Effective philanthropy

Contrary to national stereotypes, Scotland has a longstanding and proud philanthropic tradition – a trait that continues today with people generously giving to causes, and over 23,000 Scottish registered charities. Both for those giving to charities and the recipient charities there is a desire for effective giving and more generally effective philanthropy. That leads one to consider appropriate ways of supporting charities, as well as key issues for trustees and senior management of charities.

Getting the most out of cash donations

It is important for charities to ensure that cash donations benefit from Gift Aid. This point is not a new one, and generally charities are alive to the requirements for donors to opt in for Gift Aid purposes. The step of opting in is a simple one of providing basic details when making a donation that leads to the triggering of the significant benefits of Gift Aid.

The Gift Aid system may have a very productive period in the tax year beginning on 6 April 2010. The combination of the 50% top rate of income tax and the final year of transitional relief on Gift Aid could lead to significant benefits for charities. For donors taxed at the new rate (those with incomes over £150,000) and/or affected by changes in rules on pension contributions, there are benefits from gifts to charity. The message for charities is to discuss with donors the appropriate timing for donations to be made. Postponing making a donation may be the correct approach, but it is important for donors to consider the impact of such a decision. The 50% rate could operate as an incentive for some to donate to charity.

Charities should be aware of these opportunities, but those advising potential donors should also be aware of the benefits to the individual that charitable donations under the new tax regime offer. 

There are many ways to help

Cash donations are critical to charities. As we have seen above, they can also provide tax benefits for donors. However, for individuals and businesses it is worth remembering that giving cash donations is not the only way to support charitable purposes. It is possible to donate through payroll giving, gift shares and even land.

For businesses it may be appropriate to donate equipment or allow employees to assist charities during the employer’s time. These ways of giving may enable important support to be given to a charity and provide tax advantages for the business. The basic mechanism by which business will benefit from giving to charities is to reduce taxable profits. Perhaps more importantly, non-cash support or a mixed approach to assisting a charity may provide a more engaged way of developing a project and securing the benefits of having the personal involvement of those employees.

In some cases the most effective way to give to charity is to give time. This can include the traditional support that many give to charities. It is also apparent now that giving time includes providing strategic experience to charities. There are of course charities (such as Pilotlight: see Journal, May 2009, 35) that seek to facilitate and encourage business leaders and professionals to share strategic and planning skills with senior management of charities in a format that aims to assist the longer term development and success of the charity.

All of these ways of “giving” clearly derive from the idea of effective philanthropy: that there is a belief that while benefiting significantly from external input, charities and the third sector are best placed to deal with particular issues and challenges.     

Attaching conditions and taking control

It is not uncommon for supporters to place conditions on gifts to charities. It can often be seen in legacies in wills that there are directions to the trustees of charities as to the basis upon which funds can be accepted and applied.

There is as a matter of principle nothing inappropriate with donors seeking assurances over the use of funds. The principles of effective governance of a charity would encourage there to be appropriate controls attached to distributions from the charity. These could include confirmation as to how the funds will be applied, mechanisms for evaluation at key milestones in a project, or staged release of funds. As charity governance requires consideration to be given to conditions and restrictions, it is unsurprising that donors and funders wish certain safeguards and controls when they distribute funds to a charity.

While conditions may be appropriate, charity trustees must recognise their critical and fundamental duty to act in the best interests of the purposes of their charity (s 66 of the Charities and Trustee Investment (Scotland) Act 2005). At its heart is independence in the furthering of those purposes. Charity trustees must consider whether or not conditional or restricted funding offers are acceptable. It may be difficult for any charity to turn down funding sources, but funding offers that attach conditions or requirements that are not compatible with the charity cannot be accepted in a form that would undermine the ability of the trustees to act in the best interests of the charity’s purposes.

Once restricted funding is accepted, the trustees require to account for those funds carefully and separately. A key management issue is to ensure that an apparently healthy charity overall is not “sleepwalking” into financial trouble due to restrictions on the manner in which funds can be spent: a financial issue that highlights the need to apply the appropriate level of care and diligence required under the 2005 Act, and generally.  

Not all gifts are good 

It is important to note that some gifts and transactions involving charities and donors may lead to adverse tax consequences for the charity. The traps are contained in the “substantial donor rules” brought in by the Finance Act 2006 (a Finance Act that contained a significant amount of unconsulted upon and surprising legislation).

The rules are designed to penalise certain artificial transactions. However, the width of the rules can attack genuinely charitable transfers. Importantly, the effect of a transfer or transaction that contravenes the rules is to reduce the charity’s ability to benefit from income tax and capital gains tax reliefs by £1 for every £1 by which the rules have been infringed. A substantial donor is any person who has donated £150,000 or more in the past six years, or £25,000 in a 12 month period. Particular care requires to be taken in connection with any transactions with a charity’s significant donors. The substantial donor rules are a good example of the fact that charities and transactions with charities are not as a general rule wholly exempt from tax consequences.

Collaborations, mergers and reorganisations

The economic climate, and the process through which certain parts of the third sector receive funding and contracts, have highlighted the need to consider collaboration, mergers and reorganisations. These strategies can provide ways of getting more from the funding the charities have, or can allow charities to work together to further their purposes in a more effective and efficient manner. Joining forces in some cases can be the way to effective philanthropy.

A flexible sector  

The ways in which the third sector is funded, uses funding and experience, and can adapt, are some of the reasons for its success in continuing to tackle some of the most important issues facing society. That flexibility can be supported in a variety of ways from outside sources. All sources provide benefits (financial and otherwise) for donors and charities. Ultimately, what is critical to the support given is that it must seek to be effective philanthropy.

Alan Eccles is an associate in the Private Client Department at Maclay Murray & Spens LLP

Scottish SPCA

You can make a difference to the future of Scotland’s animals by leaving a gift in your will to the Scottish SPCA. You can also ensure your pet receives the care it deserves should it outlive you by using SSPCA’s Forever Care service. For those who have loved and cared for pets, this is an extremely important arrangement to make as it’s not always possible to turn to a relative or family friend.

For more information on the Forever Care service, telephone 03000 999 999 or email bell.thallon@scottishspca.org.

The Neurosciences Foundation

The Neurosciences Foundation (formerly the Neurological Foundation) was founded in the late 1970s. Its purpose is to assist in providing funds for research into new ideas and techniques to help patients who have suffered injury or damage to the brain and nervous system, from diverse causes including head injury, epilepsy, stroke, Parkinson’s, brain tumours, multiple sclerosis, dementia, motor neurone disease and many more. Whereas many of these conditions had been considered “incurable”, research over the last 30 years has advanced to the point that an effective treatment is available for most.

The Foundation adopts a vigorous review process to ensure that only the most relevant and achievable projects submitted for funding are approved. This guarantees that monies are well spent and outcomes scrupulously monitored. Successful funded projects have led to major funding from organisations such as the Medical Research Council.

The Tod Foundation

Created in 1929, the Tod Endowment Trust initially provided accommodation for respite to be taken by ministers, solicitors, doctors and artists, or their dependants. It now operates through separate bodies for each profession and the Scottish Solicitors Benevolent Fund is in a position to finance appropriate respite for Scottish solicitors (practising or retired) and their dependants. This provision is not means tested, but the holiday respite must be taken within Scotland. The attendance of a carer or companion may be funded where reasonably required, as can the provision of locum services. Thus, for example, a stressed practitioner could be provided with a short break and locum cover. 

Any member of the profession who is aware of any person who might qualify for benefit should contact the Scottish Law Agents Society, 166 Buchanan Street, Glasgow G1 2LW, or by email to secretary@slas.co.uk 

Apparently inactive charities: new OSCR guidelines

Can an apparently inactive charity be regarded as providing public benefit (Charities and Trustee Investment (Scotland) Act 2005, s 7(1)), so as to pass the test for recognition?

Possibly, according to a new policy document from OSCR, the Office of the Scottish Charity Regulator. “Apparently Inactive Charities” explains that while in general OSCR would expect any periods of apparent inactivity to be of limited duration, this needs some refinement. Four broad categories are identified:

• Temporary inactivity, planned or unplanned, probably due to some operational or administrative reason. Since this is usually short term and/or not a regular occurrence and OSCR takes a longer term view, it is unlikely to impact on a charity’s assessment.
• Dormant charities that have ceased operations and have no particular intention of reviving them, are unlikely to be considered to provide public benefit. If there is lack of activity, it must be capable of being described as an exercise of the body’s functions, as in the final category below. A possible wish to revive the charity in future is not sufficient.
• Activities lacking an external profile, such as accumulation of funds or the undertaking of research, are regarded as equally capable of providing public benefit as more overt activity.
• Anticipatory charities are those which will become more active on a certain event, e.g. the death of an individual. They are commonly set up in advance to achieve charitable status and therefore inheritance tax relief, but may be “shell” charities left in existence in case of outstanding legacies, following a merger, or charities set up to provide relief from, say, natural disaster, which may undertake no activity until disaster occurs.

OSCR recognises that in certain circumstances it is possible for a charity to exercise its functions, or fulfil its purposes, by simply awaiting a future event, and that anticipatory charities of each type described can, in principle, provide public benefit – which may, in the short term, consist simply in the reassurance provided by their existence.

However the facts of each case will need to be carefully considered. If there is no defined future event, it is unlikely that an anticipatory charity could be said to provide public benefit. A charity set up in anticipation of an impossible event would not qualify; if the future event is improbable or unlikely, OSCR would need to consider the benefit provided during the period of anticipation: for example, if there is evidence of public concern there might yet be said to be public benefit.

Peter Nicholson

For the full text of the guidance see www.oscr.org.uk