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The many faces of charities

This looks like a big, prestigious organisation: its head office is a modern, eight-storey building opposite the entrance to Moorgate underground station in the City of London. It had an income of £243 million in 2018, which gives it roughly the same turnover as, for example, Caffè Nero, which in that year had nearly 650 coffee shops in the UK and Ireland. There are almost 4,000 staff in this concrete-and-glass building and in branches around the country. The chief executive has a team of seven directors who answer to him and in 2018 was paid a salary of £173,000.¹ Not a fat cat by City standards, but undoubtedly a high earner.

So is this a financial or professional services company, perhaps, or a large accountancy practice? No – it’s actually a charity. It’s the British Red Cross, founded in 1870, the work of which ranges from relief in UK disasters, such as flooding, campaigning against modern slavery and supporting refugees. In the COVID-19 epidemic its volunteers freed up hospital beds by helping patients go home after treatment and looking after them. It also helps with overseas disasters, working with the 190-strong International Federation of Red Cross and Red Crescent Societies and the International Committee of the Red Cross in Geneva.

The chief executive since 2014 is Mike Adamson, who has in the past also worked for a consultancy firm in the private sector and an NHS primary care trust in the public sector. He says the demands of leading a large organisation are similar across the sectors, including extensive travel and work in the evenings and at weekends:

“It eats up lots of time, and you have to be very disciplined in carving out time for other things that are important, including family and friends. But I’ve undoubtedly been happiest in the charity sector. There’s the privilege of trying to make a difference in the world, combined with the freedom of manoeuvre that much of the public sector doesn’t have, and with the independence that you find in the private sector.”

At the other end of the scale from the British Red Cross is the Peak and Northern Footpaths Society, a small charity that was established in 1894 to make sure footpaths are kept open. Its first major success was in 1896, when it established a right of way from Snake to Hayfield, high on the Pennine hills in the north of England. Anyone out walking in Derbyshire, Cheshire and Lancashire is likely to come across the Society’s trademark – the square, green metal signs indicating the paths.

The Society has about 1,200 members, who pay an annual subscription of £15. It owns a small building in Stockport, Cheshire and has no paid staff. Among the membership are about 100 volunteer ‘inspectors’, each of whom checks the footpaths in their local area at least every two years. The charity also has six ‘courts and inquiries officers’, also volunteers, who are familiar with footpath law and take up contentious cases, as when a public right of way is contested by landowners. Then there are about a dozen people who help with office work. “Most of our volunteers are hikers who as they get older want to put something back,” says Dave Brown, secretary of the Society.

“I’d be surprised if any of our volunteers put in less than a day a week, and the inspectors are often walking the paths just for pleasure anyway. If paths are blocked or there are other problems, the volunteers report this to us and we take it up with the highway authorities. We’re very much against having paid staff and prefer to remain entirely as volunteers. A while back, there was a proposal to pay someone, but there was an outraged reaction to that, even though we’re quite well off.”

These two snapshots prefigure the stories later in this book that illustrate in more detail the huge range of charitable activity and the extent to which it underpins many aspects of life in the UK. But the rest of this chapter and the two that follow paint the general picture and describe the context in which charities have to work: their structures, the rules they have to follow and the debates and disputes that surround them and constrain what they do.

How many registered charities?

Charities vary dramatically not only in size and income, but also in the balance between paid staff and volunteers. And there are a huge number of charities: at the start of 2020 there were 168,528 on the register of the Charity Commission for England and Wales.² Their total income was £80.5 billion – a bit less than the combined annual take of Tesco and Sainsbury’s. In Scotland in 2020 there were another 25,000 registered charities with an income of £14 billion, according to the Office of the Scottish Charity Regulator, and in Northern Ireland, which also has a separate regulator, there were more than 6,000 registered charities in 2019, with a total income of £1.9 billion in 2017.

In England and Wales, 43% of charities on the register at the start of 2020 received less than 0.3% of that total income of more than £80 billion. The Peak and Northern Footpaths Society might be small, with an income (minus legacies) of £39,000 in 2019, but there were nearly 74,000 charities that are much smaller – so-called kitchen-table charities, all with annual incomes below £10,000.

At the other end of the scale, 2,356 charities registered in England and Wales at the start of 2020 – a mere 1.3% – have incomes above £5 million and together account for 72.5% of the total take of more than £80 billion. Some of the biggest are household names, such as the British Red Cross, Cancer Research UK (CRUK) – which had an income of £672 million in 2018/19 – and the National Trust (£595 million). The two biggest charities by income are perhaps less well known – the British Council, which had an income of £1.25 billion in 2018/19, and Nuffield Health, a chain of fee-charging hospitals and fitness clubs, which took in £993 million in 2019.

Charitable causes

It may come as a surprise that the British Council is a charity at all. It promotes British culture and language abroad, received a £184 million grant in 2018/19 from the Foreign and Commonwealth Office and looks very much like an arm of the state.³ But the bulk of its income comes from teaching and running examinations in English in other countries – and the advancement of education is one of the main ‘charitable purposes’ that organisations have by law to pursue if they are to qualify as charities. Another such purpose is the advancement of health or saving lives, which is how private hospitals such as those run by Nuffield Health, or the prestigious London Clinic, come to be charities.

In England, Wales and Northern Ireland – the law in Scotland is slightly different – the legal definition of a charitable purpose includes a requirement to be for the public benefit.⁴ That benefit can be to the public in general or ‘a sufficient section of the public’, such as people who live in a particular place or work in a certain profession. The remarkably wide range of charitable purposes means that all sorts of organisations, doing all kinds of things, can qualify to be charities.

The main starting point for charity law was the preamble to the Statute of Charitable Uses of 1601 in the reign of Elizabeth I. This preamble was retained when the statute was finally repealed in 1888, and was summarised shortly afterwards by the senior judge Lord Macnaghten as the four ‘heads’ of charity: relief of poverty, advancement of education, advancement of religion and other purposes beneficial to the community. These heads were revised and expanded in the Charities Act 2006 as 13 descriptions of charitable purposes covering a broad spectrum: as well as the familiar purposes of relief of poverty, health, education and religion, they include the advancement of citizenship, the arts, amateur sport, human rights, environmental protection and animal welfare. Other descriptions are conflict resolution; the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage; the promotion of the efficiency of the armed forces or emergency services; and any other purpose ‘analogous to or within the spirit of the existing charitable purposes’.

Yet more charities

So far we’ve referred to charities registered with the relevant charity regulators in the UK. But in England and Wales they are only part of the story. There are also about 180,000 charities that do not have to register, although they are subject to regulation by the Charity Commission.⁵ In this category are charities with an income below £5,000 a year and so-called ‘excepted’ charities that include Christian churches, Scout and Guide groups and certain armed forces charities.

Adding registered and excepted charities together brings us to a total of nearly 350,000. But we’re not finished yet. There is a third category known as ‘exempt’ charities – a mixed collection including more than 8,000 academy schools, further education colleges, many universities and most big national museums. Their total number is estimated by the Charity Commission to be nearly 15,000. They are exempt from registration with the Commission because they are considered to be adequately regulated by some other body, known as a ‘principal regulator’.

Principal regulators are often government ministers, but universities and higher education institutions in England, for instance, have the Office for Students as principal regulator. However, all the principal regulators have an agreement with the Charity Commission designed to ensure that they follow the principles of charity law in the way they exercise their functions.

So we’re now up to an impressive total of more than 360,000 charities in England and Wales with a combined estimated income as high as £160 billion. This is a complex sector, with many accretions and anomalies; over time, bits have been bolted on or sub-categories created to accommodate legal, social and political developments as they arose. In Collins Concise Dictionary the meanings of the word ‘charity’ are ‘the giving of help, money, food etc. to those in need’; institutions set up to perform that giving; and ‘a kindly attitude towards people’. In the world of charities as defined in law, that term ‘etc.’ stretches very widely; the phrase ‘in need’ is equally elastic; and kindliness is variable.

The result is that there are charities that do things that many people would not regard as charitable in the everyday sense, because they carry out quasi-governmental functions, such as state-funded academy schools or the British Council, or run controversial religious organisations such as the Jehovah’s Witnesses or the Plymouth Brethren, or provide expensive private healthcare or education, such as the London Clinic or Eton College and other public schools.

The Institution of Mechanical Engineers is a charity. So is Send a Cow, which started by sending dairy cows to Uganda and now helps Africans get the most out of their land. Some housing associations are charities. The Hitchin Bridge Club in Hertfordshire is a charity. So is the British Boer Goat Society. Some think-tanks are charities, which can be controversial if they are associated with a political point of view. Some grant-making charities hold all their assets in investments and donate the income to good causes, mostly through other charities. Others rely on constant fundraising. Charities can be as big as private sector corporations or as small as a local reading group.

Legal structure of charities

Charities can also take a complex variety of legal forms, which determine their structure and the ways they can act.⁶ Smaller charities that don’t employ staff frequently take the form of the unincorporated association, which is essentially a contractual agreement between individuals to combine for a particular purpose. Such an association will have a governing document that sets out rules for matters such as membership, the appointment of office holders and the conduct of meetings, but it does not have a separate legal identity. This means it cannot borrow money, enter into contracts or take legal action in its own right, and officers can be held personally liable if the charity is sued or incurs debts.

Many charities, especially larger ones such as Oxfam or CRUK, restrict the personal liabilities of office holders by registering under company law as companies limited by guarantee. These are different from companies limited by shares, which distribute earnings to shareholders. Members of a company limited by guarantee hold no shares, but undertake to pay a nominal sum towards costs if the company goes out of business. Crucially, the company, and therefore the charity, has its own legal personality, which means it can enter into contracts, such as contracts of employment, in its own name rather than those of individuals. From 2013 a new legal form, the charitable incorporated organisation (CIO), was made available, which allows a charity to have the status of a limited company without having to register with Companies House as well as the Charity Commission.

Another legal form is the charitable trust, commonly used when someone donates assets or a sum of money to be used for charitable purposes. As in the case of an unincorporated association, a charitable trust does not have a legal personality of its own, which means that the trustees must act as individuals if they enter into contracts and are personally at risk if the charity is sued. Charitable trusts and so-called ‘foundation CIOs’ are run by trustees and do not have wider memberships, whereas unincorporated organisations and ‘association CIOs’ generally have a wider membership that has a role in some of the decision making. Charitable companies can choose whether or not to have wider membership.

A final twist to all this complexity is that a number of charities, some of them going back centuries, were originally established by Royal Charter, granted by the monarch. Before the development of modern company and charity law, one effect of a charter was to give an organisation its own legal personality, usually with the same limited liability as a company and the ability to enter into contracts, hold assets and borrow money. Historic charter bodies that are charities include many schools and universities. In more recent times, existing charities have been able to apply to the Privy Council for a Royal Charter: the British Red Cross, described at the start of this chapter, received one in 1908; the Institute of Fundraising received one in 2020.

This labyrinth of both function and form is defined by an accretion of statutes and court judgments going back a century and more; but the difficulty for the average citizen is that the legal test of a charity does not always coincide with popular interpretations of the word.

The benefits and burdens of charitable status

Leaving definitions aside, what are the advantages of being a charity? The main one in practice is tax relief. Charities were spared from tax on income when it was first introduced to finance the war against Napoleon in 1799. Nowadays charities are spared not only tax on most forms of income, but also corporation tax, capital gains tax and business or non-domestic rates on their buildings; they are also exempt from inheritance tax. In most circumstances they do have to pay value added tax (VAT), which remains a bone of contention between their representative bodies and HM Treasury.

Another significant advantage is Gift Aid, which was introduced by John Major when he was chancellor of the exchequer during the final months of Margaret Thatcher’s premiership in 1990. This allows charities to claim back from HM Revenue and Customs the basic rate of income tax that has been paid by donors on the money they have donated; the scheme also gives an incentive for higher-rate taxpayers to give to charity, in that they can, in their annual tax return, claim back for themselves the difference between the basic rate and the higher rate of tax paid on any donations. In the year 2018/19 more than 70,000 charities received a total of more than £1.3 billion in Gift Aid, and all tax reliefs to charity totalled £3.8 billion.⁷

But tax breaks are not the only advantage: charities also share the reputational value of the word ‘charity’, with all its positive associations. For many people the word retains some of its religious resonance, deriving in part from the wording of the King James Bible, in which St Paul’s letter to the people of Corinth talks of ‘faith, hope and charity – but the greatest of these is charity’. A general aura of sanctity still surrounds the word ‘charity’; this may have been damaged by recent scandals and controversies, described in the next chapter, but most charities still find that being able to describe themselves as such is a significant advantage when publicising themselves or raising funds.

The advantages do not come without burdens, however. The definition of charity for tax purposes is different from the definition for charity law purposes, and charities have to comply with both tax law and charity law. They also have to submit a report and accounts to the relevant charity regulator every year and demonstrate that they are following one of the defined charitable purposes for the public benefit. The trustees who govern them, who cannot be paid or benefit from them, except in unusual or strictly defined circumstances, have to manage carefully any conflict of interest and report any serious incidents to the regulator. They also owe numerous legal duties to the charity they serve, not to mention compliance with the law on employment, health and safety, data protection and so on.

Charities’ income and contribution to the economy

So much for the advantages and burdens of charities: a key question is where charities actually get their money from. The popular conception is that it’s all donated by the generous British public – ordinary citizens responding to the need of others for what Collins Concise Dictionary calls ‘help, money, food etc’. But the picture is more complex than that, as evidenced by the NCVO Almanac, the annual volume of statistics produced by the National Council for Voluntary Organisations (NCVO).⁸ Its analysis is based on what it calls ‘general charities’ – all charities registered in the UK, minus religious bodies, independent schools, government-controlled organisations and housing associations.

The 2020 analysis of the 166,592 general charities registered in the UK in 2017/18 shows that they had an income of £53.6 billion, of which more than £25.4 billion (47%) – the largest component – came from individuals. Only about half of that was in the form of donations or legacies, however – the rest came from things like membership subscriptions that confer benefits, such as a magazine; the rent paid by people in housing provided by a charity; and the income from charity shops, raffles and lotteries. So, less than a quarter of the income of general charities came from people donating freely and receiving nothing in return.

The second-largest component of the income of general charities in 2017/18 was £15.7 billion (29%) from national, local and foreign government sources, which was payment for providing public services, mostly paid under contract but sometimes by means of grants (this aspect of charity work is explored in Chapter 12). The remaining 24% of the income came, in descending size, from grant-making charities, investments, donations from the private sector and the National Lottery. More than 19 million people volunteered for charities at least once in 2018/19, according to the Almanac, and the most recent calculation by the Office for National Statistics in 2016 put the value of volunteering to the economy at £23.9 billion, had it been contributed as paid work.

Most of these figures are predicted to shrink significantly as a result of the coronavirus pandemic that began in 2020. In his introduction to the 2020 Almanac, Karl Wilding, then chief executive of the NCVO, said the pandemic had prompted a burst of giving to some causes, but had seriously hampered public fundraising:

There is no doubt that the sector will be smaller in the immediate future. The questions are: how much smaller and for how long, and which organisations won’t make it? The effects of the pandemic are felt differently by different sorts of organisations with different income profiles. But the urgent challenge is finding paths to recovery.

In June 2020 the charity Pro Bono Economics was predicting from its charity tracker survey that the sector faced a £10 billion funding gap in the second half of the year.⁹

Other not-for-profit organisations

The world of charity, taking the word in a wider sense, doesn’t end with organisations that are legally constituted as charities. A key part of being a charity is that it is not for profit, in that it cannot benefit individuals other than defined beneficiaries. But there are thousands of organisations that are not set up as charities in the legal sense but are, to a greater or lesser extent, not for profit. They do work that many people would regard as charitable, in that they draw on philanthropic and altruistic motives and prioritise public or social good over private gain and profit. Their activities range from care and health services to leisure facilities and rehabilitation of ex-prisoners.

One category is community amateur sports clubs (CASCs). This legal form was set up by the government in 2002 and by 2020 there were more than 7,100 CASCs. They have to register with HM Revenue and Customs and follow strict rules in order to benefit from many of the same tax breaks as charities, including Gift Aid. Then there are community interest companies (CICs), a legal form introduced in 2005 to protect social purpose organisations that decide not to be charities, such as co‑operatives, from being converted into for-profit companies. By 2019 there were 15,729 CICs, which are required to meet a community interest test and are permitted to be companies with shareholders, in which case 35% of profits can be distributed. But most CICs opt to be companies limited by guarantee.

Larger CICs are often organisations that were once part of the NHS; one example is Chime, which was spun out of the NHS in 2011 and provides hearing tests and other audiology services in Devon.¹⁰ A successful smaller CIC is The Good Loaf in Northampton, which teaches about 100 vulnerable women each year how to bake, and runs a centre that helps them with problems such as drugs and alcohol, mental health, domestic or sexual abuse, parenting, debt and benefits.¹¹

As well as CASCs and CICs, there are so-called mutuals, which cover a range of legal forms but all allow members, who can be staff, customers or suppliers, to control the business and either share in its profits or use them for a wider community purpose.¹² The department store John Lewis is a well-known mutual, where staff collectively own and profit from the business. Mutuals can be normal limited companies in which most of the shares are owned, directly or indirectly, by staff rather than investors. But they can also be what used to be called industrial and provident societies (IPSs), which had their roots in the self-help organisations that sprang up in cities in the north of England as industry expanded in the 19th century. The former IPS now has two legal forms: one is the co‑operative society, where the owners can be the workers, independent producers, customers or a community of people with a common interest. In a co-op, profits not needed for reinvestment in the business are distributed to its members. The second form is the community benefit society, often known as a bencom, where any surpluses have to be devoted to community purposes – an example is examined in Chapter 8. Bencoms issue shares, which are not transferable and can be refunded only at their original value; and they can pay a low rate of interest, which is regarded as an operating cost rather than a distribution of profit.

CICs and mutuals are, in turn, part of the wider social enterprise movement that, according to Social Enterprise UK (SEUK), the membership body, consists of organisations that have a clear social or environmental mission, generate most of their income through trade, reinvest most of their profits, are independent of the state, are ‘majority controlled in the interests of the social mission’ and are accountable and transparent. In 2018 SEUK published research estimating that there were 100,000 social enterprises contributing £60 billion to the economy – 3% of gross domestic product – and employing two million people.¹³

One well-known social enterprise is Divine Chocolate, co-owned by the thousands of farmers in Ghana who supply the cocoa for the products and receive a share of the profits.¹⁴ Another example is Community Dental Services, a business owned by its 286 staff which has 38 clinics in central England, working mainly under contract to the NHS and local councils with the aim of providing dental services to vulnerable people.¹⁵

The overall picture

So, where does all this leave us? We have registered charities, excepted charities and exempt charities; some charities are trusts, which means the trustees carry ultimate liability, while many have the protection for their trustees of limited liability company status, and many smaller ones are simply unincorporated associations. Then there are CASCs, CICs, mutuals of various kinds and social enterprises. All inhabit a world with rules and boundaries that have bulged and shifted over time in a complicated process of accretion and adjustment.

And what should we call it all? The charitable sector, the voluntary sector, the not-for-profit sector, the social sector, the third sector? Each title describes one or some parts, but none quite encompasses them all, although what they have in common is a social, philanthropic or charitable motivation in the widest sense. The term ‘non-governmental organisation’, commonly shortened to NGO, is perhaps the most accurate description, but in practice it has come to refer mainly to international development bodies. The term ‘civil society’, more familiar in other European countries, has increasingly been used in the UK, not least by the incoming Coalition government in 2010 when it wanted to replace Labour’s term ‘third sector’ in the name for the relevant Whitehall unit. However, the term denotes all organisations that are independent of government and pursue the interests and collective will of citizens, including bodies such as political parties, many housing associations and trade unions, which are not readily seen as part of the world of voluntary action. Even the word ‘charity’ can be problematic, in that some charities have become so large and corporate that they conflict with a widely held conception that they should be unlike businesses and run by volunteers.

All this is perhaps why people sometimes give up trying to find a precise term to describe the sector and have instead resorted to the imprecise but evocative term ‘a loose and baggy monster’. The term is borrowed from a description by the author Henry James of sprawling 19th-century novels such as War and Peace by Leo Tolstoy and The Three Musketeers by Alexandre Dumas.¹⁶ The question also arises whether the monster should be rationalised. One experienced charity lawyer, David Alcock of Anthony Collins Solicitors in Birmingham, thinks improvements could be made to some of the legal forms, but there are good reasons for having them all: “The range on offer reflects the fact that people set up organisations to do a variety of things in a variety of ways, and the choice means there’s a good chance they will get the structure that suits them.”

As new legal forms have appeared and the social enterprise movement has expanded, charitable status has continued to be generally seen as the gold standard of the not-for-profit world. It enjoys the most advantages, both fiscal and reputational, albeit at the price of the strictest regulation and scrutiny. The National Audit Office (NAO), when reviewing the regulation of charities in 2012, raised the fear that scandal or misbehaviour by charity-like organisations might undermine vital public trust and confidence in charities proper.¹⁷ Since then, ironically, it has been scandal and misbehaviour in charities themselves that has played a large part in shaking public trust in the sector and making it vulnerable to attack. This, along with a change in the political atmosphere around charities, is the subject of the next chapter.