Iceland, charities and councils

There has been much talk about charities over recent years. The very word "charity" conjures up images of starving children and scraggy donkeys calling out for a few pennies to save them from a cruel fate. Reality, of course, is very different with many organisations being registered as charities by the Charity Commission when their main (or sole) function is to lobby government often using money given to them by government to mount advertising campaigns and dubious research. Some have objected to this. There is even a dedicated website (fakecharities.org) that names and shames those so-called charities that receive substantial funding from either the UK government or the EU (or both).

Charitable status is about tax. Many charities are very substantial businesses and work both to distribute money to what they consider worthy causes and to make profits so that there is money for distribution in future years. It would make little sense for any charity to spend the whole of its income every year because some of the projects it supports might require a commitment to funding over several years to have any chance of achieving their desired end, or there could be years in which an insufficient number of deserving cases require help to justify spending the whole pot. That means there is something left over at the end of the financial year, a profit. If charities were taxed on its retained profits there would be less to distribute, so we have a longstanding exemption from tax for those organisations deemed worthy of charitable status. There are other incidental benefits to being a charity, but the tax benefit is by far the most important.

One characteristic of charities is that they are concerned with administering money. They might also engage in trade in order to increase the amount of money at their disposal, but essentially their task is to distribute money to supposedly worthy causes. Once an organisation has that characteristic it is necessary to identify whether the cause(s) it supports are sufficiently beneficial to justify exemption from tax. English law has never defined charity, instead it has identified characteristics or purposes that are charitable. I am not going to bog this essay down with unnecessary technical law, so I will get to the nub of the matter. Certain purposes are recognised as being charitable purposes and some are not. The Charities Act 2006 contains the current recognised charitable purposes in section 2 (subject to section 3's requirement of "public benefit"). We can argue as long as we wish about the adequacy or otherwise of the purposes set out in section 2 and the proper scope of "public benefit", but that debate is for another day. In order for an organisation to be a recognised charity and enjoy the benefits attached to that status, it is necessary for it also to be registered as such with the Charity Commission. For so long as it is registered it enjoys the benefits.

Because charities are involved in the administration of money it is necessary for certain rules to exist about how the administrators should act. Every time a pot of other people's money is put in the hands of anyone we need rules about how the recipient should deal with it in order to prevent misuse. The rules relating to the trustees of charitable funds are strict and, in some respects, complicated. One of their primary duties is to maintain the fund. Keeping it in a biscuit tin under the bed is not permissible if it can be invested for the future benefit of the purposes the charity supports.

Many charities sought to increase their funds by investing them in Icelandic banks. As we know, many local councils did the same with their reserves. Oh dear. Charities are estimated to have lost something like £120million and councils managed almost eight times as much. The Treasury Select Committee has recommended that the charities be compensated by the taxpayer and that the councils be left to stew in their own juicy losses. The justification for councils not being compensated by central government is reported as: "They have a duty to the taxpayer diligently to protect the money they are investing on their behalf". I can see the sense of that argument but cannot see how the same reasoning does not apply to charities.

Trustees of charitable funds are under a strict and well-established duty to act with care, it would not be wide of the mark to describe that duty as "a duty to the potential beneficiaries and to the donors diligently to protect the money they are investing on their behalf". On the face of it they and council treasurers were in exactly the same position. Trustees are entitled to take advice from those with apparent expertise and to act according to that advice if it appears sound, but so are council treasurers. Trustees are obliged to investigate risk, so are council treasurers.

There are two possible differences between charities and councils on this issue. Charities do not generally have access to advice from the most knowledgeable repository of information about the status of banks, the Treasury, whereas councils do. Indeed, central government sends information to councils and volunteers advice about how they should invest their current surpluses. One might think central government to be under a particular duty to compensate for the consequences of its own advice being defective. In addition, the trustees of charitable funds are under a duty to preserve the fund first and to grow the fund second. That being the case, one might think their lack of caution disqualifies them from a bail-out.

It seems likely that the size of the sums involved and the political timing of the whole thing have something to do with the committee's recommendations. Charities are generally perceived to be fluffy and friendly and a general election is no more than a year away. £120million, what's that in the scheme of the absurdly large numbers in which government debt is now being calculated? Could they recommend £1billion for the councils that impose fines for putting glass bottles in your plastics recycling box and vice versa? No, they couldn't sell that to their constituents.

I hope the recommendation to reimburse charities, if accepted, will be met with an investigation of where the money came from in the first place. Say a particular charity lost £1million and receives 20% of its income from government. It would be wrong, on the reasoning of the committee, for the taxpayer to have to pay more than £800,000 because the other £200,000 was in exactly the same position as the taxpayers' money lost by councils.

And what a double-whammy of sweet irony the whole exercise produces.

A government dedicated to maintaining its own bloated level of spending will have to tell local councils that they must make cuts in their budgets to cover the cost of the losses suffered. Central government cannot, it claims, make cuts because to do so would mean reducing the services received by the public. We know that is their position because it is the standard line they spout when anyone suggests reducing government spending: "which schools and hospitals will you close?" they cry, with sheer intellectual dishonesty. Yet local councils must make cuts. Which services does the government want councils to restrict? Or do they, perhaps, know that it is possible to reduce expenditure without affecting anything that really matters?

The second whammy is that maintenance of governmental expenditure is promoted as an essential tool of economic stimulus to haul us out of recession. Poor Gordon's attempt to persuade the G20 love-in to back his plans for increased spending fell on deaf ears and now, if he follows the committee's recommendation, he will be agreeing to the withdrawal of about £1billion from the public sector's potential spending pot. I wouldn't put it past him to blame this loss by councils for the recession going on longer than necessary, so shifty and mendacious is everything about the man. When he borrows another £1billion to bail out his failed bail-outs any such argument will collapse.