The impact of Brexit on the charity sector
Charities need to be aware of the changes that might be ahead, such as loss of funding streams and reductions in rate relief, and plan accordingly, warns Dominik Opaliński
The UK is entering into a turbulent period in the wake of the referendum on its membership of the EU, both economically and politically.
A prolonged period of uncertainty inevitably presents challenges, not least for the voluntary and charitable sector. Many organisations within the sector are used to navigating in ‘rough seas'; however, while Brexit may disadvantage some charities, it may present real opportunities for others. The main economic risk for charities is the prospect of losing hitherto direct access to sources of funding from the EU, or from a donor that is itself funded by the EU. Alongside the impact of prolonged economic volatility, this may discombobulate an important yet hard-pressed sector of our society.
Funding from the EU in the form of the European Structural Investment Fund, for example, targets regions across the UK where private investment is lacking and labour markets are already depressed. Voluntary organisations in the UK are currently eligible to bid for funding from a stream valued in excess of £13bn. There is no guarantee that this source of funding would remain available in the wake of Brexit.
If the economy were also to be in turmoil, a reduction in corporate donations would be seen and greater pressure would be placed on public finances, leaving the government unable to re-allocate sufficient resources to replace this source of funding.
If the UK economy does enter a recession, this will impact on jobs and living standards. Consequentially, demand for the services of charities working in deprived communities can only grow stronger with time. Declining fundraising may push charities to consider mergers to deliver their strategic objectives.
Additionally, grant-making trusts and foundations face the prospect of diminishing returns from their investments, as well as a reduction in income. However, charities have shown themselves to be adept at adapting to their environments and cutting their cloth accordingly.
The past decade has seen the cutting back and placing of charities on a more professional footing, while facing a series of domestic challenges in the areas of data protection, fundraising, and lobbying. No one may know what the future holds for the UK when it leaves the EU, or when exactly this will be, but it is almost certain that charities will be the first to the rescue to deal with the fallout.
While it seems likely existing EU funding commitments will continue to be honoured until the UK’s exit is completed, it is possible that UK charities may face exclusion from new funding commitments or be placed at the bottom of the pile by the EU. However, there is time to consider and explore new sources of major funding or the possibility of forming new alliances.
Charitable tax relief
Due to the underlying EU principle of ‘non-discrimination’ in relation to charitable tax relief, UK charities may need to consider establishing a local subsidiary or an associated charity in the EU to preserve their ability to fundraise effectively in European markets. Therefore, overseas aid charities registered in the UK may have to maintain an EU presence in order to retain funding.
Any changes relating to freedom of movement will almost certainly have an impact on charities that employ staff from other European countries and that send their staff to Europe. This could also impact on the treatment of refugees and economic migrants entering the UK, affecting charities working with these groups.
The government will have the scope to set its own VAT regime, which could benefit charities. However, this would depend upon the government having to make changes which could leave the Treasury out of pocket, unlikely if the UK economy slips into a recession.
European law has allowed British taxpayers to make donations to European charities while being able to claim any available UK tax relief. Additionally, UK charities have been able to benefit from donations made by European donors, in accordance with the relief available for charitable giving in the donor’s own country. At some point, UK charities will become ineligible to receive tax-relief donations directly from most EU-resident donors.
Unfortunately, any new policies on charity reform are likely to be towards the bottom of the list of priorities for some time to come. It will be even more important for charities to carefully examine policy initiatives in the next Budget as much may change, for example a possible reduction in rate relief.
Constitutionally, charities registered in England and Wales and operating in Scotland must be wary – the Scottish government is considering a second referendum to leave the UK. If a second referendum is called at some point in the future, this may have a very different outcome. There is also speculation as to whether the Scottish government will also seek to remain in the EU itself.
Hunters incorporating May, May & Merrimans
This article was originally published in Solicitors Journal and can be found here.