The trouble with charities

Why are charities in the spotlight?

Government attempts to cap tax relief on charitable donations have sparked a debate about how charities are funded. The Treasury reckons that the total cost of charitable tax breaks will be £3.64bn this year.

When a British taxpayer makes a donation, the charity receiving it can use the Gift Aid scheme to claim back the basic rate of income tax, 20%, on the gross amount. If you are a higher rate taxpayer you can also claim back the difference between the higher rate of tax 40%, or 50% and the basic tax on the gross donation.

Chancellor George Osborne recently attempted to cap Gift Aid on donations of above £50,000 but was forced to back down when charities opposed the move. Britain's charities argued "that reducing the tax break would diminish donations and thus their ability to do good works", says The Economist. Charities won the day because they are "by and large, more popular than chancellors".

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Are the charities right?

A study by the Charities Aid Foundation showed that tax breaks don't always encourage giving. For example, the French, who have generous tax breaks, give just 0.14% of GDP to charity. That compares badly with 0.22% in Germany, which offers far less fiscal incentive to give.

Besides, the traditional idea of charities run by well-meaning volunteers raising funds through jumble sales is increasingly out of date, says Christopher Snowdon in his "Sock Puppets" report for the Institute of Economic Affairs (IEA). Many in the so-called third sector' after the private and public sectors see themselves "as a more caring, semi-professional wing of the state".

Government support either through direct contributions or lucrative contracts for services provides more than 75% of the income for around 27,000 of Britain's approximately 169,000 charities. In total, government directly provides a third of charity funding. If you include National Lottery funding, "the voluntary sector' receives more money from the state than it receives in voluntary donations", says Snowdon.

But it's all in a good cause?

That's the other problem. Some charities seem to spend much more money on simply surviving ie, paying for staff, headquarters and fundraising campaigns than on helping their causes. One high-profile example is Sentebale, a charity for

African orphans, patronised by Prince Harry.

In 2010, it only spent £1.1m on charitable projects but £500,000 on staff. That includes one executive on £100,000. In 2008, the One Foundation, started by Bono, lead singer of rock band U2, raised £9.5m but only spent £118,000 on good causes. The charity responded that it is an advocacy group designed to publicise good causes rather than dish out money to them itself but even so, its running costs chewed up £5.1m of donations.

Meanwhile, this February, supporters stopped funding Awema a Welsh charity for ethnic minorities after an audit revealed that senior staff had received massive pay rises.

Where else does your money go?

While not every charity has highly paid staff, nor does the money always go where you might expect it. An undercover

investigation by The Daily Telegraph found that one firm that provides chuggers (the "charity muggers" who accost you on

the high street) for big charities, such as Marie Curie and the RSPCA, broke charity law by not disclosing how much it charges clients. Donors to Marie Curie were told that their donations would pay for extra nurses, when in fact the main aim was to collect phone numbers for use in future fund-raising drives.

Meanwhile, The Times found evidence that some private-sector firms collecting and selling clothes on behalf of charities might actually keep most of the profits for themselves. Industry body the Fundraising Standards Board estimates that this could cost British charities £50m a year.

Who regulates all this?

The Charity Commission is the regulator responsible for checking charity accounts. However, it is only responsible for checking for blatant fraud or mistakes, not for whether charities are spending the money effectively. It does investigate complaints made about charities and, following various scandals, it devoted its 2012-2015 strategic plan to "developing the compliance and accountability of the sector". However, with its annual budget being cut by 33% in real-terms to £20m by 2014, it may struggle to raise standards across such a disparate sector.

The rise of the fake charity

Traditionally, political lobbying could not be a charity's main activity. However, over the past decade the Charity Commission has relaxed those rules. As a result, says Christopher Snowdon in his IEA report, many charities are now effectively government-funded pressure groups that produce research and run campaigns to change laws and influence public opinion some even describe them as fake' charities.

For example, anti-smoking group ASH is entirely funded by various government bodies. In turn it uses this money to influence public policy. Regardless of your views on smoking, it does seem odd that the government spends our money to lobby itself.

More sinisterly, it also means that such charities can potentially be used as a smokescreen for unpopular government policy objectives, concludes Snowdon, by making it seem as though the government is simply yielding to pressure from well-meaning charities, which are in fact acting as "sock puppets" campaigning for greater state power.