Opinion: Charities need to justify their tax breaks

Luke FitzHerbert, senior researcher at the Directory of Social Change

My cousin Sue owns and runs an excellent but modest local homecare service. I work with many charities running similar services to hers.

Her little business has to pay full taxes, but the charities do not. Are the differences great enough to justify our continuing tax exemptions?

We get at least 80 per cent rate relief - a huge commercial benefit - and, if we are successful, we pay no tax on the surpluses we earn. Some of us do have a serious VAT problem, but this is commonly reduced or circumvented by our use of trading subsidiaries.

Will this be sustainable as we dance further down the contracting road?

Charities are being encouraged by just about everyone to become social enterprises, competing for contracts in the welfare marketplace. At our best, we have a strong case. No profit goes to our owners. Our trustees, thankfully still unpaid, have no personal interests at stake and are free to defy commercial pressures if they are at odds with charitable aims - neither their incomes nor their jobs are at risk. A good contract for commercial providers is simply one from which they can expect to make an honest and reliable profit, but for a charity it is generally one in which there are additional public benefits from the work being done.

Such as what, for example? Well, we might add value through the input of volunteers - more difficult for Sue and her like when bidding for the same contracts. We can offer better value by using our own donated income to supplement the basic level of service provided for in the contracts concerned. And, time after time, charities act as the public conscience, doing the things that people know ought to be done, in the way they ought to be done, whether or not they are commercially attractive.

This is fine, but it does not always happen. Too often, what our competitors see are charities operating simply as businesses, charities that are run not by their trustees but by their staff, charities prepared to do whatever is legal to earn money, and charities for which the preservation of existing jobs is an end in itself and financial growth is the annual measure of success.

How are we to keep genuinely charitable as we throw our organisations into the new world of social enterprises? It would be a start if we all had to explain in our reports how our practice differs enough from that of commercial competitors to justify our otherwise unfair tax advantages.

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