When is a Charity Not a Charity?

The recent decision by the English Charity Commission that two private schools are not doing enough to justify their charitable status has sparked a volley of criticism in the media, with accusations that the venerable Commission has succumbed to the politics of envy and even class war.

The controversy is the product of the 2006 Charities Act, which tried to tighten up the definition of the ‘public benefit’ that a charity must offer in return for generous tax benefits. The Commission’s interpretation of the new rules was that Highfield Priory School and St Anselm’s School were offering too few scholarships and bursaries to claim that they were anything more benificent than private businesses.

Rather than being a radical new departure, the idea that there needs to be some regulation of the charity sector goes back more than four hundred years to the Charitable Uses Act of 1601. Fans of the Victorian novelist Anthony Trollope (us included) will also be familiar with the controversies around the perceived abuses of a (fictional) medieval trust called Hiram’s Hospital that are the basis of his novel The Warden.

In the 21st century, the Charity Commission has moved cautiously in implementing the new rules, with much consultation along the way. Yet still there has been a furore. So far, as the New Philanthropy Capital blog pointed out this week, the debate has generated more heat than light.

There is a good case for a public benefit test. In our view, the public has a right to ask for something in return for the tax subsidy to giving. This seems to strike the people who run charities as an outrageous notion – not just in Britain, but in America, where the charity lobby is fighting politically driven attempts to get them to justify how the spend their tax-advantaged dollars.

So far, these attempts have made little progress. It seems that the Commission is going to struggle to make much headway, and charities saw off recent legislative proposals in California. We also wonder if the game is worth the candle. As the NPC blogger argues, the current public benefit test doesn’t tell you much about whether a charity is any good, just that it is following the rules.

In the end, we get the charity sector we deserve. If donors don’t ask tough questions about real impact and put their money where it achieves the most, weak charities will muddle along and the growth of good charities will be stunted. That is why we think that impact-focused philanthrocapitalists, along with philanthropic intermediaries like NPC, and globalgiving, have the potential to do more to drive a step-change in the effectiveness of charities than regulation. To that end, the less controversial initiative by the Charity Commission to get charities to improve their reporting (such as this new template for aid agencies), may achieve more than the justified but probably doomed attempt to pursue a small number of the most egregious rule-breakers.