What is a Charity?
The problem is summed up rather nicely by none other than Lord Hailsham, who said:
“ … the words ‘charity’ and ‘charitable’ bear, for the purposes of English law and equity, meanings totally different from the senses in which they are used in ordinary educated speech or, for instance, in the Authorised Version of the Bible.”
Or, as Lewis Carroll put it more eloquently in Alice’s encounter with Humpty Dumpty in “Alice Through the Looking Glass:
""I don't know what you mean by 'glory,' " Alice said.
Humpty Dumpty smiled contemptuously. "Of course you don't—till I tell you.
I meant 'there's a nice knock-down argument for you!' "
“But 'glory' doesn't mean 'a nice knock-down argument'," Alice objected.
“When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less."
“The question is," said Alice, "whether you can make words mean so many different things."
“The question is," said Humpty Dumpty, "which is to be master—that's all."
The following text is taken without alteration from the HM Revenue & Customs website
What is a Charity?
Distinction between a charity’s objects and the way it operates (VChar2050)
You should not confuse the way in which a charity fulfils its objects with the charitable nature of the objects. There is nothing to stop a charity charging a large amount of money for its charitable services. Private hospitals, nursing homes and schools can have charitable status and may charge substantial fees. They will normally be charitable organisations provided they are non-profit making ie there is no distribution of profits to shareholders.
Trading subsidiaries (VChar2100)
Charity law restricts the activities in which a charity can engage to those relating to its charitable objectives. In addition trading activities of charities are exempt from corporation tax only to the extent that they are in pursuit of the organisations charitable objectives. For these reasons many charities establish trading subsidiaries. Charity trading subsidiaries engage in a wide range of commercial ventures in order to raise funds for the parent charity. Profits of trading subsidiaries can be passed to the charity free of corporation tax. It is important to remember that charities’ trading subsidiaries are not charities. Some VAT relief, such as the sale of donated goods and fund-raising events, specifically extend also to charities trading subsidiaries. But in many cases relief is available only to the charity.
Charities will often refer to certain of their activities as “trading” activities. In this context the term “trading” is usually used to describe the organisation’s non-charitable commercial fund-raising activities. These activities are usually, if they are of any scale, carried out by the charity’s trading subsidiary. It is important not to confuse the term “trading”, when used in this way, with the term “business” as used for VAT purposes. For VAT purposes “business” can have a much wider application than “trading”, as understood by charities. A charity’s trading activities will invariably be business activities for VAT purposes. But it is important to bear in mind that, in addition, some or all of the charity’s primary or charitable activities might also be business activities for VAT purposes.
The distinction between “trading” and “business” is a common source of confusion for charities. A charity may consider very carefully the VAT aspects of their trading activities, but neglect to consider whether their charitable activities might also be “business” for VAT purposes.
When seeking advice charities will often refer to their “trading” activities. It is important when responding that you do not use the term “trading” if what you mean to refer to are the charity’s business activities.
Not for profit (VChar2200)
Charities and “not for profit” organisations are not the same thing. While all charities will be non-profit making organisations, not all non-profit making organisations will be charities. Clubs and associations, professional and trade bodies, mutual societies (including many large insurance companies and building societies), friendly societies, motoring organisations, the Co-operative movement, trades unions, political parties and lobby groups etc are all non-profit making organisations, but they are not necessarily charities. Bodies which exist to benefit their members, as opposed to the community at large, are not usually charities. Organisations with political aims and objectives are not charities.
Charities may have a membership structure and the members may derive some benefits. But usually it is a case of the body of members coming together to support work which is of benefit to the wider community. An organisation which exists solely to benefit or further the aims of its members is not a charity.
The status of commonly found organisations (VChar2250)
The following paragraphs outline the status of some common organisations.
Sports clubs are not usually charities. This is because the promotion of sport is not a charitable object in itself and such clubs usually exist to provide facilities for their members.
However, it may be possible for some sports clubs to be charities. If the organisation has objects which are:
- for the public good
- in the interests of social welfare
- the club exists for people who are in some way in need by reason of youth, old age, infirmity, disability, poverty or social circumstances.
Under these conditions an organisation which exists to promote, for example, swimming to assist the rehabilitation of injured people might qualify as a charity. Or the provision of sporting facilities might be ancillary to wider charitable objectives. Also, certain umbrella bodies which exist to promote a sport and physical welfare in general might have charitable status as being for the benefit of the community.
Affiliation to a national charity
A local organisation may be affiliated to a national organisation which is a clearly recognised charity. It may be that all affiliated organisations are governed by the same written constitution and share the same aims as the national charity. Only where this is the case can you accept that the local organisation is also a charity.
There are a number of organisations which exist to do good work but are not charities. Many such organisations choose not be charities. Charitable status brings with it many restrictions on the use to which funds can be put. Some organisations prefer to retain freedom to spend money on non-charitable activities.
Charities that are advancing education are a benefit to the community. The term “advancing education” includes not only the obvious purpose of schools and universities but also other activities of benefit to the public such as research or information services. However, there are commercial organisations providing similar services and the main distinction between the commercial and the charitable organisation is likely to be the intention or not to make a profit.
Many private hospitals (ie non-NHS) and nursing homes are operated by charities. Others may be profit-making commercial organisations. NHS hospitals and NHS Trusts are Crown bodies for VAT purposes and are not charities. However, such hospitals may have associated charities, leagues of hospital friends etc which exist to help and raise money for the hospital. NHS Hospital managers and consultants frequently act as trustees of charitable Trusts founded to help the hospital in its work and funded from donations or bequests. These charitable Trusts will usually have charitable status in their own right.
Charities freedom to engage in political activities is limited and they cannot have political objects. They are constrained by law to reasonable lobbying to further their non-political objects. The Charity Commission have set guidelines to specify what is and what is not acceptable. Many political organisations operate along the same lines as charities. For example they will engage in fund-raising and rely on volunteer support. They will usually have a membership structure. They are not charities because they pursue political objects; as do lobby groups, eg Greenpeace and Amnesty International. (However, please note that some political organisations may set up a charitable foundation or trust which does not get involved in the lobbying.).
Particular care should be taken with Housing Associations. Some have charitable status and some not. Charitable Housing Associations usually exist to provide housing for a particularly needy sector of the community eg the elderly, people with disabilities or those who are homeless. Other Housing Associations exist to provide housing generally, or to serve a particular locality; these will not necessarily be charities. You will find that some Housing Associations are Industrial and Provident Societies. This does not entitle them to claim the charity reliefs - you will need to check if the Housing Association is registered with the Charity Commission or recognised as a charity by HMRC.
Despite the apparent complexity of the issues set out above, the status of an organisation is rarely a subject of dispute.
If there is doubt it is up to the organisation concerned to demonstrate its charitable status.
Or, as Humpty Dumpty puts it, if you presume to be the "master" you can make words mean what you want and it is up to everybody else to fathom out what they mean, and act accordingly.