The UK Public Accounts Committee (PAC) has issued reports on the Charities Commission and UK tax authorities (HMRC) and their handling of regulatory matters.  The Charities Commission has put out a press release with a very solid response to the Public Accounts Committee.  I agree with most of the points of the Commission.  The only one thing that I would concur with the PAC is that the investigation into Cup Trust was probably “feeble”.  But as I have blogged before (here and here and here and here and here), The Cup Trust is one charity and many other regulators have let a lot more bad apples stay in the barrel than the Charities Commission.

The one shocking point is that “The Commission’s resources will decline from £32.6 million in 2007-08 to £20.4 million by 2015-16, a reduction of 48% in real terms.”  This is an embarrasment to the UK government and needs to be rectified before there is more long term damage.  There is a real cost of regulation and there is a far greater cost of not regulating the charity sector.  There are some interesting suggestions for better information sharing between the HMRC and the Charities Commission.  It is interesting that the PAC noted “One of the unintended consequences of the current system of reliefs has been the scope for individuals and companies to try to exploit loopholes in it and Gift Aid is vulnerable in this respect.” As Homer Simpson would say “Dah”.  In Canada we have THE most generous tax incentives for donations and just completely coincidentally I guess the greatest abuse of charity tax incentives!  Also the PAC notes “Tackling abuse provides good value for money, with £44 saved in revenue for every £1 spent.”  Then why has the UK government slashed the Charities Commission budget and continues to dramatically underfund the Charities Commission?

The UK charity incentive system costs a bit and PAC notes “HMRC does not know if these reliefs have encouraged more people to give more to charity as was intended, and the evidence for increased charitable giving is at best inconclusive.”  This is the same problem we have in Canada and our PBO has published some very good reports on the efficacy and challenges of more tax incentives. 

The PAC notes “The sharing of information within HMRC and with other bodies, such as the Charity Commission, has been inadequate”.  If HMRC is anything like CRA then confidentiality and privacy of “taxpayers” trumps everything.  CRA can make some small disclosures about a charity after it is revoked for cause but nothing before that.  Now the very minor “ineligible individual” rules in Canada allow CRA to warn a particular charity that has a fraudster or charity abuser in it, but cannot warn the general public.  CRA also cannot say anything about the actions or even confirm the existence of over 100,000 non-profits that are not registered charities. 

The PAC notes “HMRC acknowledges its relationship with charity regulators is important in tackling abuse, so we were surprised that the sharing of information has been poor and that there has been a failure on both sides to work together effectively. HMRC only took legal advice to clarify what information it can share with the Charity Commission after the publicity surrounding abuse of tax reliefs by the Cup Trust. Prior to this HMRC would not tell the Commission if a known promoter of tax avoidance schemes was involved in the running of a charity.”

The PAC also notes: “However, only since the National Audit Office report in December 2013, has the Commission incorporated tax avoidance into its risk framework. It now considered tax avoidance to be a key concern and acknowledged that it had not previously given this prominence.”  It is good that more prominence is given to tax avoidance.  This is one of the weaknesses of having both a tax regulator and a charity commission.  We have a similar problem in Ontario where the Public Guardian and Trustee of the Attorney General office refuses to get involved in massive charity scams that take place in Ontario because they argue that if it is a registered charity and the scamming relates in some way to tax incentives then it is the responsibility of the CRA to investigate and deal with the matter.  The fact that the PGT has all sorts of powers that CRA does not, does not seem to be persausive. 

Here are the original PAC reports and the text of the Charity Commission response.

“Charity Commission rebuts PAC criticism

5 February 2014

Charity regulator highlights rapid, visible progress

William Shawcross, Chairman of the Charity Commission, says:

“I completely reject the suggestion that the Commission lacks a coherent strategy. We have already begun to implement the recommendations of the National Audit Office. We are making rapid, visible progress. The figures on new statutory inquiries and the increased use of our powers demonstrates that our new board and senior management team are implementing significant change.

I am confident that we are taking the Commission in the right direction. We recognise that we must strengthen our approach to identifying and tackling the most serious abuses of charity – and we have asked for new powers to enable us to do this. We also have to ensure that the few cases of serious mismanagement and abuse do not undermine public trust and confidence in charities more widely. It is a shame the Committee hasn’t recognised this progress.”

The Charity Commission has accepted and is already implementing many of the recommendations set out in the Public Accounts Committee report published today (Wednesday 5 February). It has already acknowledged that its approach to tackling problems in charities was in the past too cautious at times and that it must improve the way in which it identifies and addresses deliberate abuse in charities. It has also accepted the need to make better use of its own data.

The Commission is opening more statutory inquiries into charities and using its legal enforcement powers more, as was recognised by the NAO. For example, it now routinely uses its powers immediately to gather information during statutory inquiries, rather than asking trustees to volunteer information in the first instance. The Commission confirms that it has:
opened 48 inquiries since 1 April 2013; during the previous financial year (April 2012- March 2013) it opened 15 inquiries;
used its legal enforcement powers 657 times in statutory inquiries and operational compliance cases since 1 April 2013. The figure for the previous financial year was 216.

The Commission has been clear that its enforcement powers are insufficient and has welcomed the Cabinet Office consultation to extend and strengthen its legal powers, for example by giving the Commission a discretionary power of disqualification to prevent trustees from resigning to avoid removal. The regulator is hopeful that Parliament will grant these powers, which will strengthen and speed up its most serious investigations into charities.

Other changes made since the NAO reported in 2013 include:
a major increase in the Commission’s programme of scrutinising and reviewing charities accounts: in 2012-13, the Commission analysed 5% of the sets of charity accounts received. To date this financial year, it has monitored 18% of accounts received to help it identify serious abuse in charities and improve the quality of charity reporting.
a new dedicated operational monitoring team, which promotes compliance by conducting follow-up work with charities involved in non-inquiry compliance cases.
a new Memorandum of Understanding with HMRC, strengthening the provisions under the information sharing gateway.

The Commission’s resources will decline from £32.6 million in 2007-08 to £20.4 million by 2015-16, a reduction of 48% in real terms. The Commission is now conducting a thorough review of its regulatory and business delivery model, including risk appetite, management, and IT capability, in preparation for the next spending review.

The Committee’s report refers to two specific cases:

Afghan Heroes (registered charity number 1132340): we do not accept that this is an example of slow progress. The Commission contacted the charity in September 2013 about how much income was spent on charitable activities and various payments to companies connected to some of the trustees. At a meeting in October 2013 the trustees were unable to allay the Commission’s concerns and so it opened a statutory inquiry into the charity in November 2013 and used powers to restrict the charity’s bank accounts. The Commission expects to announce further developments in the case shortly.

The Cup Trust (registered charity number 1129044): the Commission opened a statutory inquiry into the Cup Trust in March 2013 and appointed an interim manager to the exclusion of the trustees. The NAO published a detailed report on this case in December 2013. We do not accept the Committee’s suggestion that our investigation was “feeble” and this was not the finding of the NAO, nor of the Charity Tribunal whose judgment in October 2013 reflected the strength of the Commission’s investigative processes and procedures.”