Charitable Status
Charitable status for Internet Watch Foundation (IWF)
1 Purpose
1.1 The governance working group which reported to Board in 2003 identified the need to examine whether IWF would be eligible for charitable status at sometime in the future. At their meeting on 27 January 2004, Board instructed the executive to:
“investigate charitable status in view of the developing situation and the potential tax position.”
1.2 This paper examines some of the issues for the Internet Watch Foundation in pursuing charitable status and makes a recommendation that IWF proceed with an application to the Charity Commission.
2 Background
2.1 The question of whether IWF should consider applying to the Charity Commission in order to achieve charitable status has been raised before and advice sought from the Commission on a previous occasion. At that time the Commission advised that because our subscribers received a service as a result of their contribution our application was unlikely to be successful. The information that ISPs received from us which protects them from prosecution was considered to be a service.
2.2 At the time of the previous consultation with the Charity Commission, IWF had around 8 subscribing members who formed the Industry Board. The 8 Industry Board members set the IWF budget and provided all the finance to enable the IWF to operate. The constitution at the time prescribed that any end of year surplus would be returned to the Industry Board members thus avoiding any UK taxes.
3 Present position
3.1 There have been a number of changes in recent years to the rules with regard to the eligibility for charitable status. For example, we are advised that the “notice and takedown” procedure is likely to be considered to be in the public interest.
3.2 The IWF now has around 40 subscribers and many are not internet service providers, they include mobile operators, search engines, software companies, hardware manufacturers, the EU and APACs (banking industry). Many current subscribers do not host content.
3.3 The recent success in achieving a wider subscription base may result in a surplus for financial year 2003/4 and this could be subject to UK taxes.
3.4 The present company structure is as follows:
Internet Watch Limited – our trading company which is limited by two £1 shares; the directors are Chair of IWF, Chair of Funding Council and IWF CEO
Internet Watch Foundation Limited – this company owns both IW Ltd shares and is a not for profit company limited by guarantee; the directors are the Board of IWF
4 What are the advantages and disadvantages of the IWF being a charity
4.1 The advantages of having charitable status:
Many funders and grant-making trusts are allowed (or choose) to only fund charities and this could enable access to additional funding opportunities.
Charities have, for the most part, a good public image, and most people think of a charity as being "a good thing", so it may be easier to raise money or obtain co-operation and help as a charity. Charities present an image of probity and credibility.
4.2 In addition there are several tax advantages:
Mandatory 80% relief on non-domestic rates for property used wholly or mainly for charitable purposes and the possibility of up to 20% further discretionary relief. Administration and management are classed as "charitable" when they are directed to the achievement of charitable objects. Premises used partly for charitable purposes (including administration and management) and partly for other purposes (for example, use by Internet Watch as a trading subsidiary) are eligible for rate relief if more than half the use is charitable.
- Exemption from income tax or corporation tax on profits or surplus and capital gains tax on gains from the sale of assets, provided the profits are used wholly for the charity's purpose.
- The right to claim basic tax on donations received from UK tax payers whether corporate or individuals made under gift aid. Companies, including companies owned by a charity (in this case Internet Watch Limited), can make gift aid donations gross. The company donates the full amount to the charity, including tax, and claims tax relief when calculating its profits for corporation tax. Gift aid would also be used where a charity's trading subsidiary (Internet Watch) wishes to donate all its profits back to the charity (Internet Watch Foundation).
- Donors do not generally pay inheritance tax on legacies to a charity or capital gains tax on assets donated to a charity.
- Exemption from having to pay stamp duty on conveyancing.
- Further advantages can arise in the area of VAT. This is particularly likely if the charity has a trading or other subsidiary company. Companies, but not trusts or unincorporated bodies, can be ‘grouped’ for VAT purposes, considerably simplifying inter group transactions. Issues arise for charities and further advice should be sought before VAT grouping.
4.3 Disadvantages of charitable status:
- There would appear to be two initial disadvantages for Internet Watch Foundation in pursuing charitable registration:
- First, our application may not be successful. Solicitors have advised that there is a good chance of the application succeeding; however, they cannot guarantee that this will be the case. They have estimated the percentage for a positive outcome at around 60 to 65%.
- The second disadvantage is linked to the above in that the cost of pursuing a charity registration in this scenario will be higher since this will not be a straight forward application. Solicitors have advised that our costs will be in the region of £5,000 to £6,000 plus VAT. If we were to appeal against a negative response our costs could be substantially higher at around £10,000 to £12,000. A straight forward application for charitable status on behalf of, for example, an old persons’ home would usually cost in the order of £2,000
5 Other considerations
5.1 These include:
- There are limits to the trading that a charity can undertake and so for this reason it may be beneficial for Internet Watch as the trading subsidiary to remain a subsidiary of Internet Watch Foundation post charity registration so that any non-primary purpose trading can take place through the subsidiary.
- In general, members of the governing body cannot be paid for serving on the governing body or for any other work they do for the charity, unless this is authorised by the governing document or through the Charity Commission. Solicitors have advised that they would expect to obtain Charity Commission consent for the Chair of Board to continue to be paid.
- Charity Commission rules do not prescribe a governance structure and we may be advised to convert the Board of Internet Watch Foundation into our trustees, subject to obtaining the consent above.
- The Commission rules do not preclude industry representatives from becoming trustees, directors of the limited company or sitting on the Board and the constitution could stipulate that a certain number of trustees should be drawn from a particular interest group. However, trustees are obliged to act independently of all interests. It will be necessary to consider a governance structure which integrates our decision making safeguards and consultation guidelines in order to ensure an appropriate balance in stakeholder groups. Professional advice will be necessary in order to achieve this within a governance structure acceptable to the Commission.
- Charities are public bodies and therefore open to public scrutiny.
- All charities must prepare and file with the Charity Commission annual accounts, and most must prepare an annual report. This would not be seen as a disadvantage to Internet Watch Foundation which produces these documents annually.
- Registered charities with income or expenditure over £10,000 must have their accounts audited and submit them every year to the Charity Commission. Again, this would not be a disadvantage for Internet Watch Foundation.
- Accounts for charities are generally more complex and are referred to as a consolidated statement of finances and not a balance sheet. The statement of income and expenditure is usually divided into “restricted” and “unrestricted” funds and this refers to occasions where a sponsor has specified the use of the funding. Advice has confirmed that once familiar with the procedures they are not unreasonably complex and a number of charities manage their finances with the software currently used by IWF.
- A charity cannot have “political objectives” although a charity can quite properly seek to influence opinion on particular issues which are directly related to its objectives and experience.
- Commission rules require a charity to be independent of government but do not preclude the charity from carrying out the function of government where their charitable purpose coincides with a government function.
- A number of Internet Hotlines in other European countries are run as charitable trusts and are partly funded by the EU.
6 Process
6.1 If Internet Watch Foundation were to pursue charity registration our current Memorandum and Articles of Association would need to be reviewed. From a brief overview the solicitors have advised that they would need to redraft the objects so that they are for charitable purposes, separate the powers from the objects clause, expand the powers and generally update the governing document. They have advised that it is often easier and cheaper if we start afresh rather than attempt to amend the current document.
6.2 On our behalf, the solicitors would apply to the Charity Commission to register the Internet Watch Foundation explaining the circumstances. The time that the Commission would take to approve our registration depends a great deal on how many questions are raised, but typically, for a straight forward application, it can take between six weeks and four months. For an organisation such as IWF it could take even longer depending on the extent of the discussions with the Charity Commission.
7 Summary
7.1 There appear to be very clear financial and reputation advantages for progressing with a charity application. The costs of the application if successful could be off set by the tax and business rate relief savings that could be made on the use of Internet Watch Foundation's property (subject to the use of the premises by the trading subsidiary). Our current proportion of the business rates for our East View office total £6557 per annum. 80% mandatory relief on business rates, the minimum relief, would achieve a saving for IWF of £5246 in a full year.
7.2 The Solicitors consulted and other sources have advised that they do not believe IWF would find the rules relating to the Charity Commission onerous.
8 Recommendation
8.1 Board is invited to instruct the executive to proceed with an application for Internet Watch Foundation to become a charitable trust.
9 Acknowledgements
9.1 Meetings have been held with David Kerr (former IWF CEO), IWF Accountants (Peters, Elworthy and Moore) and a firm of solicitors specialising in advice to UK charities. Telephone discussions have taken place with the Charity Commission, Stephen Balkam (CEO ICRA) and a former colleague who operates accounts for both a limited trading company and a charitable trust. Email exchanges have also taken place with colleagues from charities. The solicitors that were consulted, act on behalf of 600 UK charities and successfully guided ICRA through to charitable status with the Commission creating a new category of charity to enable ICRA to be eligible.
Page Created: Thu, October 7th, 2004
Page Modified: Wed, October 20th, 2004
