Charities and Brexit
Simon Steeden considers how charities could be affected by the legal and financial uncertainty following the UK's vote to leave the EU
In the wake of the EU referendum, the only certainty faced by charities seems to be uncertainty. But even before we find out how ‘hard’ the government would like Brexit to be, some potential risks and opportunities faced by the sector are already clear.
A prospective loss of EU funding is an obvious concern for the sector. The chancellor, Philip Hammond, has announced that the government will honour EU funding for structural and investment fund projects agreed after the Autumn Statement which continue after we have left the EU, but it remains to be seen whether other sources of EU funding will be honoured in the same vein. For example, it is uncertain whether UK-headquartered charities will remain eligible to receive EU funding allocated to tackle humanitarian projects abroad, such as the £40m received by Oxfam to tackle the refugee crisis in 2014.
Another area of uncertainty surrounds opportunities to bid for EU funding, with anecdotal evidence of educational institutions being asked to withdraw from pan-European funding bids because of concerns about how a UK partner might damage the prospects of a consortium.
Even where grant funding is forthcoming, the depreciation of sterling has increased domestic inflation and reduced the purchasing power of grant funding overseas. According to the chief executive of World Child Cancer, sterling’s fall led to a 9 to 13 per cent cut in programme funding within six weeks of the referendum.
As a result, some US-headquartered charities are already exploring the option of setting up European affiliates in other EU jurisdictions (such as Holland or Luxembourg) to supplement, or in lieu of, a UK office. A shift towards mainland Europe may also be accelerated by possible reversal of the principle from the European Court of Justice case of Persche (Case C-318/07), which can allow (rarely, in practice) for UK tax payers to receive charitable relief on donations to organisations established in other European countries.
Meanwhile, an Institute for Fiscal Studies analysis of UK public finances has found that lower economic growth and higher inflation will reduce tax receipts and offset any savings gained by leaving the EU. If correct, we may see a reduction of disposable income and a knock-on impact on charitable donations, alongside an increase in demand for the services of charities focusing on relief of poverty and other disadvantage. Early signs of a downturn in the property market could concern trustees of charities reliant on legacy income or with significant property portfolios, such as care homes and social housing providers.
The sector will also be closely watching how public spending decisions are handled by the reshaped government in times of even greater financial uncertainty. International development charities will be particularly concerned about any undermining of the commitment to allocate 0.7 per cent of GDP to overseas aid.
Pension deficits are set to remain among the sector’s biggest challenges. According to Hymans Robertson, the UK’s pension deficit rose from £830bn to £900bn overnight following the referendum and reached £935bn by 1 July. It is widely known that many charities were already struggling with defined benefit pension scheme deficits. The Bank of England’s base rate cut to 0.25 per cent in August has made it even harder for such schemes to find returns capable of covering spiralling liabilities.
Another major practical concern for charity sector employers is the status of European workers. The care industry is heavily reliant on European migrant workers, currently employing about 84,000 care workers from EEA countries, 90 per cent of whom do not have British citizenship and whose future is uncertain. Recent reports suggested the government is considering reconfiguring the immigration system on a work permit basis, under which economic migrants would only be granted access if they were both highly skilled and in receipt of a firm job offer. Charities employ many non-graduates and such a skills-based immigration system would be poorly suited to their needs.
Amid these challenges, some charities might find comfort in potential opportunities. Upon leaving the EU, the UK government will have a carte blanche to set VAT rates and reliefs, which may create space for charities to push for a more favourable position on irrecoverable VAT, long a concern of the sector. The government would have the freedom to make procurement rules more beneficial for charities and others, such as by expanding the Social Value Act and amending state aid rules which can impinge on the ability of charities to receive public funding and take on the delivery of public services.
Simon Steeden is a partner in the charity and social enterprise team at Bates Wells Braithwaite