This article originally appeared on the City Philanthropy website, on the 10th October 2016. The original article can be found here.
With the dust still settling around June’s controversial “Leave” win in the UK’s referendum on EU membership, charities are understandably bracing themselves, anxious to predict the implications for an already strained social sector. As negotiations begin, many fundamental questions remain unanswered, including many about the process, complexity and timing of invoking Article 50. Months later, we are no closer to a clear picture of the true impact of these decisions, and it seems we are unlikely to be sure for years to come.
Should charities be concerned about their income streams? Is it possible to prepare for the coming changes?
Brexit is likely to trigger complex shakeups to the law and parts of the tax regime – particularly those driven by the EU. These changes are likely to hit philanthropists and high value donors whose lifestyles and assets are global in nature. This may have an affect on their spending, and therefore charities’ bottom lines, in years to come. Savvy charities will need to wise-up to the tactics and approaches in this context, to realign their strategies for major giving in a post-Brexit world.
A recent ‘STEP Philanthropy’ panel event of lawyers shed light on some interesting perspectives. Prompted by this, and drawing on our expertise in working with charities and donors, I.G. Advisors sees several key areas of concern:
- Cross-border philanthropy flows will almost certainly be impacted. Many donors to UK charities hold property and investments in the EU. The ability of these individuals to benefit from tax incentives when giving to UK charities is likely to change. New legislation will arise here following EU and country negotiations, and these may differ on a country-by-country basis. Ultimately, the consensus seems to be: incentives for flows of philanthropy back to the UK are likely to be less favourable than they are now.
“Cross-border giving constitutes one of the rare areas in our sector where EU law has had a ‘direct effect’, even without domestic implementing legislation. We have enjoyed a recent exception to the general rule of territoriality and the real question for cross border giving is how, if at all, Brexit will affect this. It will depend very much on the ‘model’ of exit ultimately selected. ” Alana Petraske, Special Counsel on Charities and Philanthropy at Withers.
- Donors are concerned about changes to Inheritance Tax. A week before the referendum George Osborne said a vote to leave the EU might result in an increase in Inheritance Tax (IHT). There may also be unfavourable inheritance implications for Britons living in the EU. The impact of this on charitable giving may be felt by charities with substantial income streams from legacies.
- EU funding is at risk. This much is obvious. The value of EU funding to UK charities is around £200m per year, plus billions worth of structural and investment funding. The Treasury recently announced it will guarantee and back EU-funded projects signed before this year’s Autumn Statement, but it’s unclear whether charities are part of this commitment. The Thomson Reuters Foundation in London has just released a Report on this topic (“Brexit Could Put Lives of Vulnerable at Risk Due to Less Charity Funding: Report”).
- Wellbeing and job security of charity workers is a concern. Charities are concerned about their ability to recruit and retain staff. A number of areas of employment law are directed by the EU – discrimination, family leave rights, health and safety in the workplace, for example – and these will likely change. In addition, the UK could require EU citizens be subject to the same immigration system that already applies for non-EU citizens. This could have significant implications for charities whose workforce includes EU citizens, in handling the uncertainty for their staff, and planning for future recruitment.
What can charities do?
There are two positive points amidst the concerns. Firstly, because most of charity regulation is based on UK law, the general running and governance of charities should not be hugely affected; some of the changes to how charities need to operate may even be beneficial (or provide more flexibility). Secondly, there are a number of tangible actions that charities can take now to prepare, that will serve to strengthen their organisation. Here are our top 3 tips:
- Strengthen and prioritize relationships. Charities have an opportunity now, whilst the situation remains stable, to strengthen and deepen relationships with existing major donors. Charities should examine their stewardship practices – are they sufficient? Does the organisation have open and effective channels of communication? Are donors appropriately thanked, provided with adequate information and given interesting and appropriate opportunities to engage with the cause? This is good practice regardless, but will be even more important in times of uncertainty and change. This will also be a good time to prioritize your networks: it may be necessary to diversify in future, so start laying the groundwork now.
- Talk about giving now, before rules change. We do not know what the new rules will be, but we know that uncertainty is bad for giving. We also know giving incentives are likely to be less favorable if Britain’s exit from the EU goes ahead. This is an opportunity to have careful, honest, informed conversations with key donors about the potential changes to the landscape, and discuss how they might plan their giving around the benefits of giving more, sooner. Front-loading their intended giving in the next couple of years is a good way to reduce risk.
- Review and strengthen leadership. Trustees and senior leadership need to ensure they keep track of the changing external environment so that they can adjust strategies as required. Fundraising regulation is likely to become more stringent, as is regulation around compliance and accountability. Every charity will benefit from ensuring their key leadership team and board are skilled appropriately and informed of changing landscapes, and that the governance is strong enough to withstand potentially significant changes and risks over the coming 2 years.
The UK is in an era of uncertainty. No one can say for sure what Brexit will bring for the charity sector, or society as a whole. In fact it might bring with it opportunity; Alana Petraske argues that donors may be able to positively adapt to the new circumstances – “Creative use of Foundations and group structures may become more important, particularly where inheritance tax is concerned.”
However, in this climate of uncertainty I.G. Advisors believes a few key actions –keeping informed, planning forward, communicating effectively with donors and strengthening existing relationships – will help your organisation to buffer any storm that lies ahead.
Juliet Cockram is the Head of Philanthropy at I.G. Advisors.