Essential Finance - The long arm of the law

With the Charities Bill likely to become law by early 2007 at the latest, and the 2006 Budget currently going through parliament, Nick Sladden highlights some major changes taking place that will affect the way arts charities conduct their business.
The content of the Charities Bill has been debated at length over the past few years since its first introduction to Parliament in May 2004. Following the General Election in May 2005 the Bill then had to be reintroduced to Parliament from scratch and now it is undergoing its second reading in the House of Commons. As a result, once amendments are agreed by both Houses, the Bill should be given Royal Assent and then become an Act either later this year or in early 2007.

Charitable issues

The most controversial issue in the Bill is that a charitable organisation must have exclusively charitable purposes and be for the benefit of the general public as a whole. Previously, criteria had been presumed to be the case for most arts charities, given that many have objects focused on education; but now the onus is on a charity to prove that it meets the public benefit test to ensure that its charitable status is kept.

Whilst for many charities this requirement can be easily met, for others it may require a little thought. For example, if an arts charity charges for admission and is exclusively for members, is it truly benefiting the public at large? Since the definition of public benefit will be handled on a case-by-case basis it will be interesting to see how this will be interpreted. Until the Charities Bill is made law and we see how it works in action, it would be prudent for charities to ensure that they have strategies in place to ensure that they are able to demonstrate availability to the public as a whole. If they cannot, the financial implications could be significant.

Budget 2006

Gordon Brown delivered his tenth budget on 22 March this year. It seemed to reflect the view of many political tipsters that this could be his last, and very little was announced that would rock the political boat. Sport appears to have been the big winner, with £600m being allocated to provide training and facilities in the run-up to the 2012 Olympics. Other significant announcements included changes in Inheritance Tax so that it is payable when transferring pension funds to dependents on death, and will now be payable on discretionary trusts.

Tax relief

For the charitable sector, Gordon Brown made a number of announcements that should help financially. First, with respect to charitable giving, the government confirmed its commitment to the Payroll Giving Grant Scheme, aiming to increase the number of small- to medium-sized businesses who offer Payroll Giving Schemes. For employers with fewer than 500 staff, the government will provide a grant of up to £500 for setting up Payroll Giving before December 2006. In addition, the first £10 of employees gifts will be matched during the first six months of their donations.

The government announced that it is keen to encourage greater use of such tax-relief schemes welcome news for all involved. However, coupled with this will be measures to preserve the integrity of charitable reliefs and to ensure that funds are used for the purposes intended. This is definitely an area where there will be further changes in future.

Social dimensions

The Budget also announced that the Treasury will undertake a review into the future role of the charities sector in social and economic regeneration. How the arts sector will fit into this at the moment is unknown, but the review will be launched at a conference in May, with the results feeding into the Comprehensive Spending Review. Initial conclusions are likely to be available by the Pre-Budget Report, issued later this year.

Other key measures include:

Volunteering: the government will work with the charities sector to continue the success of the Year of the Volunteer 2005, particularly focusing on encouraging participation from all age groups and a diverse range of backgrounds.

Youth Action and Engagement: work continues into this initiative, launched at last years budget. The government announced that it has raised over £10m from 19 new corporate supporters and the 7 founding partner companies.

Invest to Save: this is a venture capital fund set up for public sector delivery. The government announced that 463 projects worth £450m have been funded, of which approximately £97m has been for projects in the charitable sector.

Reference was also made to the need to consider carefully the benefits provided by charities to their high-value donors or angels.

This years budget demonstrates that the government is committed to working with the charitable sector to increase tax-efficient fundraising and to ensure that the general public is able to get involved. Coupled with this is a desire to quantify charitable status and to ensure that funds are being used correctly. Charities now need to be able to demonstrate how they provide services to the general public a new criterion for all.