Michelle Ferris, Head of Charities and Care, explains the benefits and drawbacks of seeking charitable status as a care provider.
Once a more common choice of set-up, the number of charitable entities in the care sector has fallen away in recent years. Analysis published last year by NPC, a charity think tank1, estimated that only 14% of providers and 10% of care beds in the sector were run by charitable organisations. Going forward with an increased focus on community and an ethical and green agenda, it is possible that charities will form a larger part of the sector than they do currently. So what are the pros and cons of being a charity within the care sector?
- Potential to attract grant funding from a wider range of sources. Being a charity opens any organisation up to more funding sources, such as charitable trusts. This can be particularly useful for capital projects.
- Greater attraction to future resident and staff in being a 'community' based entity.
- Ability to reclaim gift aid on donations from eligible individuals. Charities are able to register to claim gift aid, which enables an extra 25% to be claimed from HMRC on eligible donations from individuals.
- Significant tax breaks. One of the major pros of a charitable set up is that no corporation tax is due on trade that advances charitable objects – which can be care fees in the right set-up. There are also potential VAT advantages for those care entities who provide services but do not fall under CQC registration – such as day care for adults – if they are a charity or not-for-profit. See our later piece regarding this.
- Loss of control over future direction. Charities are governed by boards of trustees, who are responsible for the overall strategy and operations of the charity. This means that no individual can control or drive future direction. Charities are also unable to pay trustees for carrying out a trustee duty, meaning that to receive remuneration from a charity you must be employed, with the ultimate control over any employment resting with the trustees.
- The 'asset lock'. One of the key founding principles of charities is that they contain an 'asset lock'. This means that any assets that become part of a charity are locked for charitable purposes indefinitely – they cannot be extracted for personal use, even on wind-down of the entity.
- Lack of flexibility around remuneration. Since charities have no ownership, and no share capital, the only way to take remuneration from a charity is through the payroll or to invoice the charity, which can be less tax efficient.
- Increased governance. Operating a charity with a board of trustees requires significant decisions to be taken by a board. This, combined with the legalities of being a charity, means that charities are more complex to run and administer.
Whilst the tax advantages of charitable registration can be considerable, there is a lot that often needs to be sacrificed in exchange. The asset lock is pretty unpalatable for most individuals running an established business (why would you want to give away everything you've worked hard to build up?), but for new entrants into the market, or those looking to add additional locations or structures, there are some real positives to be considered through charitable registration.
When considering if a charitable entity might be for you, my advice would always be to look within yourself and find your motivation for wanting to be in the care sector. If it is profit driven, then a charity probably isn't for you. But if you are looking to drive greater purpose and community engagement through your operations, then a charity could be a good solution.
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.