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The International Journal
of Not-for-Profit Law

Volume 4, Issue 1, September 2001

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Corporate Philanthropy and Social Responsibility in Latin America

La Filantropia Empresarial: Un Deber Moral, Social y Legal
por Antonio L. Itriago Machado y Miguel Angel Itriago Machado

Regional:
Conference Report on the "Simposio de Responsabilidad Social Empresarial en Las Américas"

Brazil:
Corporate Social Responsibility Conference

Chile:
Conference on Corporate Social Responsibility

Chile:
New Web Site to Encourage Social Responsibility

Articles

Trends in Self-Regulation and Transparency of Non-Profit Organization in the U.S.
By Robert O. Bothwell

ICNL'S Educational Initiative for Central and Eastern Europe: One Year Later
By Radost Toftisova

An Overview of Issues in Charity Litigation in Malaysia 2001
By Mary George

Charity, Politics and the Human Rights Act 1998: Chasing a Red Herring?
By Graham Moffat

Case Notes

Asia Pacific:
Australia

Central and Eastern Europe:
Hungary

Latin America:
The Bahamas

Middle East and North Africa:
Egypt

North America:
The United States

Western Europe:
The Netherlands
| Switzerland | Turkey

Country Reports

Asia Pacific:
Regional
| Australia | Cambodia | East Timor | Indonesia | Malaysia | New Zealand

Central and Eastern Europe:
Regional | Albania | Croatia | Hungary | Romania

Latin America and the Caribbean:
Regional | Argentina | Bermuda | Chile | Guatemala | Saint Lucia

Middle East and North Africa:
Egypt | Iran | Israel

Newly Independent States:
Armenia | Kazakhstan | Kyrgyzstan | Moldova | Russia | Tajikistan | Ukraine

North America:
Canada

South Asia:
India

Sub-Saharan Africa:
Gambia
| South Africa | Tanzania | Uganda

Western Europe:
Austria | Ireland | Scotland | Turkey | the United Kingdom

International:
The London School of Economics Conference | The United Nations Global Compact

Self-Regulation Reports

The Humanitarian Accountability Project

Spain:
New Publication on Transparency and Accountability

Tanzania:
Tazania's First National NGO Forum Disucsses a Draft Code of Conduct

The United Kingdom:
Reports on Developments with Respect to Self-Regulation in the UK

Reviews

Charity Law Matters
By Ronan Cormacain, Kerry O'Halloran, Arthur Williamson
Reviewed by Karla Simon

 

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Editorial Board

Country Reports: Western Europe

Austria

The Role of Foundations in Civil Society – But Not in Austria

By Robert Harauer*

Introduction

In 1997 the European Commission released a Communication on “Promoting the role of voluntary organizations and foundations in Europe.” [1] In this paper the Commission emphasized the important role of the structures of the civil society for future democratic development in Europe in reference to foundations and associations. In this paper the European Commission states that “the existence of a well-developed association and foundation sector is an indication that the democratic process has come of age”. But at the same time the Commission sees a lot of insufficient conditions in some Member States and comes to the result that: “Despite their increasing reliance on foundations and voluntary organizations to carry out a wide range of functions, public authorities have not on the whole acknowledged their responsibility to ensure that the sector is as well placed as possible to make its distinctive contribution to the public good. (...) One of the greatest problems facing policy makers is the present serious lack of information about the sector”. Therefore, the Commission recommends the collection of knowledge and information on all relevant levels of this sector and comes to the conclusion that: “Public authorities [of the Member States], should review public policy and make proposals about what would need to be done for policy to help the voluntary sector to increase its capacity and where relevant to improve its skills in order that it can best fulfil the new roles it is being called on to address.”

Of course, we are at present facing a serious lack of information about the role of foundations in European countries regarding their contribution to financing and organising cultural, social, environmental, health and educational affairs within their societies. And recent reports like the John Hopkins Comparative Nonprofit Sector Report [2] impressively shows the importance of non-profit organizations like NGOs, associations and foundations when it comes to volunteerism, self-organisation and structures of the civil society.

But are foundations really such a good thing in principle, which would mean that the more foundations a country has, the better its performance as a well-structured civil society? Obviously we all know that, for instance, this is not the case in Liechtenstein, a small country with several thousands of foundations. But Liechtenstein may be an historical exception, and I will analyze the Austrian case to illustrate that the foundation concept does not tell us anything about the special purpose which is hidden behind this legal structure. And in many cases a foundation will have nothing to do with contributions to the public good or the civil society.

The 1993 private foundation act in Austria [3]

In 1993, the government, a coalition between the Social Democrats and the People’s Party, submitted a bill to parliament concerning the reintroduction of private foundations in Austria. This was something pretty new for the country since the abolishment of foundations by Joseph II (1741-1790), who felt uncomfortable with private organizations which could disturb the relationship between the absolutist regime and its subjects, and private foundations had not existed in Austria for over 200 years. Parliament passed the bill and the private foundation act became law. But the introduction of the private foundation act was not communicated very extensively to the public or the media, nor there was public discussion about foundations and the role they can fulfil within a society beforehand. 

In 2000, the new conservative-right wing government’s announcement that it would raise the tax rate for private foundations slightly and the ongoing debate in the media on this issue gave reason for public awareness. For the very first time many citizens heard that something like private foundations do exist in their country, while they had no idea what they are or what they do. The reason for this peculiar situation can be easily illustrated by regarding the intention of the government in 1993.

In the eighties and early nineties more and more well-known sportsmen, artists and businessmen transferred their financial assets to Monaco, Switzerland, or other countries with low tax rates. Having been confronted with the argument that income taxes in Austria could be too high for private investment, the government sought to keep private assets in Austria and attract foreign money. For whatever reason, the government regarded foundations as the most appropriate instrument for this endeavor.

During the internal discussion about the introduction of the foundation act considerations were never voiced that foundations usually fulfil purposes other than those of being mere instruments for profitable property administration. So the intention of the government was not to promote the civil society through charitable foundations and ensure their contribution to social, cultural, educational or health affairs but to make Austria attractive as an international marketplace for private capital investment. Huge amounts of private money should be kept within the country through generous tax regulations. The annotation to the government bill makes this intention clear: “Mit einem bedarfsgerechten Stiftungsrecht könnte nicht nur der Vermögensabfluss hintangehalten werden, sondern im Hinblick auf das im Übrigen in Österreich günstige Umfeld (Verfügbarkeit erforderlicher Dienstleistungen wie etwa rechtliche Beratung und im Bankwesen sowie politische Stabilität) sogar ein Anreiz geschaffen werden, ausländisches Vermögen in österreichische Stiftungen einzubringen. So kann das Stiftungsrecht zu einem Mittel der Stärkung des inländischen Kapitalmarktes werden.” [4] ) (An adequate foundation act would not only halt the flight of capital, it would also create an incentive to attract foreign capital to Austrian foundations in consideration of the otherwise promising general conditions like widely available banking and legal consultation services and political stability. The foundation act would therefore aid in a strengthening of the internal capital market.)

However, parliament passed the bill, enabling individuals and enterprises to transmit massive amounts of assets to their beneficiaries at extremely low costs, and called this legal construction the private foundation act. The tax-rate for the transfer of property into a foundation was about 2.5%, the tax-rate for redistributing the money to beneficiaries 25%. Capital gains within the foundation were not liable to taxation.

Obviously, the private foundation act became an attractive instrument for the rich. German tycoon Karl Friedrich Flick immediately transferred his fortune of about 2.5-3 billion euros to Austria, and Austrian tycoons and nobles put their assets in such foundations. The list of foundations in Austria is a who’s who of the business world and the wealthy.

Of course, the private foundation act also provides for the establishment of charitable foundations. But as the act’s tax advantages do not differentiate between charitable and private purposes, private foundations in Austria are essentially established for favoring private persons: husbands and wives, sons and daughters, relatives and so on (so-called family foundations).

Austria is thus facing the following situation:

More than 2,000 foundations have been established since 1993;

To fully understand the consequences of the Austrian foundation act for the civil society a comparison with German foundations is useful [5] : In 1998 Germany had about 7,800 foundations. The total amount of assets held by German foundations was estimated to be between 11 and 23 billion euros. More than 90% are charitable foundations and only about 4% so-called family foundations, foundations which benefit private persons only. Concerning the purpose of the charitable foundations the most important areas are social affairs (29%), education (20%), health, environmental issues, religion, sports and international understanding (16%), research and science (12%), and culture and the arts (11%).

These figures underline the fact that, according to the adequate taxation law in Germany, under which only charitable foundations enjoy the full range of tax advantages, foundations in Germany are primarily charitable and express a willingness to contribute to the public good. Due to the specifics of German tax law the establishment of family foundations does not represent a profitable strategy for the rich.

After comparing these figures with the Austrian situation we can sum up that:

It is evident that legal instruments like tax laws are instruments for steering individual behavior. Concerning the strengthening of civil-society structures the Austrian government missed an important opportunity in 1993 by not designing a more finely tuned tax law for foundations which would have limited the full advantages of tax reductions to charitable foundations only and contained less attractive regulations for family foundations.

As a consequence of this omission, the role which foundations could fulfil within the civil society in Austria has been ruined for a long time. In the middle-term future there will be no chance for a serious change in this situation. [6]

Conclusion

An international discussion on the importance of the civil society and its organizations is underway. Not only the European Union is moving forward on this issue. The United Nations and the Council of Europe strengthened the importance of civil-society structures much earlier, and even the World Bank and the WTO recently became aware – maybe even more acutely after Seattle in late 1999 – that civil-society structures have to be incorporated into the international policy-making level. “I see a United Nations keenly aware that if the global agenda is to be properly addressed, a partnership with civil society is not an option; it is a necessity. I see a United Nations which recognises that the NGO revolution – the new global people-power – is the best thing that has happened to our Organization in a long time”, proclaimed Kofi Annan, Secretary General of the United Nations in his speech on the 23rd of February 2000 in Wellington, New Zealand. [7] International governmental organizations became aware of the fact that we have entered into a new era of democracy and the impact and structures of civil societies had been heavily underestimated in the former national and international political systems.

Charitable foundations are part of civil societies, and they can play an important role as promoters, organizers and co-financiers of democratic, social, cultural and educational initiatives and projects. The creation and preservation of a wealth of charitable foundations – as a complement to and not a replacement of the public sphere – is therefore one of the tasks and challenges facing western European countries. But the Austrian situation shows how the environment for charitable foundations easily can be ruined through short-sighted budget interests and national tax regulations.

* Robert Harauer is the Director of MEDIACULT – International Research Institute for Media, Communication and Cultural Development, Anton-von-Weber-Platz 1, 1030 Vienna, Austria. He can be reached at mediacult@mediacult.mdw.ac.at. This article is reprinted with permission from MEDIACULT. 

[1] ) See: http://www.europa.eu.int/comm/off/com/orgfnd.htm.

[2] ) See: Lester M. Salamon and Helmut K. Anheier, et al. (1999), Der Dritte Sektor, Gütersloh.

[3] ) For more details see: Robert Harauer (2000), Die Strukturschwäche der Zivilgesellschaft in Österreich, Sozialwissenschaftliche Rundschau, Vol 1/2000, Vienna.

[4] ) 1132 GlgNR 18.GP (see: A.Breinl (1997), Typologie der Privatstiftung. Eine empirische Analyse der ersten 365 Stiftungsurkunden, Vienna).

[5] ) For more detailed figures see: H. Anheier (1998), Das Stiftungswesen in Zahlen: Eine sozial-ökonomische Strukturbeschreibung deutscher Stiftungen, in: Bertelsmann Stiftung (ed): Handbuch Stiftungen, Wiesbaden;

R. Harauer (2000), Die Strukturschwäche der Zivilgesellschaft in Österreich, Sozialwissenschaftliche Rundschau, Vol 1/2000, Vienna; Brummer/Ruprecht (eds) (1998), Statistiken zum deutschen Stiftungswesen, Maecenata Verlag, Munich.

[6] ) The new government, the coalition between the Peoples Party and the right-wing Freedom Party, altered the foundation act in autumn 2000. Taxes on property transferred to a foundation are now 5%, and the tax rate of 25% for capital withdrawal has been split into 12.5% for taxation of capital gains within the foundation and 12.5% for capital withdrawal for beneficiaries. This amendment will slightly raise the tax-income coming from foundations. Concerning the problem of charitable foundations vs. family foundations this amendment will have no influence.

[7] ) See: http://www.un.org/News/Press/docs/2000/20000229.sgsm7318.doc.html.

Ireland

Scheme of Tax Relief for Donations to Eligible Charities and Approved Bodies in Ireland

By Emma Fitzgerald

Since 6th April, 2001, a new scheme of tax relief for donations to certain “approved bodies” has been available to corporate and individual donors in Ireland.  Prior to the commencement of the new scheme, tax relief on donations was only available in very limited circumstances.  Section 45 of the Finance Act, 2001 inserted a new section 848A and Schedule 26A into the Taxes Consolidation Act, 1997 (the “Act”) which effectively merged these pre-existing tax reliefs with new tax reliefs under the umbrella of a single scheme.

Approved Bodies

The tax relief is only available in relation to donations to “approved bodies” which include “eligible charities” and various educational and other named organisations.  An “eligible charity” is defined in Part 3 of Schedule 26A of the Act as any body in Ireland which is currently authorised by the Revenue Commissioners for the purposes of the new scheme.  Authorisation is subject to making a formal application (the form of which is available on the Revenue website at www.revenue.ie. ) and satisfying the Revenue Commissioners that the organisation has been exempted from tax for the purposes of section 207 of the Act (i.e. holds a charitable exemption number or CHY No.) for at least three years prior to making the application. 

Authorisations issued under the new scheme will be valid for periods of up to five years and upon expiry may be renewed by fresh application.

Since 1999, the Revenue Commissioners have published a list of named organisations with charitable exemption from tax in response to a request under the Freedom of Information Act, 1997.  The recent amendments give the Revenue Commissioners legislative permission to make publicly available the name and address of any approved body under the new scheme.   A list of the names of approved bodies is currently maintained and available on the Revenue website (www.revenue.ie.).  In the absence of an official register of charities in Ireland, this list is one of the few governmental sources identifying Irish charities. 

An eligible charity may be required to publish certain information, including audited accounts, at the reasonable request of the Minister for Finance.  The practice of the Revenue Commissioners in the past has been to treat these accounts as confidential.  Despite the introduction of the word “publish” in the recent amendments to the Act, the Revenue Commissioners have advised that this practice will continue. 

Donations Qualifying for Relief

The minimum donation in any year that must be made to any one approved body is IR£200 (~250) (IR£148/~185 for the short tax year from 6th April, 2001 to 31 December, 2001).  This donation may be paid in instalments.  There is no maximum qualifying donation.

A donation must also satisfy the following conditions:

The Revenue Commissioners have advised that as a general rule of thumb donations should be at arms length and with no strings attached.  Nominal or incidental benefits such as the right to receive a newsletter would not disqualify a donation.   However benefits such as preferential rights of entry to prestigious events, particularly where entry may normally be subject to a cover charge, would constitute a disqualifying benefit.

Nature of Relief

The application of the tax relief depends on whether the donor is an individual PAYE (Pay As You Earn) taxpayer or an individual on self-assessment or a company.

In the case of donations by individuals, relief will be given at the donor’s marginal rate of income tax.

The tax relief is paid directly to the approved body only in the case of a donation by an individual PAYE taxpayer.  The individual PAYE donor must complete and send a certificate in the prescribed form (the “Appropriate Certificate”) in respect of the donation to the approved body.  The form of the Appropriate Certificate can be found on the Revenue website (www.revenue.ie. ).   At the end of the tax year in which the donation was made, the approved body may submit the Appropriate Certificate together with a declaration that the details are all correct and complete to the Revenue Commissioners in order to claim the refund. 

Irish Charities Tax Reform Group

The legislative developments in Ireland in the area of tax effective giving are largely attributable to the lobbying activities of the Irish Charities Tax Reform Group.  Further information about this group and its campaigns and submissions can be found at www.charitytaxreform.com.

Implementation of White Paper on a Framework for Supporting Voluntary Activity and for Developing the Relationship between the State and the Community and Voluntary Sector
By Emma Fitzgerald* 

In September last year, the Irish Government published a White Paper on a Framework for Supporting Voluntary Activity and for Developing the Relationship between the State and the Community and Voluntary Sector.  The Implementation and Advisory Group, established to oversee the implementation of the proposals contained in the White Paper met for the first time in July this year.  The Group, co-chaired by the Department of Social, Community and Family Affairs and the Department of Health and Children, is comprised of 12 members drawn equally from the Community and Voluntary Sector and the responsible Government Departments.    The terms of reference of the Group include the role of advising on the development of a regulatory framework for the Community and Voluntary Sector.

A new unit (the White Paper Implementation Unit) has also been established within the Department of Social, Community and Family Affairs to support the Implementation and Advisory Group and implement the decisions of the White Paper.   One of the functions of the Unit is to initiate and prepare an overhaul of the charities legislation in Ireland.  The Department has said that it will consult widely on the proposed legislative changes and this consultation process is expected to continue into early 2002.

The Department of Social, Community and Family Affairs has also established a National Committee on Volunteering with the object of devising strategies and actions for supporting and developing volunteering in Ireland.  The Committee comprises representatives from relevant Departments, universities with related research or training roles, business and industry, foundations, leading NGOs and community and voluntary groups.  Submissions may be made to the Committee before 28 October, 2001 on issues including modes of volunteer management and volunteering practice in Ireland and approaches to volunteer development in other countries.

Scotland

Report of Scottish Charity Law Review Commission 

In May 2001, after meeting for about a year, the Scottish Charity Law Review Commission published its final report.  The Report and a Summary Document are available on the Commission’s website at www.charityreview.com.  The Chair of the Commission was Jean McFadden, and members included Colin Crosby, Gillian Donald, Martyn Evans, Richard Fries, Alistair Grimes, Keith Jones, Kaliani Lyle, Simon Mackintosh, Ian McPherson, John Naylor, David Orr, Avril Sloane, and Janette Wilson.

The Commission’s brief was to “review the law relating to charities in Scotland and to make recommendations on any reforms considered necessary.”  In particular the Commission considered the following questions:

It is worth noting that each of these was considered in depth and is dealt with by one or more of the Commission’s many recommendations.

One of the interesting problems facing by the Commission was that certain matters (e.g., taxation) are UK-wide issues, while others (e.g., the definition of charity for Scotland) are within the purview of the Scottish Parliament.  Nonetheless, the Commission does suggest that review of the charity definition – not simply for tax purposes, but more generally – might be considered throughout the UK.  Given the developments in the Cabinet Office (see the UK Country Report in this issue) and in Northern Ireland (see the Book Review of Charity Law Matters, also in this issue), this might well be an appropriate time to move forward with such a comprehensive review. 

Principal recommendations of the Commission include the following:

  1. That there be four defining principles for a Scottish charity; it should be an organization:
    • whose overriding purpose is for the public benefit
    • which is non-profit distributing
    • which is independent
    • which is non-party political.
  2. That there be a new regulator for Scottish charity, called CharityScotland, which would function in similar ways to the Charity Commission of England and Wales.  This new regulator would consolidate powers currently held by other regulatory agencies and it might make for a smoother application of charity law.  In addition, Charity/Scotland would have functions related to support of charities, not merely regulating them and protecting the public, but helping them to perform better.
  3. That a new legal form be created for charities, called a Charitable Incorporated Organization and that this form be optional for charities formed under other laws.

These would be quite comprehensive changes, and they merit much discussion and review by the voluntary sector in Scotland.  The proposed duties and obligations of the proposed CharityScotland are spelled out in detail in the Commission’s report and are apt to generate a certain amount of controversy.  We will continue to report on developments. 

Turkey

Political Party Bans in Turkey

As the government of Turkey continues its attempt to ban all political parties that seem to it to be a danger to the general will of the majority, [1] there has been one singular victory against the Islamist Welfare Party.  Yet, despite this victory, the decision may be appealed.  In addition, there is now considerable political confusion about whether to continue to seek a ban against the equally Islamist Virtue Party. 

Previous attempts to ban two political parties in Turkey were struck down by the European Court of Human Rights:

Most recently, however, in the case of the Refah Partisi (Welfare Party) and Others v. Turkey [4] , the European Court, in a 4-3 Chamber decision, over a strong dissent, held that Turkey’s ban of the Party was permissible.  The Welfare Party decision has ramifications for the action in the Turkish Constitutional Court, in which the government was seeking to ban the Virtue Party, a successor to the Welfare Party.  That case was decided against the Party on June 22.

Welfare Party Case

On May 21, 1997 the Principal State Council for the Court of Cassation brought proceedings against the Welfare Party, seeking to ban it because it had become the “center (mihrak) of activities against the principle of secularism” enshrined in Article 2 of the Turkish constitution.  Once the ban was ordered, the Party and its leaders sought review in the European Court. 

The Court engaged in its normal analysis of cases such as these:

  1. Has a condition or restriction been placed on the right to freedom of association?
  2. Is the condition or restriction reasonable, or is it an “interference” with the right to freedom of association?
  3. If there has been an “interference “–
    1. Was it “prescribed by law”?
    2. Does it have a “legitimate aim”?
    3. Is it “necessary in a democratic society”?
  4. In deciding whether an “interference” has a “legitimate aim,” it must be justified --
    1. In the interests of national security or public safety,
    2. For the prevention of disorder or crime,
    3. For the protection of health or morals, or
    4. For the protection of the rights and freedoms of others.
  5. In deciding whether a particular “interference” is “necessary in a democratic society” to achieve the “legitimate aim,” the state party must show that the “interference” was proportionate to the aim pursued. [5]

Granting that there had been an interference with the applicants’ freedoms of association speech, the Court went on to determine whether the interference was justified, as described above.  The major question presented, according to the majority, was whether the aims of the Welfare Party were such that they could undermine the democratic imperative of Turkey to be a secular state.  The Court found that they did, citing three different goals of the Party:

  1. to establish a plurality of legal systems in Turkey based on differences in religious belief,
  2. to establish Sha’riah law in Turkey; and
  3. to develop jihad or holy war as a political method. 

Proof of these aims was not discovered through the Party’s founding documents or platform, but rather through statements made by Party leaders and members.

Although the majority of the Court found that dissolution was permissible, the dissent argued forcefully that it was not.  The dissent disagreed, for example, with the majority’s reliance on statements by Party members in distinction to a real Party platform, noting that in previous cases the European Court had rejected such reliance.  Most importantly, however, the dissent rejected the notion that the ban would be legitimate “in a democratic society.”  Citing the previous Grand Chamber decisions in the UCP and ÖZDEP cases, the dissent argued in favor of the importance of protecting pluralism in any democratic state. 

In addition, the dissent discussed the principle of nondiscrimination, which it called “one of the fundamental principles of a democracy.” (¶ 69).  Citing the “Belgian language” cases and Abdulaziz, Cabales and Balkandi v. United Kingdom, [6] the dissent also relied the importance of religious tolerance as being in the interest of society as a whole for its conclusion that the ban of the Welfare Party violated the human rights protections laid down in the ECHR. 

Under Article 43 of the ECHR, any party to the case may request the referral of a Chamber judgment to the 17 Grand Chamber of the Court, and one assumes that will be done in this case.  The appeal must be taken within three months of the Chamber decision or else that decision becomes final.

Virtue Party Case

After the ban of the Welfare Party, various members of the banned Welfare Party reconstituted themselves as the Virtue Party and stood for Parliament in the last election.  Although support for the party fell to 15% in that election, it is clear from newspaper stories that the Party continued to have wide-spread support.  Nonetheless, on June 22 the Constitutional Court came out against it, stating that it had become a “focus of anti-secular activities.”  In light of the decision in the Welfare Party case, it is likely that the attempts by more moderate Turks to amend the Political Party law to make it more difficult to ban parties will fall on deaf ears.  But it is a healthy sign – one clearly favoring pluralism – that such a bill has found considerable support in Turkey.  KS

Notes

[1] The dissent in the Welfare Party case, infra note 4, notes that there have been 15 cases brought in Turkey to ban various political parties and that of these four have gone to the European Court of Human Rights.  All except the most recent have been won by the parties involved. 

[2]   European Court of Human Rights, (133/1996/752/951)(Grand Chamber decision, January 30, 1998).

[3] European Court of Human Rights [GC], #23885/94, §26, CEDH 1999-VIII.

[4] See Affaire Refah Partisi (Partie de le Prospértié) et autres c. Turquie, Cour Europeenne des Droits de L’Homme, 31 juillet 2001.  (The full text decision is available only in French)

[5] In ÖZDEP the Court states that the “interference in issue was radical…,”involving as it did, the dissolution of the party before it even began its activities.   It also noted that the party was “penalised solely for exercising its freedom of expression.”

[6] Series A, # 6, pp. 33-34, §§9-10 and series A # 94, pp. 35-36, § 72. 

the United Kingdom

In connection with various inquiries about charitable status that are being undertaken in the United Kingdom (e.g., the Scottish Charity Law Review Commission; the Charity Law Association (England)), the Performance and Evaulation Unite of the UK Cabinet Office has been asked to undertake a more consolidated approach. It is conducting an inquiry into the legal and regulatory framework for the entire voluntary sector.  This should also be seen against the background of the adoption of Compacts in England, Northern Ireland, Scotland and Wales, which give some hints as to ways in which the legal environment may be modified to reflect more modern perceptions of the relationship between the state and the sector. [1]

The following document describes the scope of the Cabinet Office inquiry and is reprinted here with permission.

 Mordernising the Legal and Regulatory Framework for Charities and the Voluntary Sector  

  1. The Performance and Innovation Unit is undertaking a broad-ranging review of the legal and regulatory framework for charities and the voluntary sector.  The aims are to enable existing and new not-for-profit organisations to thrive and grow; to encourage the development of new types of organisation; and to ensure public confidence in the sector. This will help to secure a strong, independent and diverse sector, capable both of challenging Government and working with it where appropriate.

Background

  1. There are over 185,000 registered charities in England and Wales alone.  But charities are only part of a much wider not-for-profit sector, which includes hundreds of thousands of community organisations pursuing social objectives, such as sports and recreational clubs, and mutual bodies concerned with the interests of their members, such as self-help groups, friendly societies and co-operatives. 
  2. These organisations make a very significant contribution to the health and dynamism of the economy and society. They bring in new funds, and contribute the energy and expertise of committed individuals.  They empower communities that the state and the private sector often cannot reach, and contribute both to personal development and to social capital.  Voluntary action strengthens citizenship through active engagement, enabling people to contribute their time to worthwhile causes and helping to build neighbourhoods and communities. 
  3. The independence of the sector is key to its success. The November 1998 Compact, which sets out the principles of the relationship between the Government and the voluntary sector, emphasises that recognition of the continued independence of the sector is central to the partnership. The Prime Minister’s speech to the National Council for Voluntary Organisations in 1999 reinforced this message, recognising that the modern role of Government is not to supplant or dominate voluntary activity. The sector’s capacity to challenge Government also helps to create policy debates, promote a pluralist society and strengthen democracy.
  4. Equally, the unique skills of the sector means that where appropriate, it can play a vital role in delivering services in areas which the Government wishes to support. There is therefore a shared interest in ensuring that the sector has the capacity to deliver these services in an efficient and effective way. 

Government Policy to Date

  1. Policy has evolved rapidly over the last few years, reflecting the importance which Government places on the voluntary sector. Key measures have included:
    • The Compact, mentioned in paragraph 4 above, and the accompanying Codes of Good Practice.
    • Recent policy initiatives – such as the childcare strategy and Sure Start, the New Deal for the unemployed, Education Action Zones, and New Start – have put the voluntary sector in a leading role.
    • Government has also become increasingly reliant on the sector for the direct delivery of services – for example, Housing Associations manage around 1.5m homes.
    • The Government improved tax incentives for the giving of money with a package of measures in Budget 2000, and has introduced new measures to encourage volunteering through initiatives such as Active Community and Timebank.
    • Government is considering a new legal form for charities that will remove the need for dual registration and should reduce the regulatory burden (the Charitable Incorporated Organisation).
    • The Chancellor announced in Budget 2001 a consultation on possible tax reliefs to help community amateur sports clubs that make a positive contribution to their communities.

The Case for Further Reform

  1. There are growing public demands for greater openness and accountability. In addition, the fact that many voluntary organisations receive public subsidies in one form or another – such as tax reliefs and grants – makes it all the more important that they operate in a transparent manner.
  2.   However, there is a perception that incentives for improving efficiency, effectiveness and accountability within the sector are not strong enough.  The ways in which beneficiaries of charitable and not-for-profit activities can participate in decision-making are often regarded as unclear. A lack of accessible, appropriate information can make it difficult for donors to assess performance and register their views. There is concern about the declining trend in the levels of individual and corporate giving, which led to the Budget 2000 tax package and the Giving Campaign.
  3. There are also concerns that although the sector is evolving rapidly in response to changing economic and social circumstances, aspects of the legal and regulatory framework are outdated, and may be restricting the efficiency and growth of the sector.
  4. In light of these concerns, various organisations have been calling for reform. The National Council for Voluntary Organisations, for example, launched a consultation document early this year which recommended changes to the current legal definition of charities. The Scottish Charity Law Review Commission has recommended the establishment of a new regulatory regime for charities in Scotland along the lines of the Charity Commission in England and Wales, as well as a new legal definition of charity; the Scottish Executive is consulting on these proposals. 
  5. A review of the legal and regulatory basis for the voluntary sector provides an opportunity to develop a new framework which encourages the sector to be innovative, dynamic, efficient and effective on the one hand, and which protects beneficiaries, donors, staff and volunteers on the other.

The Current Legal Definitions of Voluntary Organisations

  1. Some, but by no means all, voluntary organisations are charities. Charitable status carries with it certain tax and other advantages.  However, the legal framework that determines charitable status appears to be outdated. The existing legal requirement for charitable status is based on charitable purposes, classified under four heads:
    • the relief of poverty;
    • the advancement of education;
    • the advancement of religion;
    • other purposes beneficial to the community.
  2. Only organisations that satisfy the Charity Commission’s (and ultimately the courts’) interpretation of the case law defining “charitable purposes” are eligible for tax benefits. Questions have arisen about whether these traditional definitions of charitable status are sustainable, both in terms of which activities are included, and which are excluded (such community self-help organisations).
  3. A growing number of organisations which are not charities are facing new challenges working in the grey area between charitable and commercial activity. Examples include mutual enterprises, and organisations concerned with social enterprise and job creation.  The current legal and regulatory frameworks are not designed to help these types of organisation. For instance, the definition of a mutual organisation is unclear (at least to those outside mutual organisations), and the existing frameworks lack the flexibility to support the development of new forms of organisations that deliver a public benefit.

The Current Regulatory Framework

  1. The Charity Commission regulates charities. The 1993 Charities Act created a new reporting regime, and strengthened the Commission’s powers to intervene in cases of mismanagement of funds. But there is no single regulatory framework or regulatory body for the non-charity voluntary sector.  Activities are regulated only in so far as they come under the authority of a sectoral regulator, such as the Housing Corporation in England.
  2. There is a debate about the quality and coherence of regulation. Many organisations involved in a range of activities, for example, are faced with conflicting and overlapping demands by different regulators. There is also a case for looking at whether there is scope for more self-regulation.
  3. Proportionality in regulation is also important. For instance, there are currently a very large number of small or informal groupings which are of insufficient size to be formally regulated.

What Will the PIU Project Do?

  1. The objectives of the project will be:
    • to map out a comprehensive picture of the wider not-for-profit sector;
    • to clarify the Government’s strategy toward the sector;
    • to set out the principles that should underpin a reformed regulatory and legal framework;
    • against this background, to review the legal and regulatory framework for the sector in order to assess how it could better enable existing organisations to thrive and grow, encourage the development of new types of organisation, and ensure public confidence;
    • to review which types of organisations  should have a special status;
    • to make recommendations for the removal of any unnecessary legal restrictions on investment, entrepreneurial activities, mergers and acquisitions;
    • to make recommendations on modernising the regulatory framework for charity and the voluntary sector.

Timetable

The project started work at the end of June 2001 and will finish in the winter of 2001/2.

Sponsor Minister 

The sponsor minister for the project will be Baroness Morgan.

How to Contact Us 

Do you have views on our project?  Do you have experience of this very diverse sector?   Do you have examples of what works well and what works less well?   What is crying out for change?   We would love to hear from you.  Please contact Vicki Bakhshi on (020) 7276 1893, or by email on vicki.bakhshi@cabinet-office.x.gsi.gov.uk

[1] For a discussion of the UK compacts from a comparative perspective, see Daimar Liiv, Guidelines for the Preparation of Compacts, 3 IJNL 4.

 

Copyright © 2012 The International Center for Not-for-Profit Law (ICNL)
ISSN: 1556-5157