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New ICAEW guidance published to dispel common myths about charities

Author: ICAEW

Published: 14 Jul 2023

Common myths surrounding charities are explored in new guidance published today by ICAEW.

The guidance, called 'Dispelling common myths about charities', covers how charities are run, carry out their work, are funded and staffed, and whether they are liable for tax or their vulnerability to fraud, among other issues. By addressing these myths, the guide offers practical recommendations to help dispel them so public and donor confidence in the sector continues to build.

It also explains why it is important for a range of stakeholders, including donors, to understand not only what charities do, but to shine a light on how they operate, the need for a professional approach, and the funding of core activities.

The working group who co-ordinated the guide, included charity practitioners from BDO, Crowe and RSM. It was chaired by Pesh Framjee, who has led several not-for-profit teams within accountancy firms. He said:

“There are many negative misconceptions created by the myths that abound about charities. As someone that has worked with and for charities for over 35 years, I too often see the negative consequences that impact on charities. It is incumbent on all of us who recognise the important work that charities do to actively try and dispel these myths and ensure that the popular narrative focuses on the facts and reality.”

Kristina Kopic, ICAEW Head of Charity and Voluntary Sector, ICAEW explains:

“People’s goodwill and generosity remain the lifeblood of the sector, but this is at risk if the public misunderstand what charities do and how they operate. We hope that by tackling the 10 most common myths about how the voluntary sector operates, we will encourage charity trustees, staff, and advisers to be transparent, in areas where misconceptions are prevalent.

The guidance considers the following ten myths surrounding charities and their operations:

  1. Charities spend too much on fundraising.
  2. They should not make a surplus or build up cash reserves.
  3. Too much is spent on highly paid executives.
  4. They should not undertake commercial activities.
  5. Charities should be run and staffed [for free] by volunteers.
  6. Too much is spent on overheads.
  7. Charities don’t pay taxes, so need less money.
  8. Professional qualifications are needed to become a charity trustee.
  9. Charities are less vulnerable to fraud than other organisations.
  10. Charities should not engage in campaigning and political activity.

Refuting charity myths: too much money spent on overheads

As far as the myth that most charitable donations go on administration costs or overheads, according to the UK Civil Society Almanac 2022, 86% of the sector’s expenditure related to activities directly linked to a charity’s purpose.

Guidance suggests that trustees must ask if their charity is making sufficient investments in important infrastructure, including legal and regulatory compliance, management skills and technology. While it is important to understand the composition of a charity’s cost base, it is not, however, an indicator of its effectiveness.

Charities should be able to explain how administration and other related costs will increase efficiency and improve impact, transparency, governance, and leadership, to understand where savings or investment could be made.

Challenging the myth: Charities are less vulnerable to fraud

Trustees need to recognise their charities can be vulnerable to different types of fraud and develop an effective culture of prevention, the guidance says. Every dimension of fighting fraud – deterrence, detection, and response – requires an effective anti-fraud culture at its foundation.

Fraud awareness does remain low among charities. Nearly half believe they are not at risk of fraud, according to an October 2019 report by the Charity Commission and the Fraud Advisory Panel.

Charities DO pay tax

While charities are not exempt from tax, they do qualify for some exemptions, which leads to a mistaken belief that charities do not pay tax.

Charities are, however, exempt from income or corporation tax on most types of income if they use the money for charitable purposes. In addition, charities can claim tax reliefs on business rates, legacies, and eligible donations. According to government figures, tax relief of just under £4bn was awarded to charities in the tax year ending April 2022. However, charities are subject to payroll taxes and the VAT regime (with certain charity exemptions), and they pay business rates, albeit at reduced rates depending on the property’s usage. Overall, analysis show that tax contributions from charities outweigh the tax reliefs they claim.

The guide advises charities that they should explain their tax contributions and the relevant tax reliefs and exemptions they have been granted. They should also review their tax strategy to ensure they are claiming relevant tax reliefs and exemptions so they can maximise the funds available for their work. This is a complex area and charities may need to seek professional tax advice to optimise their tax affairs.

Kristina Kopic, ICAEW Head of Charity and Voluntary Sector, concludes:

“Charities are value-led organisations that care deeply about the causes they serve, but they must operate professionally, or they might not survive. Donors want to know that the charity they support financially is sustainable and accomplishing its mission.

“In helping to put these common myths to bed once and for all, charities gain more time to focus on delivering their important work and reaching their strategic aims.”

ENDS

Notes to editors:

CONTACT:
ICAEW media office: media.office@icaew.com
Judith Dow: judith.dow@icaew.com
Mobile: 07889 894431

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