UK: Charities And Local Government - New Guidance

Last Updated: 28 March 2007
Article by Janet Hoskin and Nicholas Dobson

In February 2007 the Charity Commission issued guidance to Charities on the delivery of services on behalf of public bodies (CC 37). This replaces the previous guidance ‘Charities and Contracts’. This contains a useful run through of the key points charities and public bodies need to consider when entering into contracts to deliver services. We have summarised the key points and issues raised from this guidance in this update which may be useful for public bodies when considering whether to use charities to deliver any of their services.

The government is encouraging increased participation of the voluntary sector in public service delivery as a means of reforming public services. The outsourcing of services can be to a range of bodies such as charities, industrial and provident societies and housing associations. This update looks at some of the issues involved in using charities to deliver these services.

There is no general prohibition on charities delivering public services even if a public body has a legal duty to provide the service provided the local authority retains the "functional discretion". Charities can therefore be used to deliver certain services.

Restrictions on using charities:

Public bodies need to be aware that there are certain restrictions they need to consider when deciding whether a charity is the appropriate vehicle to use to deliver a service:

  • Charities can provide only services which are ‘charitable’ and which fall within a recognised charitable area e.g. providing housing for the poor, providing leisure services for the public;
  • Charities must only undertake activities that are within their objects and powers;
  • A charity's activities must be for the public benefit; and
  • Charities must be independent.

Public service delivery presents both opportunities and risks for charities and it is useful for public bodies to be aware of these when looking to enter into arrangements with charities.

Advantages in using charities:

A charity's purposes are often broad and may (depending on its constitution) overlap with the duties of a public authority. Using a charity can provide a number of advantages and opportunities in the provision of public services:

  • A charity can be wholly focused on the provision of a particular service and does not have to compete against other more demanding services which may have been the case when the service was provided for by a public body;
  • A charity can attract funding from a variety of sources;
  • Charities often involve local people and they have the capacity to build up a relationship of trust within the community;
  • Charities are ‘value driven’ rather than ‘profit driven’ and therefore potentially have a lot to offer in improving the standards of public services.

Barriers to charity involvement: �� Risk of compromising the charity's independence;

  • Risk of not achieving ‘full funding’ (see below for further points on funding);
  • Danger of mission drift and the charity carrying out the objectives of the public body;
  • Financial risk and the use of the charity's reserves;
  • Reputational risks for charity in delivering a public service. As a matter of good practice, there should be a clear policy and procedure for handling complaints and this should be discussed and agreed with the public body;
  • Unequal bargaining position against the public body.

Independence issues:

For a body to be a charity it must be independent. The charity must exist in order to carry out its charitable purposes, and not for the purposes of implementing the policies of a governmental authority. To this end:

  • Charity trustees should preferably be independent from the public body, and recruited on the basis of their skills, local knowledge and experience of the voluntary sector. If the public body has power to appoint some trustees - those trustees must act solely in the interests of the charity and they are not a delegate of the public body;
  • Charities need to draw up their own objectives, aims, policies and business plans;
  • A charity's constitution should also contain an express provision to manage any conflict of interest regarding the public body's representatives on the trustee body;
  • Separate legal and financial advice should be taken by the public body.

Funding issues:

Public bodies and charities will usually enter into a funding agreement which will set out the terms of the provision of funding to the charity. Key considerations when negotiating funding are as follows:

  • What level of duty the public authority has to provide the service? Is there an absolute legal duty (with no discretion over the level of service to be provided)? A legal duty but with discretion over service levels, or is the service purely discretionary? In those circumstances where a public authority has an absolute legal duty to provide a service and no discretion over the level of service, there would have to be very clear justification in the interests of the charity for subsidising the service;
  • Length of the funding. Short term funding can hinder a charity's long term planning. Another issue also mentioned recently by the Charity Commission is whether it is then justifiable for a charity to use its reserves to fund any shortfall;
  • Use of surplus funding - some funding agreements require repayment of any surplus;
  • Conditions - charities will not be able to accept conditions that impact on their charitable status;
  • Full cost recovery - under the terms of the Compact (a framework to guide partnership working between the state and the third sector) and its Funding and Procurement Code full cost recovery should apply in any case where a public authority is purchasing a service from a charity, unless the charity lawfully decides to forego full cost recovery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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