Supporting the Not‐for‐Profit Sector: the Government's Review of Charitable and Social Enterprise

AuthorA. Dunn,C. A. Riley
DOIhttp://doi.org/10.1111/j.1468-2230.2004.00503.x
Publication Date01 Jul 2004
REPORTS
Supporting the Not-for-Pro¢t Sector: the Government’s
Review of Charitable and Social Enterprise
A. Dunn
n
andC.A.Riley
nn
INTRODUCTION
The governance of organisations has enjoyed sustained attention over recent
years.In the UK, this hasbeen fuelled by the promulgationof a number of volun-
tary codes of practice designed to improve corporate accountability,
1
and by the
Government’s far-reaching review of company law.
2
Perhaps unsurprisingly, the
spotlighthas tended to fall most on commercial bodies, typically addressed under
the rubric of ‘corporate governance’, but the ‘not-for-pro¢t’sector has not escaped
attention, made more urgent by the expansion in the role of,a ndthe expectations
on, thatsector. So, increased demands have been put upon not-for-pro¢ts (includ-
ing charities)to assist in the deliveryof state services, theregenerationof commu-
nities, the provision of ‘public goods’, and the fostering of entrepreneurial spirit.
3
It is against the background of these developments that the Government
launched, in September 2002, its review of the not-for-pro¢t sector, with the
publication of its consultation paper Private Actio n, Public B ene¢t (hereafter PA P B ).
4
Taking as its theme the development of a modern legal framework for not-for-
pro¢ts, PA P B had a wide-ranging remit
5
and delivered a large and diverse range
of recommendations.
n
Newcastle LawSchool, University of Newcastle.
nn
Department of Law,Durham University.We are grateful to the anonymous referees for their helpful
comments on an earlier draft.
1 These codes are consolidated in the FRC, The Combined Code (2003) available at: http://
www.frc.org.uk/publications/content/CombinedCodeFinal.pdf (last visited 15 January 2004).
2 For the fruits of that review, see ModernCompany Law fora Competitive Economy: FinalReport (Lon-
don: DTI, July 2001), and the Government’sWhite Paper, Modernising Company Law Cm 5553 -I
and II (2002).For an excellent discussion thereof, see R.Goddard,‘‘‘Modernising Company Law’’:
The Government’s White Paper’, (2003)66 MLR 402.
3 See for example NextSteps onVolunteeringand Giving in the UK: A DiscussionDocument (London: H.
M. Treasury & Home O⁄ce, December 2002),The Role of the Voluntary a nd Community Sector in
Service Delivery: A Cross Cutting Review (London: HM Treasury, September 2002), D. Blunkett,
CivilRenewal: A NewAgenda,The CSV Edith Kahn Memorial Lecture (London: Home O⁄ce, June
2003).W|thin the Home O⁄ce there is an Active Communities Directoratewhich has the aim of
supporting voluntaryand community groups and pushing forward a strategy for the sector.The
Directoratecomprises an Active Community Unit,a Char ityUnit and a Civil Renewal Unit.
4PrivateAction,Public Bene¢t (London: StrategyUnit, 2002).
5 The Government’s strategy towardsthe voluntary and community sector is described as fourfold:
‘tohelp char ities and other not-for-pro¢t organisations playa bigger role in revitalising commu-
nities and empowering citizens yencouraging public support for the sectoryhelping the sector
rThe Modern LawReview Limited 2004
Published by BlackwellPublishing, 9600 Garsington Road,Oxford OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA
(2004) 67(4) MLR 632^657
For the purposesof this review, we can focus on two areas forreform.The ¢rst
relatestospeci¢callycharitable organisations. Here, the de¢nition of charity and
the importance of public bene¢t preoccupied much of PAP B , but other issues
too were considered, includingproposals for smallcharities, fundraising, mergers,
investment practices, and the role and purpose of the Charity Commission.The
majority of the proposed reforms to charity law were supported by the Govern-
ment in its ownsubsequent response toPAPB ^ Charities and Not-for-Pro¢ts: A Mod-
ern L egal Framew ork
6
(hereafter‘MLF’) ^ and manyof these will form thesubject of
a Charity Bill (to be prese nted in the current Parliamentary session).
7
The second area concerns the range of legal ‘vehicles’ or ‘forms’ available for
not-for-pro¢t organisations. PA P B rightly emphasised the importance of the law
providing appropriately constructed vehicles, tailored to the distinctive needs of
not-for-pro¢torganisations.
8
It also argued, persuasively, that the existingforms ^
more particularly the company limited by guarantee and the Industrial and
Provident Society ^ su¡er serious shortcomings. In response, it recommended
updatingthe law on Industrialand Provident Societies and, more radically, intro-
ducing two new legal forms ^ the ‘Community Interest Company’ and the
‘Charitable Incorporated Organisation’.
This note addresses in turn each of these two areas for reform. It ¢nds a com-
mon theme running through proposals in both areas, namely ensuring that not-
for-pro¢t organisations provide a su⁄cient ‘public bene¢t’from their activities.
This theme ^ encapsulated by the very title of PA P B ^ is seen in the tightening
of the de¢nition of charity, in attempts to ensure greater public accountability of
charities, and in the restricting of the Community Interest Company to those
organisations that provide a public bene¢t from their activities. Although public
bene¢t unites and drives the Governments project, however, we shall suggest that
a much more discriminating approach to the application of this requirement is
needed than the project achieves.
For charities, a requirement that they bestow bene¢ts upon a su⁄cientlybroad
section of thepublic is quite rightlyimposed.This is an appropriate quid pro quo for
the ¢scal subsidies and privileges charities enjoy
9
^ although even here we shall
criticise the crude formalism with whichthis requirement is too often applied to
charities. For the wider not-for-pro¢t sector, however, matters are very di¡erent.
to becomemore e¡ective and e⁄cientyenablingthe sector to become a more activepartner with
Government in shaping policyand del ivery’, PA P B ,32.
6Charitiesand Not-for-Pro¢ts: A ModernL egalFramework (London: Home O⁄ce, 2003).
7 Some recommendationsare to be taken forward through changes in policyor practice of regula-
tors, or through the development of schemes for self-regulation. The Scottish Executive is pro-
posing its own Charity Bill for Spring 2004, see Scottish Parliament O⁄cial Report, Col 1955^
1965, 24 September 2003.
8 Note that PAP B , and therefore this note, addresses only the issue of corporateforms.
9 Brie£y, in distinction to other organisations, charities’ ¢scal privileges include exemptions for
income (Incomea ndCorporationTaxes Act1988,s 505(1)), exemptionsfor capital gains (Taxation
of Chargeable Gains Act 1992, s 256(1)), exemptions for inheritance tax on charitable legacies
(InheritanceTax Act 1984, s 58(1)(a)),exemptions for VAT(Value AddedTax Act 1994), local taxa-
tion relief at 80% of non-domestic rates(Local Government Finance Act1988,s 43). Charities can
also recoup tax on covenanted sums over 4 years and e njoymille nnium gift aid (Fina nceAct 1998,
s 48 as amended).
A. Dunn and C. A. Riley
633rThe Modern LawReview Limited 2004

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