the ability of charities to promote positive public behaviour.64

60.We heard that by operating as a charity, and having the beneficiary at the heart of the service, people get better support than might be provided by other sectors.65 Many witnesses told us that charities provide support to people who are disadvantaged66 and fill gaps in the services offered by the public and private sectors.67 People and Work Talwrn set this in context and suggested that charities should be wary of simply picking up what the state had left behind:

“During the twentieth century charities adapted as the State took on many of their traditional roles. As the State now moves away from non-statutory interventions, charities will need to change again but it would be wrong for them to just pick up what the State is walking away from, even if they had the resources to do so. The challenge, and opportunity, is to do things differently and better.”68

61.We also heard about the contribution of charities as employers, with the sector estimated to employ 827,000 people in the UK.69

62.Richard Jenkins from the Association of Charitable Foundations concluded that: “At the end of the day, charity is an expression of human passion, resourcefulness, a sense of injustice and the need to do something.”70

63.Charities play a fundamental role in our civic life. They are often in the front line of support for the most vulnerable and are therefore in the best place to assess their needs. They not only provide. They inspire and innovate and through their advocacy help shape our laws, government policies and society as a whole.

64.We note that the Minister for Civil Society, Rob Wilson MP, said in December 2015 that he wanted “government to be one partner among many” for the charity sector, “a helping hand rather than crutch.”71

65.We believe that the Government, the rest of the public sector and the private sector should foster robust and meaningful partnerships with the charity sector and support and facilitate charities whenever possible.

12 Explanatory notes to the Charities Bill [Bill 83 (2005–06)-EN]

13 Lord Hodgson of Astley Abbotts CBE, Trusted and Independent: Giving charity back to charities: Review of the Charities Act 2006 (July 2012): [accessed 14 March 2017]

14 Charities Act 2006, sections 1–2. These provisions have since been replaced by the Charities Act 2011, sections 1–3.

15 Charities Act 2006, section 3. This provision has since been replaced by the Charities Act 2011, section 4.

16 The Charity Commission, ‘Public benefit: rules for charities’: [accessed 14 March 2017]

17 Public Administration Select Committee, The role of the Charity Commission and “public benefit”: Post-legislative scrutiny of the Charities Act 2006 (Third Report, Session 2013–14, HC 76)

18 Lord Hodgson of Astley Abbotts CBE, Trusted and Independent: Giving charity back to charities: Review of the Charities Act 2006 (July 2012): [accessed 14 March 2017]

19 Ibid.

20 Cabinet Office, Government response to The Public Administration Select Committee’s Third Report of 2013–14: The role of the Charity Commission and “public benefit”: Post-legislative scrutiny of the Charities Act 2006 and Lord Hodgson’s statutory review of the Charities Act 2006: Trusted and Independent, Giving back to charities, Cm 8700, September 2013: [accessed 14 March 2017]

21 NCVO, Regulating fundraising for the future: Trust in charities, confidence in fundraising regulation (September 2015): [accessed 14 March 2017]

22 Ibid.

23 Public Administration and Constitutional Affairs Committee, The 2015 charity fundraising controversy: lessons for trustees, the Charity Commission, and regulators (Third Report, Session 2015–16, HC 431)

24 Charities (Protection and Social Investment) Act 2016, section 14

25 Lord Hodgson of Astley Abbotts CBE, Third Party Election Campaigning - Getting the Balance Right (March 2016): [accessed 14 March 2017]

26 ‘Charities warn ‘gagging law’ stops them campaigning on election issues’, The Independent (18 February 2015): [accessed 14 March 2017]

27 Lord Hodgson of Astley Abbotts CBE, Third Party Election Campaigning - Getting the Balance Right (March 2016): [accessed 14 March 2017]

28 The Charity Commission, ‘Exempt charities (CC23)’: [accessed 14 March 2017]

29 The Charity Commission, ‘Guidance: Excepted Charities’: [accessed 14 March 2017]

30 Other than Charitable Incorporated Organisations, all of which must register, regardless of income.

31 Joint Committee on the Draft Protection of Charities Bill, Draft Protection of Charities Bill (Report of Session 2014–15, HC 813, HL Paper 108), para 39

32 The Charity Commission for England and Wales, ‘About us’: [accessed 14 March 2017]

33 Committee of Public Accounts, The Charity Commission (Forty-second Report, Session 2013–14, HC 792)

34 National Audit Office, The regulatory effectiveness of the Charity Commission (December 2013):–001-Charity-Commission-Book.pdf [accessed 14 March 2017]

35 National Audit Office, Follow-up on the Charity Commission (January 2015): [accessed 14 March 2017]

36 Cabinet Office, ‘Government announces new clause to be inserted into grant agreements’: [accessed 14 March 2017]

37 Cabinet Office, ‘Update on a new clause to be inserted into grant agreements’: [accessed 14 March 2017]

38 See section on the role of charity advocacy in Chapter 8.

39 The Charity Commission, ‘Recent charity register statistics: Charity Commission’: [accessed 14 March 2017]

40 Ibid.

41 NCVO, ‘UK Civil Society Almanac 2016: size and scope’: [accessed 14 March 2017]

42 NCVO, ‘UK Civil Society Almanac 2016: spending’: [accessed 14 March 2017]

43 NCVO, ‘UK Civil Society Almanac 2016: beneficiaries’: [accessed 14 March 2017]

44 Q 116 (Martin Sime) and written evidence from Charity Law and Policy Unit, School of Law and Social Justice, University of Liverpool (CHA0104), Charity Tax Group (CHA0122), Children England (CHA0173), Clinks (CHA0084), Professor John Mohan, Dr David Clifford and Dr Rose Lindsey (CHA0158), Mr Andrew Purkis (CHA0146), Public Relations and Communications Association (CHA0030), Stella Smith (CHA0060) and The Institute of Chartered Accountants in England and Wales (CHA0168)

45 Q 72 (Jane Wilson) and written evidence from Community Sector Coalition (CHA0171) and Social Enterprise UK (CHA0117)

46 NCVO, ‘UK Civil Society Almanac 2016: Income from Government’: [accessed 14 March 2017]

47 Ibid.

48 National Audit Office, Outcome-based payment schemes: government’s use of payment by results (June 2015): [accessed 14 March 2017] and NCVO, Payment by Results and the voluntary sector (April 2014): [accessed 14 March 2017]

49 NCVO, ‘UK Civil Society Almanac 2016: Income from Government’: [accessed 14 March 2017]

50 Written evidence from British Red Cross (CHA0162), Bolton Community and Voluntary Services (CHA0064), Lucy Caldicott (CHA0170), Citizens Advice Newcastle (CHA0108), Civil Exchange (CHA0141), Community Southwark (CHA075), Mr Andrew Purkis (CHA0146), Rural Community Council of Essex (CHA0096) and Visionary (CHA0174)

51 Written evidence from Locality (CHA0133), National Association for Voluntary and Community Action (CHA0076) and Oxfam GB (CHA0113)

52 Written evidence from Action Against Hunger (CHA0078)

53 Written evidence from Action with Communities in Rural England (ACRE) (CHA0085), Civil Exchange (CHA0141), Common Vision (CHA0136), Camelot UK Lotteries Ltd (CHA0115), Calouste Gulbenkian Foundation (CHA0163), Locality (CHA0133), Voluntary Organisations Disability Group (CHA0050) and VONNE (CHA0123)

54 Q 41 (Matthew Taylor)

55 Q 21 (Rebecca Bunce), Q 46 (David Cutler), Q 61 (Paul Hackwood, Aamer Naeem), and written evidence from Bolton Community and Voluntary Services (CHA0064), Charities Aid Foundation (CHA0089), Children England (CHA0173), Foundation for Social Improvement (CHA0057) and Mr Wally Harbert (CHA0019)

56 Written evidence from Charity Law and Policy Unit, School of Law and Social Justice, University of Liverpool (CHA0104), Community Links Bromley (CHA0100), Localgiving (CHA0016), MHA (CHA0124), Dr Therese O’Toole and Dr Ekaterina Braginskaia (CHA0116) and Pilotlight (CHA0073)

57 Written evidence from Locality (CHA0133)

58 Q 20 (Asheem Singh)

59 Q 62 (Aamer Naeem)

60 Q 61 (Paul Hackwood, Aamer Naeem)

61 Written evidence from RSM UK (CHA0120)

62 Written evidence from British Heart Foundation (CHA00152), Sense, The National Deafblind and Rubella Association (CHA0040), Small Charities Coalition (CHA0140) and Voluntary Organisations Disability Group (CHA0050)

63 Q 62 (Paul Hackwood)

64 Written evidence from Common Vision (CHA0136)

65 Written evidence from Clinks (CHA0084) and Lloyds Bank Foundation for England and Wales (CHA0031)

66 Written evidence from Action Against Hunger (CHA0078), Lucy Caldicott (CHA0170), Charity Tax Group (CHA0122), Chilterns MS Therapy Centre Ltd (CHA0066), Citizens Advice Newcastle (CHA0108) and Community Links Bromley (CHA0100)

67 Written evidence from Alzheimer’s Research UK (CHA0074), Chilterns MS Therapy Centre Ltd (CHA0066), Home-Start Slough (CHA0068), Hospice UK (CHA0130), London Funders (CHA0090), MHA (CHA0124), Together for Short Lives (CHA0144), Visionary (CHA0174) and Wellcome Trust (CHA0164)

68 Written evidence from People and Work Talwrn (CHA0034)

69 Written evidence from British Heart Foundation (CHA0152), National Council for Voluntary Organisations (CHA0148) and Sense, The National Deafblind and Rubella Association (CHA0040)

70 36 (Richard Jenkins)

71 Cabinet Office, ‘Giving Tuesday 2015: Rob Wilson speech’: [accessed 14 March]

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