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
