The voluntary sector has been struggling for some years with increasing costs, reduced funding and rising demand for its services. The Budget contains a complex cocktail of measures that have the potential to affect charities’ finances and viability both positively and negatively.
Our detailed review of the Budget and its impact on business can be found here.
Positives
Local government funding
The Chancellor announced a much-needed 3.2% rise in core local government spending, including at least £600m in new funding for social care. Many charities depend on a variety of local authority support.
Specific initiatives
These include local ‘trailblazer’ programmes, mental health crisis centres and a ‘Connect to Work’ employment initiative. All are areas for potential charity involvement.
Social investment vehicle
This will be spearheaded by the Chief Secretary of the Treasury in conjunction with the Department of Media, Culture and Sport (DCMS), to bring together the government, the voluntary sector and socially motivated investors.
Continued charitable giving tax relief
There were no changes to the relief from Income Tax and Inheritance Tax on charitable donations.
Employment allowance
This deduction from employer’s National Insurance contributions has been increased from £5,000 to £10,500 a year and the restriction to small companies has been abolished, so this higher allowance will now benefit all charities that employ staff.
Negatives
Employers’ National Insurance (NI)
This well-trailed hike from 13.8% to 15% will hurt all charities employing paid staff.
National minimum wage (NMW)
As announced on Budget day, the NMW will rise by more than three times inflation for most employees and by far more for those under 21 and apprentices. In the low pay environment endemic in the voluntary sector, many charity staff are paid the NMW. There will also be a ripple effect through workforces as the higher paid seek to protect their differentials.
Taken together with the NI increase, the impact is dramatic. Analysis in the hospitality sector, which has a similarly heavy concentration of lower-paid workers, shows that these two measures will increase the cost of employing a full-time employee working 38 hours a week and paid at the NMW by a startling £2,500 a year.
Private schools
The Budget confirmed previous government announcements, imposing VAT on private school fees and stripping away the entitlement to claim 80% charitable relief against Business Rates. Many private schools operate under charitable status.
Hospices & social care
The Budget included an exemption from the NI increase for public sector organisations, such as the NHS. Unfortunately, this does not extend to the staff working at the 200 hospices across the UK run by charities, nor to those employed in residential and domiciliary care settings provided by charities. This has provoked intense lobbying, so it remains to be seen if this will generate a reversal of this government’s decision.
Financial implications for the voluntary sector
Charities tend to be run on a highly conservative financial basis, maintaining sufficient reserves to meet continuing costs for an extended period and ring-fencing funds earmarked for specific charitable purposes. Financial reporting standards imposed by the Charity Commission are generally higher than for commercial enterprises. The Charity Commission also provides a monitoring and oversight regime intended to control and limit financial excess or malpractice.
As such, the voluntary sector’s overall financial profile appears at first sight to be stronger than many other parts of the economy. Nevertheless, there are many charities that depend on short-term funding from local government, which leaves them vulnerable to the current parlous state of local authority finances.
Most formal charitable activities are conducted through companies limited by guarantee. Having no shareholders, normal equity-raising strategies are not available to them, whether it is for initial capital, as they grow or in times of financial difficulty. Conversely, they have the alternative of a potential donor base to exploit for all these purposes.
Charities are almost exclusively philanthropic enterprises with no profit or capital gain motivation in the usual sense and with the ultimate fiduciary and management responsibility vesting in volunteer Trustees. As such, they will be more cautious about financial risk than commercial businesses. The Budget will hit those charities hard which have a high labour element in their cost base, undoubtedly prompting some to close their doors voluntarily before they are forced to by outside stakeholders. Others will opt to curtail the services they provide.
Conversely, in the new era of increased government spending, there will be opportunities for the voluntary sector to get involved in facilitating the use of that extra funding to deliver public services.
The way forward for charities
Charities will be right to view the Budget as a classic example of the Curate’s Egg made famous by a Punch cartoon in 1895: a mix of good and bad parts. They must be ever more vigilant about their finances and realistic about their future viability.
Some Trustee boards will require support in navigating financial difficulties, especially where the experience in such a situation is limited. As such, getting independent expert advice is a wise and sensible strategy. An experienced outside view of the way forward may be invaluable when financial pressures are mounting and prospects seem bleak.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.