The International Journal
of Not-for-Profit Law
Volume 1, Issue 2, December 1998
On 13 March 1998 the European Commission decided formally to set up the consultative committee for Co-operatives, Mutual societies, Associations and Foundations (CMAF). The main task of the committee is to act as an interface between the Commission and the various members of the European social economy. The CMAF committee comprises 24 full and 24 substitute members who are appointed by the Commission on the basis of proposals by representative organisations of the social economy. The president and the secretariat are provided by the Commission. The first meeting of the Committee was held on 30 June 1998. (EC Official Journal, 18 March 1998).
The 6th European Conference on the Social Economy was held at Birmingham, England from 3 to 5 June 1998. The conference, which was attended by 435 participants from 23 countries plus representatives of the European Commission and European Parliament, presented a series of conclusions based on five core objectives:
- validating the social economy as an integral and creative part of a modern mixed economy;
- highlighting the potential of the social economy to create new jobs;
- highlighting the role and capacity of the social economy in reforming the welfare state;
- promoting the social economy’s role in developing European citizenship; and
- highlighting how the social economy supports lifelong learning and promotes entrepreneurship.
A prime concern of the delegates was the delay in the adoption of the proposed European statutes for co-operatives, mutuals and associations. Hitherto, adoption of these statutes has been linked at the Council of Ministers to adoption of the proposed European Company statute, which is currently blocked by some member states. The Commission undertook to examine the possibility of dissociating the two proposals if the European Company statute remains blocked. www.social-economy.org.uk/uksef/
On 12 May 1998 the European Court of Justice ruled that certain European Commission budget programmes had been funded without any legal basis. These budget lines, several of which affect funding of NGOs, were suspended pending the establishment of a legal basis. Following an inter-institutional agreement between the European Commission, the European Parliament and the EU Council of Ministers on 17 July 1998, several budget lines have been partially or totally unblocked but others remain blocked, including programmes for co-operation with charitable associations, measures in the social economy sector, and contributions towards NGO projects concerning developing countries (European Parliament Session News, 23 September 1998).
On 15 September 1998 the European Parliament adopted a report on the common VAT system for the EU. The report calls, inter alia, on the European Commission to apply an experimental reduced rate of VAT to certain labour-intensive services and to the provision of social housing. At present, the European Commission is suggesting that the labour-intensive categories that offer the best prospects for job creation should be selected for the lower rate; these categories include domestic services such as home help, care of the young, disabled, elderly or infirm but are not linked specifically to the provision of such services on a nonprofit basis. By contrast, lower rates for housing are currently confined by EC VAT law to housing provided as part of a social policy. The Commission has asked representative bodies in the social housing field to suggest a definition of social housing; this is likely to be restricted to housing that attracts subsidy from central or local government but an official announcement on this subject is still pending. (EC Official Journal No C 196 of 22 June 1998 and European Report of 19 September 1998).
On 1 January 1999, 11 EU countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) will be adopting a single common currency, the Euro, as the third stage of Economic and Monetary Union (EMU). The Euro will be the legal currency in the Euro zone and the European Central bank will set one interest rate for the zone. Conversion rates between the Euro and the old national currencies will be fixed on 1 January 1999. On 1 July 2002 the Euro notes and coins will be in full circulation and the national currencies will be withdrawn completely.
The four EU states (Denmark, Greece, Sweden and the UK) that are not joining the Euro zone, at least for the time being, will nevertheless be affected by the introduction of the Euro. For example, from 1 January 1999 UK businesses can file accounts, issue shares or bonds, maintain bank accounts and pay taxes in Euros if they wish to do so, although tax returns will still be required in pounds sterling. The effect of the Euro is not confined to businesses, and nonprofit organisations with donors, beneficiaries, clients, suppliers, or investments in EMU states will have to take account of the implications for their activities.
- On 23 March 1998, comments were invited on proposals to update the legal framework for industrial and provident societies (I&P societies). I&P societies are mutual, incorporated organisations that are either co-operative or conduct their business for the benefit of the community, such as housing associations and certain clubs, some of which have charitable status. The proposals involve amending the Industrial and Provident Societies Act 1965 to define the types of organisation that are eligible to register as I&Ps, to simplify the registration process, to align the legislation with developments in company law, and to facilitate mergers and reorganisations. (HM Treasury News Release 37/98 dated 23 March 1998).
- In June 1998 the Committee on Standards in Public Life issued its report on “Personal liability in Public Service Organisations” (PSOs). This study examined the comparative legal liability of individuals serving in a wide range of PSOs, including both nonprofit organisations and public bodies. Its recommendations include:
- advocating use of corporate structures for the greater protection of appointees;
- where still applicable, reviewing the rationale for prohibiting appointees from purchasing personal liability insurance;
- extending to all appointees the current statutory discretion of a court to relieve from personal liability trustees and company directors who have acted honestly and reasonably;
- reviewing the case for promoting comprehensive legislation to clarify the duties and responsibilities of appointees.
It remains to be seen whether the Government will accept the recommendations for legal reform.
- The National Lottery Act, which was passed on 2 July 1998, alters the distribution of money from the National Lottery by creating a new fund for expenditure on health, education and the environment which will receive 13.33% of the money available for distribution to “good causes” funded by the lottery. The share of the lottery money devoted to each of the other good causes (sport, the arts, the national heritage, and charities) will be reduced from 20% to 16.66%. The reallocation after the year 2000 of the remaining 20% of the available funds, which is currently allocated to projects marking the Millennium, has yet to be announced. The Act also establishes a new corporate body, the National Endowment for Science, Technology and the Arts (NESTA), which is to be endowed with lottery money which would otherwise be available for the other good causes.
- The Human Rights Act 1998, which incorporates the European Convention on Human Rights (ECHR) into UK law, was passed on 9 November 1998. The provisions of the Act will be implemented gradually, so that it is unlikely that the Act will have full effect before the year 2000. The Act will enable UK persons to claim the protection of the ECHR before UK courts without having to present their case to the European Court of Human Rights.
- The Charity Commission has invited views on issues for consideration in its forthcoming review of the Statement of Recommended Practice (SORP) for Accounting by Charities issued in 1995. Feedback to date has suggested that there is no need for a fundamental change to the SORP. Any proposed amendments will be announced for public consultation before further action is taken (Charity Commission, September 1998).
One of the issues raised in the course of the Charity Commission’s Review of the Register of Charities (see IJNL, Issue 1) was whether some special status could be accorded to village shops to take account of the role they play in the regeneration of rural communities. One of the Charity Commissioners has stated publicly that it is difficult to see how a village shop could ever be a charity or how it could be charitable to provide a fund to help keep a village shop open, because there will inevitably be a benefit to the shop owner that is inconsistent with charity law. (Charity Commission Press Release 19 November 1998).
The High Court has held that the Charity Commission was justified in refusing to register as a charity a trust established for the education of the public in the subject of militarism and disarmament. Registration was refused on the grounds that the trust had political objectives: it was clear from the background material supplied that the intentions of the trust included not only the education of the public in peaceful means of conflict resolution but also in a particular view of conflict by characterising the current policies of Western governments as militarist and challenging those policies (Southwood v Attorney General  The Times 26 October 1998).
In the Summer 1997 Budget the Government announced a review of the current system of taxing UK charities. It is unlikely that any major changes will occur before the review is completed. At the time of writing, it is expected that the initial recommendations of the review will not be announced before December 1998, and that these will be followed by a consultation period before any changes to the law are implemented.
The Charity Law Association (CLA) devoted its Fourth Annual Conference on 15 October 1998 to the taxation of charities. In the light of the delay in the completion of the government tax review, the conference reviewed the existing tax laws. Individual sessions focussed on the tax treatment of fundraising campaigns, charity trading companies, conflict of laws concerning charitable legacies, and the division of estates between charitable and taxable beneficiaries.
In its submissions to the government tax review, the charity sector has emphasised, inter alia, the reduction of charities’ investment income resulting from recent changes to the tax treatment of company dividends. Under current law, a UK charity’s investment income is enhanced by its ability to claim repayment of the 20/80 tax credit attaching to a dividend received from a UK company. From 6 April 1999, the dividend tax credit will be reduced to 1/9 of the dividend and will no longer be repayable. As a temporary compensation measure, a transitional relief has been granted to charities in the period 6 April 1999 to 5 April 2004. During this period charities can reclaim an amount based on the dividends received each year: the amount reduces each year from 21% of dividends received in 1999/2000 to 4% in 2003/2004. (Finance (No 2) Act 1997, Section 35).
The 1998 Budget included one significant measure concerning charities: the introduction of a new temporary tax relief for gifts to developing countries. Under the so-called Millennium Gift Aid scheme, the existing Gift Aid rules for single cash gifts are amended for gifts to charities supporting anti-poverty or educational projects in the world’s poorest countries, provided that the gift is made after 30 July 1998 and before the end of the year 2000. Details of the 80 currently eligible countries are given in The Gifts for Relief in Poor Countries (Designation) Order 1998, SI 1998 No 1868. Under this scheme, a deduction is allowed for single cash gifts of at least £100 or for a series of smaller such gifts that total £100 or more for the tax year. A deduction is also granted to businesses for the cost of gifts in kind, in the form of trading stock or used plant and machinery, and medical equipment, for these purposes (Finance Act 1998, Sections 47 & 48).
The 1998 Budget made minor changes to the scheme for exempting heritage assets from inheritance tax. The exemption for gifts of heritage assets to certain non-charitable nonprofit organisations has been withdrawn for lack of use (the exemption for gifts to charities remains). The conditions for owners to retain possession of heritage assets have been tightened by withdrawing the facility for owners to opt for public access to the assets only by prior appointment, and a time limit of 2 years from the date of death or gift has been introduced for claims to heritage relief to be made. (Finance Act 1998, Sections 142 to 145).
The Department of Trade and Industry (DTI) has announced changes to the tax exemption scheme for scientific research associations (SRAs), some of which are and some of which are not also charities. Under the new rules, exemption from corporation tax will only be granted to SRAs approved by the DTI that have as their sole object the undertaking of scientific research which creates new knowledge or applies existing knowledge in new areas that is generally available to an industry. Under a temporary concession intended to give SRAs time to restructure their activities where necessary, SRAs that were eligible for tax exemption for accounting periods ended before 1997 will continue to be treated as eligible for the exemption for accounting periods beginning before 1 September 1999 (DTI and Inland Revenue Press Releases 4 September 1998).
The Inland Revenue has announced a change of practice concerning capital payments received by UK charities from foreign trusts created by UK settlors. Previously, the tax authorities were seeking to assess the charity to tax on such payments to the extent that they were derived from a capital gain realised by the foreign trust. With effect for payments made after 9 August 1998, it will be accepted that the charity is exempt from tax on the receipt provided that it is applied for charitable purposes (Inland Revenue Tax Bulletin 36, 10 August 1998).
The Inland Revenue has issued guidance notes on its approach to the inspection of accounting records held by charities. The notes cover the charity’s rights to confidentiality, professional representation, and appeal against any tax assessment. (Inspection of charities’ records, Inland Revenue Code of Practice 5, November 1998).
See also in this issue: A review of the recent case Gaudiya Mission v. Kamalaksha DAS Brahmachary
The tax law changes effective for 1999 that have been enacted include an amendment to the real estate tax, which authorises municipalities to grant exemption from this tax to nonprofit organisations.
- The Finance Law for 1999 includes the following provisions concerning not-for-profit organizations:
- the existing income tax relief for individual donations to certain (e.g. philanthropic, educational, cultural, heritage or sporting) types of not-for-profit organization equal to 50% of the donation up to a maximum of 1.75% of taxable income is to be extended to individual donations to not-for-profit organizations established exclusively to promote enterprise by providing financial support to entrepreneurs;
- three representatives of the not-for-profit sector, two of which will be designated by umbrella not-for-profit organizations and the third by the chamber of commerce and industry or the artisans’ chamber (chambre des métiers), will be included in the composition of departmental tax tribunals convened to hear appeals against tax assessments on not-for-profit organizations.
- On 15 September 1998 a series of measures were announced, detailing a new approach by the tax authorities to the fiscal status of not-for-profit organizations. These comprised an instruction issued by the Tax Administration describing a new approach to determining whether a not-for-profit is liable to the income tax on commercial organizations, and an announcement by the Prime Minister .
The Prime Minister announced that:
- income tax assessments previously issued to but unpaid by not-for-profits whose not-for-profit character was disputed by the tax authorities will be revoked;
- a grace period lasting until 31 March 1999 will be granted to not-for-profits to comply with the terms of the new instruction by the Tax Administration;
- not-for-profits seeking to clarify their tax status under the new instruction can seek an opinion from the not-for-profit specialist in each tax office, which they can rely on against a challenge by the Tax Administration;
- henceforward, it will be accepted that membership subscriptions paid to not-for-profit associations qualify for the tax relief for donations, provided that the subscriptions do not give the member a benefit other than the right to attend meetings and to receive information and accounts.
The new instruction by the Tax Administration lays down a three step approach to determine the not-for-profit character of an organization, taking into account the following factors: whether the management has a (financial) interest in the organization; whether the organization competes with the private sector; and whether the activities are conducted along similar lines to those of commercial businesses having regard to the so-called “rule of the four Ps”, i.e. the not-for-profit organization’s approach to its products, public (customers), prices and publicity. (Bulletin Officiel des Impots 4 H-5-98 and Instr. SLF & DGI, all dated 15 September 1998)
Framework and Tax Legislation
Under the auspices of the Bertelsmann Stiftung and the Maecenata Institut a project has been initiated which will help to provide input into the development of new legislation for the not-for-profit sector in Germany. The project will be looking at reform of the laws affecting foundations, including the tax laws affecting foundations. In this connection it will focus on the legislation proposed in the last Parliament by the Green Party, which is due to be introduced in this session of the Parliament once again. In addition, the project will look more broadly at legislation affecting the “public benefit” sector in general – “das Gemeinnützigkeitsrecht.”
A working group has been formed, which consists of representatives from academia, the political parties, practicing lawyers and accountants, representatives of the foundation and public benefit sectors, and international experts. One colloquium for the working group has been held, and others are planned for the coming year. In addition two public meetings are expected to be held in May 1999 and November 1999.
The first colloquium identified various broad themes that need consideration as the law reform process continues. These include the formation of foundations, the definition of public benefit, the management of funds, appropriate tax incentives, etc. For further information about this process, please contact Rupert Graf Strachwitz of the Maecenata Institut, firstname.lastname@example.org, or Dr. Volker Then of the Bertelsmann Stiftung, email@example.com.
The Finance Act 1998 introduced two new provisions for tax relief for donations. First, corporate donors can now claim relief for donations to certain charities. Second, there is a new relief for donations by both individuals and companies to schools in disadvantaged areas.
Under the first relief, corporate donations to eligible charities are an allowable expense. Eligible charities are charities that have been granted exemption from income tax under Section 207, TCA for a period of at least 3 years. The relief applies to donations between IEP 250 and IEP 10,000 for corporate donations to any one charity in an accounting period, subject to an overall maximum limit for all such gifts equal to the lower of IEP 50,000 and 10% of the donor’s annual taxable profits before such gifts are taken into account (Section 486A, Taxes Consolidation Act (TCA) as amended by Sec. 61, Finance Act 1998).
The second relief concerns gifts to designated schools or approved bodies established solely to raise funds for the benefit of designated schools. The donation must fall within the following annual limits, net of any consideration received for the gift:
- between IEP 250 and IEP 1,000 for individual donors;
- between IEP 250 and IEP 10,000 for corporate donations to any one designated school or approved body.
There is an additional maximum limit for all such gifts by a corporate donor equal to the lower of IEP 50,000 and 10% of the annual taxable profits before such gifts are taken into account (Section 485A, TCA as amended by Section 17, Finance Act 1998).
See also in this issue: A review of the recent case Revenue Commissioners v Sisters of Charity of the Incarnate Word
The bills containing the tax changes for 1999, which were introduced in the Parliament on 12 October 1998, include the following proposals:
- introduction of an environment investment deduction in 1999;
- increase in the budgets for the energy investment deduction and investments in green funds (the original bill for tax exempt green funds was passed on 16 December 1997 with effect from 1 January 1998);
- introduction of an additional 7% deduction (in addition to the actual cost) of training expenses for those non-profit organisations that are subject to corporate income tax, e.g. if they carry on regular business activities that compete with the commercial sector.
(Fiscal Up to date, 20 October 1998 and Bill proposal 26245).
On December 14, 1998 the Compact between the Government and the Voluntary and Community Sector in Northern Ireland was presented at a ceremony in Belfast. Attended by the Secretary of State for Northern Ireland, Mo Mowlam, representatives of the Department of Health and Human Services, and members of the voluntary sector, including the Chair of the Northern Ireland Council of Voluntary Action (NICVA), the ceremony made clear that value of the close relationship between voluntary organizations in Northern Ireland and various government agencies. As Jacqueline Irwin, Chair of NICVA pointed out, “The publication of the Compact is a new milestone in the development of relations between the voluntary and community sector and Government in Northern Ireland.” And Mo Mowlam spoke about the fact that the “process for preparing the Compact, which was developed jointly by Government and the sector,” shows that there is “already a strong, mature relationship” between the two.
One aim of the compact is to set out ways in which Government and the sector can “work together as partners to build participative, peaceful, equitable, and inclusive communities in Northern Ireland.” To achieve this and other aims, the Compact sets out a description of roles, a list of shared values and shared principles, a list of commitments undertaken by the partners, and an agenda for further action. For further information on the Compact and to obtain a copy, readers should contact firstname.lastname@example.org.
Swedish non-profit organisations (ideella föreningar) and foundations (stiftelser) are, as a rule, subject to the national income tax on the same conditions as those which apply to Swedish companies (aktiebolag) and economic associations (ekonomiska föreningar). Certain foundations mentioned by name as well as enumerated types of activities of non-profit organisations and foundations are, however, exempt from the income tax to a large extent. A new bill proposes to extend to non-profit organisations and foundations the benefits of group taxation currently available to corporations.
Although consolidated balance sheets are not recognised for tax purposes, the law allows shifting of income within an affiliated group of companies through group contributions (koncernbidrag, deductible to the donor, taxable to the donee). Moreover, the taxation of corporate profits follows the classical double taxation principle. Under the rules governing the participation exemption, dividends received by a resident company or certain other entities from a resident company on business-related (organisational) shares may be exempt from tax.
For tax neutrality reasons, the new bill proposes that the participation exemption would also apply to dividends received by such non-profit organisations and foundations which are subject to income tax on the same conditions as those which apply to companies etc., and that the shifting of profits through group contributions would be allowable also where the parent of the group is such an entity. To prevent unintended tax reliefs, the bill proposes that a tax on withdrawal would apply in cases where a non-profit organisation or a foundation ceases to be liable to income tax on its profits on the same conditions as apply to companies and economic associations. (Government Bill 1998/99:7)
A new law has introduced major changes to the Turkish tax system. With effect from 1 January 1999, for corporate income tax purposes the exemption of certain types of activities (e.g. schools, hospitals, fairs and social activities) carried on by associations and foundations is abolished; in addition, associations and foundations will be liable to withholding tax on their income including grants received. (Law 4369 of 29 July 1998)