Charitable sector overview

In evaluating a commercial investment opportunity, understanding the company's business environment is an important step towards understanding the company itself. Making charitable investments is no different. As you learn more about the causes and charities you wish to support, you will also want to understand and appreciate the environment in which they operate. To provide some context, this section offers a brief introduction to the characteristics and challenges of the UK charitable sector.

The charitable sector is large and diverse

There are over 164,000 registered ‘general charities’ in the UK¹ with a total income of £31 billion in 2005/06 and expenditure of just over £29 billion. These charities employ 611,000 paid staff (2.2% of the overall workforce). The sector has grown substantially in the past few years.  In 2002 there were around 150,000 registered charities with a total annual expenditure of £20.4 billion. Based on income, health is the largest sector (see Figure 1)².

On top of these ‘general charities’, there are many other organisations and groups – such as schools and universities, housing associations and faith groups. In total there are 865,000 civil society organisations. Many of these, such as the 600,000 informal community organisations, have very little or no income.

The largest charities attract most of the sectors funding

The largest charities attract most of the sector’s funding. There are only 353 charities with an income of over £10m, or 0.2% of the sector. They garner £13 billion, or 42%, of the sector’s income. Charities with an income of below £100,000 make up 85% of charities. In 2005/06 their total income was £1.96 billion, or 6.3% of total sector income. The disparity in funding has increased since 2004, when the largest charities received 38%, and the smallest 9%, of total sector income.

The current economic environment is likely to disproportionately affect smaller charities. While larger charities tend to have stable funding reserves, small and mid-size charities face heightened pressures when overall funding declines. Mid-sized charities are perhaps most at risk as small, local charities can more easily adapt to changing conditions as they have fewer paid staff and a smaller beneficiary base.

Government funding of charities is changing

Total government funding represents 35.7% of the sector’s earnings. Charities with an income of between £100,000 and £1m rely most on government funding, while charities with an income of less than £10,000 rely the least (9.2%). There has been a shift from grants to contracts since 2002. Over 60% of third sector statutory income is from government procurement of third sector provision of public services such as counselling services and care for the elderly.

Charities are becoming more entrepreneurial, now earning over half their total income

Earned income now, for the first time, represents over half of income coming to charities (50.3%). Earned income includes fees for services and goods provided, public sector fees and payments for contracted services, sponsorship and income from trading subsidiaries. Charities are becoming more entrepreneurial, largely due to external funding pressures. Many charities have set up social enterprises to generate independent income.  For example, you might have donated items to a charity shop on the high street, or have attended a social event held at a museum or art gallery.

Charity law has undergone significant changes in recent years

The origins of UK charity law date back to the Charitable Uses Act of 1601, although charity law has developed differently in each of the home countries.

England and Wales

The Charities Act 2006 has important consequences for charitable organisations in England and Wales; it does not apply to charities in Scotland or Northern Ireland.

The Act is deregulatory in spirit and largely gives greater flexibility to charities to fulfil their purposes more effectively. It does not change the principle of what makes an organisation charitable: a charity “is established for charitable purposes only and is subject to English and Welsh law.”

However, the definition of charitable purpose has been expanded to include twelve subsections and a need for the purpose to be of public benefit. The twelve subsections are:

• The prevention and relief of poverty 
• The advancement of education 
• The advancement of religion 
• The advancement of health or the saving of lives 
• The advancement of citizenship or community development (including rural or urban regeneration, and the promotion of civic responsibilities, volunteering, the voluntary sector or the effectiveness or efficiency of charities)
• The advancement of arts, heritage, culture or science 
• The advancement of amateur sport 
• The advancement of human rights, conflict resolution or reconciliation or promotion of religious or racial harmony or equality and diversity 
• The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage 
• The advancement of animal welfare 
• The promotion of the efficiency of the armed forces of the Crown 
• Any purpose which may reasonably be regarded as analogous to the above including existing charity law.

The definition of public benefit is not a new one. A charity’s activities must be: “Of clear benefit to the public or a section of the public. A benefit that is not unreasonably restricted by geographical or other restrictions, or by ability to pay fees.”  Public benefit is no longer presumed in the case of poverty, religion and education. Every charity must now clearly demonstrate its public benefit, but the existing legal understanding of the term still applies. In practise, the activities of registered charities are regulated by the Charity Commission.

An important aim of the Act is to define and modernise the role of the Charity Commission. For example it requires that, “So far as is reasonably practicable the Commission must, in performing its functions, act in a way which is compatible with the encouragement of – (a) all forms of charitable giving, and (b) voluntary participation in charity work.”

• Details of the Bill, and its stages of implementation, can be accessed on the website of the UK Parliament.

Scotland

Since the 1990 Act there have been several reviews of charity law in Scotland, culminating in the Charities and Trustee Investment (Scotland) Act 2005 which established a system of charity regulation in Scotland. The Office of the Scottish Charity Regulator (OSCR) was established through Part 1 of the Act and is required to regulate all charities in Scotland.

The 2005 Act removed the presumption of public benefit for all charities and introduced a two-part ‘Charity Test’. It also allowed for a proportionate regulatory regime to be introduced by Ministers and introduced a new legal form which allows charities to take on corporate status and limit liabilities for their members.

• More information on charity law in Scotland can be found on the website of the Office of the Scottish Charity Regulator.

Northern Ireland

The Charities Bill for Northern Ireland was introduced in December 2007. It creates the first statutory framework for charities in Northern Ireland, including providing statutory definitions of charity and charitable purpose, and establishes a Charity Commission for Northern Ireland (CCNI) and a charity tribunal. It also creates a Register of Charities for Northern Ireland and introduces the Charitable Incorporated Organisation (a new legal form) as well as setting out new rules with regard to fundraising and collections.

The draft legislation is similar to the 1993 and 2006 Charities Acts for England and Wales. Some significant points of variation are:

• ‘The advancement of peace and good community relations’ is included as a charitable purpose. 
• Promoting the efficiency of the armed forces is not a charitable purpose (as it is in England and Wales).  
• There will be a public benefit test similar to that in Scotland. 
• All charities that operate in Northern Ireland will be required to register, with no exemptions. ‘Designated religious charities’ which meet certain criteria will have more organisational freedom than other charities.

The Social Development Committee published its Report on the Charities Bill in May 2008.  It is anticipated that the Bill will receive royal assent in 2008. For the most up-to-date information, visit the website of NICVA, the umbrella body for voluntary, community and charitable groups in Northern Ireland.