Andrew O'Brien: Silence from the Chancellor. Should charities be nervous?

Ahead of Wednesday's Budget, our columnist looks at how charities could be affected

Andrew O'Brien
Andrew O'Brien

A quiet pre-Budget period could mean that there isn’t much coming on Wednesday. Given the lack of a majority for the government, Brexit, slowing growth and higher inflation, it could be that the Chancellor simply has no wiggle room.

However, a quiet pre-Budget could mean that significant changes are on the way. If controversial changes are going to be made to balance the books in the wake of the Brexit vote, the Chancellor is not going to want these to leak out to the newspapers so that they unravel before he has stood up at the dispatch box. The latter scenario is one that is going to worry charities more.

So what could the Chancellor announce on Wednesday and how would it affect charities?

VAT registration threshold

One of the few things that has been picked up in multiple newspapers is the proposal that the Chancellor will reduce the VAT registration threshold to £20,000, to – ironically – bring it in line with the rest of Europe.

The UK has a high VAT registration threshold at present, at around £85,000. For charities, this means that they don’t have to register for VAT until they reach this threshold – although some may do so voluntarily – and avoid the complexity of dealing with this part of the tax system. A reduction in the threshold would, therefore, have a significant impact on smaller charities.

Depending on how these smaller charities work, they could end up paying tax to HM Revenue & Customs, which they didn’t have to do before. Overall, it is estimated that this change could raise billions in additional revenue. Charities need to be alert to changes in this space.

Insurance premium tax

One area from which the government has already shown an interest in increasing revenues is the insurance premium tax. The rate of this has doubled in recent years, and is now costing charities an extra £25m a year. The average tax take-up has increased from £150 to £300 per charity, according to the specialist charity insurer Ecclesiastical. The Chancellor has said that he wants to bring IPT in line with VAT, which would mean increasing it from 12.5 per cent to 20 per cent. This would add an extra £20m to the bill. Overall, this would leave charities paying about £80m a year in IPT.

Again, the biggest impact is going to be on the smallest charities, which generally pay a larger proportion of their income on insurance than the largest charities. It is also a cost that few can avoid because insurance is usually required by law or regulation.

Public sector pay

Increased costs is one half of the coin, the other side is increased spending pressures. One of the few areas of expenditure that hasn’t risen significantly in recent years has been pay, so a return to "normal" levels of pay increases in the public sector could add further pressure to charity budgets.

Many charities are competing with the public sector for staff or benchmark themselves again public sector counterparts. Increased awards to public sector staff will have an effect on pay settlements in the charity sector. Hammond will not want to see salaries explode in the public sector, because this will further reduce his room for giveaways, but any loosening of the cap will have an impact on the charity sector. 

Could the Charity Commission be given a few million?

There is £40m of unspent Libor fines to be distributed to military charities, so we can expect more announcements on that in the Budget.

A consultation on charging charities for the Charity Commission might also be announced. The new chief executive of the commission has said that this issue needs to be resolved, and it may be that the government gives the commission a few million more in order to tee up a consultation. The argument would be that "government has chipped in a few million; charities should do the same". We need to be careful that this doesn’t overshadow the bigger issues at stake or see the charity sector sign up for permanent charging in return for only a temporary increase in Treasury funding.

More light might also be shed on the so-called dormant assets, which could be worth between £1bn and £2bn. These funds will take years for the government to access, but with a new civil society strategy announced could these funds be used to underpin it?

Andrew O’Brien is head of policy and engagement at the Charity Finance Group. Third Sector will be providing full coverage of the Budget on Wednesday 22 November

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