There has been a great deal of discussion about the impact a vote to leave the EU would have on the economy and political environment, but there has been little debate about the potential impact on the third sector. In this article, I look specifically at what impact a vote to leave the EU would have on the sector.
The world of charities and not-for-profit organisations is a multifaceted one. Clearly the impact on a charity which relies on EU funding and has employees travelling in Europe is going to be very different to a grant-giving charity supporting schools in Africa. The thoughts I have raised here can therefore only be high level and general, affecting one perhaps, but sparing another.
By referring to leaving the EU, I mean the total removal of Britain from the EU and, possibly, the European Economic Area and the European Free Trade Association too, depending on what model of relationship the government decides to have with Europe in the future.
Because it is so difficult for economists and politicians to say what will happen if Britain votes to leave Europe, it is somewhat daunting to try to piece together from the conjecture and surmising anything of substance which can be used as a foundation for considering impact.
With these caveats behind me, I suggest there are three key categories:
The general consensus (with some strong views to the contrary) is that a leave vote will cause, at least in the short term, damage to the economic environment while Britain tries to reconfigure her trading agreements.The markets do not like uncertainty and in the weeks running up to the referendum, the mere fact that Britain might vote out has been enough to cause instability. A vote to leave would be likely to exacerbate this position.
If we enter a period of recession, it seems reasonable to also expect a negative impact on employment and living standards. This in turn may increase demand for the services of those charities working nationally with disadvantaged people.
Charities have, of course, seen this all before. Charities have been going into battle since 2008 in what has been a time of financial hardship for the nation as a whole. As a result, many charities have emerged as leaner institutions, more experienced at dealing with the type of issues their beneficiaries face during a recession. Many charities might therefore say then that the economic impact would result in 'more of the same'.
It goes without saying that charities who rely on income from investments or have property portfolios will be keeping a watchful eye on the markets.
The Britain Stronger in Europe campaign has published research that suggests that charities could lose more than £200m in funding if Britain were to leave the EU. This figure being the amount 249 charities received in 2014. There is no guarantee that this source of funding would remain available if Britain were no longer part of the EU.
Clearly, this is just one source, referring to comparatively few charities and specifically to a one year period. It is therefore important not to jump to too many conclusions from these statistics but at the same time, the reduction of major funding from the EU would be detrimental for many charities in the UK and, if the economy is also in difficulties, fundraising generally will be more of a struggle at a time when the need is greater.
Apart from institutional funding from the EU, there is effectively a principle of 'non-discrimination' binding on EU member states in respect of charitable tax reliefs (see more below). If the UK leaves the EU, UK charities may need to establish local affiliates to fundraise effectively in European markets.
Legal, tax and political implications
In terms of legal implications, charities and not-for-profit organisations will be in a similar position to businesses based in the UK. A vote to leave would give the government a new mandate and possibly a new leader, which could result in large swathes of law being amended.
Of particular interest will be any changes relating to the freedom of movement (assuming we also leave the EEA). This will have an impact on charities that employ staff from other European countries and send their staff to Europe. It would also be likely to have an impact on the way in which refugees and economic migrants are treated upon entering the UK, which will have implications for those charities working with these groups.
Similarly, leaving the EU would give the government scope to set its own VAT regime that could benefit charities by replacing exempt supplies (under the various social exemptions) with zero-rated or super-reduced rated supplies, thus ‘unlocking’ VAT recovery on costs. However, this is reliant on the government making changes to the law that could ultimately result in the state losing out financially, something it may not be keen to do in the resulting economic climate. It will also create winners and losers in the charity sector. Any change of such a nature is therefore likely to be slow to appear.
By way of an example from a tax perspective, European law has enabled British taxpayers to make donations to European charities while being able to claim any available UK tax relief. European charities can also benefit from UK tax reliefs including Gift Aid (provided they are registered with HMRC, something which, admittedly, has proven difficult in practice).
This EU law was enshrined in the Finance Act 2010 so would not be automatically changed on 23 June (or indeed after a withdrawal agreement has been signed, perhaps in two years' time) should the result of the referendum be to leave. However, like many laws of European origin, they are precipitated by a belief in minimising the impact of national boundaries. The government may feel that a vote to leave Europe is a mandate to repeal laws that they felt were 'forced upon' the UK by Europe. It should be noted, however, that Norway, Iceland and Liechtenstein also benefit from these laws, and they are not members of the EU, although they are members of the EEA and EFTA and therefore remain subject to the 'four freedoms', including the freedom of movement.
Similarly, English charities may currently benefit from European donors, in line with the relief available for charitable giving in the donor's country. If the result of the referendum is to leave the EU, the UK's charities will become ineligible to receive tax-relieved donations directly from most EU-resident donors.
While trying to avoid too many layers of hypotheticals, it is quite possible that a vote to leave the EU would cause Scotland, which appears strongly in favour of remaining, to request another referendum to leave the UK. Scottish independence would arguably have more significant implications for many charities than leaving the EU because of the number of charities who are working on both sides of the border. Charities would have to rethink all their working practices, employment and contracts in line with changes to Scottish law.
If the UK votes to leave the EU, I believe that most of the changes will be indirect. The day after the referendum is likely to be the same as any other for many charities, regardless of the outcome. What we may see in time, however, is a return to the all too familiar days of economic downturns and market instability with its negative impact on employment, volunteering and fundraising.
Of course, there will be many who are directly affected. Some charities will lose their funding from European resources and will have to consider new sources of major funding in a climate which is growing increasingly hostile to proactive fundraising practices.
This will form the backdrop to shifts in politics as new laws (and potentially political parties) are created which would presumably have a more national outlook. We will just have to see what impact this has on charities.
But charities are adept at changing to their circumstances. The past decade has been a time of stripping back and putting charities on a more professional footing. The latest hostilities - be it to do with data protection, fundraising, lobbying or executive pay - may result in further pain but not without new growth. We may not know what the future holds for Britain if it leaves the EU, but we do know that our charities will be there to pick up the pieces.
Emma Flower is an associate for the charity and philanthropy team at the law firm Withers