Leading financial and political commentators are still speculating as to what a post-Brexit UK would look like outside the EU, and the type of relationship the UK will have with Europe in the future. Such a prolonged period of uncertainty inevitably presents challenges, not least for the diverse not-for-profit and charitable sector in the UK.

Funding

The main economic risk for UK charities and not-for-profit groups is the prospect of losing hitherto direct access to sources of funding from the EU, or indirectly from a donor organisation that is itself funded by the EU in some way. Combined with the impact of prolonged financial volatility in the UK economy, this may only discombobulate an important yet already hard pressed sector of our society.

Prior to the referendum, research published on behalf of the Remain campaign suggested that charities stood to lose in excess of £200m of funding (based on the amount that 249 charities received in 2014) if the UK were to leave the EU. Recently, the National Council for Voluntary Organisations (NCVO) published research, from the period 2013/14, in which it estimated that UK charities received £308m in direct funding from the EU.

Funding from the EU in the form of the European Structural Investment Fund (ESIF), for example, targets disadvantaged communities in regions across the UK where private investment and funding is lacking and labour markets already depressed. In other more vibrant areas of the UK, such as Cornwall, economies have grown to rely on the valuable work of local not-for-profit sector organisations, who in turn receive significant funds from the EU.

Around 20% of ESIF’s budget has been allocated to strengthen social cohesion and inclusion. Over the lifetime of the programme of this fund, namely 2014–2020, not-for-profit organisations in the UK are currently eligible to access and bid for funding from such a stream valued in excess of £13bn. There is no guarantee that this source of funding would remain available when the UK leaves the EU, however, it seems likely that existing EU funding commitments will continue to be honoured until the UK’s exit from the EU is completed.

Apart from institutional funding from the EU, there is an EU principle of “non-discrimination” in respect of charitable tax reliefs that binds member states. If the UK leaves the EU, UK charities may need to consider establishing a local subsidiary or an associated charity in the EU to preserve their ability to fundraise effectively in European markets. Therefore, overseas aid charities registered in the UK that do not have a physical presence in the EU, other than the UK, may have to do so to maintain an EU presence in order to retain funding.

Legal implications

The legal implications for charities and not-for-profit organisations will be similar to those for businesses based in the UK. Having been members of the EU for over 40 years, European law has been incorporated into and influenced many areas of life in the UK and law since the European Communities Act 1972 was enacted.

Any changes relating to the freedom of movement (assuming we also leave the internal market of the European Economic Area) will also be important to monitor. This will almost certainly have an impact on charities, including universities, that employ staff from other European countries and that send their staff to Europe. This could also have an impact on the treatment of refugees and economic migrants on entering the UK, which will naturally have implications for charities working with these groups.

Tax implications

When leaving the EU, the government will have the scope to set its own VAT regime which could benefit charities by replacing exempt supplies under the various social exemptions, with zero-rated or super-reduced rated supplies, in effect releasing VAT recovery on costs. This would depend upon the government having to make changes to the law which could leave the Treasury out of pocket, unlikely if the UK economy slips into a recession. Any such changes are likely to be slow to materialise.

European law has, having been incorporated into the Finance Act 2010, allowed British taxpayers to make donations to European charities while at the same time being able to claim any available UK tax relief. European charities have also been able to benefit from UK tax reliefs, including Gift Aid, provided they are registered with HMRC—a process easier said than done. Similarly, UK charities have to-date been able to benefit from donations made by European donors, in accordance with the relief available for charitable giving in the donor’s own country. Given the result of the referendum, the UK’s charities will at some point become ineligible to receive tax-relief donations directly from most EU-resident donors.

Political implications

Unfortunately, in the current climate, charities and any new policies on charity reform that are not already making their way through Parliament, are likely to be towards the bottom of the list of priorities for ministers and civil servants for some time to come. Therefore, it will be even more important for charities to consider making representations and to carefully examine policy initiatives in the next budget as much may change, for example, a possible reduction in rate relief or gift aid.

Constitutionally, charities registered in England and Wales that also operate in Scotland will need to monitor developments very carefully. Scotland, along with Northern Ireland, voted overwhelmingly to remain in the EU. The Scottish Executives are considering a second referendum to leave the UK and are in the process of discussions with Brussels. If a second referendum is called at some point in the future, this may have a very different outcome in the wake of a Brexit. There is also speculation as to whether the Scottish government will also seek to remain in the EU itself.

Dominik Opaliński

Partner, Hunters incorporating May, May & Merrimans

This article was originally published in New Law Journal and can be found here.