Instead of setting up new charities, founders should think about donor-advised funds or Community Foundations instead, says Paul Palmer.

Are there too many charities in the UK?  Some people certainly think so. The parting shot of the retiring chief executive of the Charity Commission in 2014 was to outline why he believed a 16.1 per cent increase in the registration of new charities in one year was too many.  

Supporters of the idea that there are too many charities, such as Lesley-Anne Alexander, chief executive of the RNIB, have asked whether we need over 700 charities in England for the hard of sight.

Amongst those who have railed against this view have been Sir Stuart Etherington, chief executive of NCVO, who highlighted the independence of civil society and said that the creation of new charities provided a freshness and vigour to the sector.  Equally in support was the Confederation of Service Charities who cited diverse demands to justify the existence of over 2000 service charities.  

But what are the real costs of having so many charities? And in 2015, are there better alternatives to setting up your own charity?

At the macro level there are the costs of regulating the sector via the Charity Commission, a government-funded regulator, which covers England and Wales. The Commission’s budget is just over £20m and there are separate budgets for its equivalent organisations in Scotland and Northern Ireland. Their budgets are met purely by the taxpayer.

This is an unusual situation. Most other regulators ask a fee contribution to pay for their regulation. But in this case, the regulators are not allowed to charge for their services. The government justifies this policy because of the public benefit that charities contribute; there has been a reluctance on the part of successive governments to be seen to be taxing the donation activity of charity.  

Tax relief for charities – through exemption from income, asset and property-based taxes and also through donor reliefs – costs over £3bn per year. So charities benefit from a great deal of taxpayers’ money.

'Is diversity worth the cost?'

One thing to consider is that there is a cost to having a diverse sector. The question is whether the diversity is worth the cost. Is it economic and efficient to have so many charities being set up each year? Should people moved to set up a charity be made to consider more cost efficient alternatives?

First let’s look at the set up costs. It is possible to “do it yourself” and register a new charity but if you choose to use a solicitor this will usually start at £3,000 plus VAT. Of course that the charity can offset its own set up costs, but how many people donating for the first time in someone’s memory would be satisfied that their first donations have gone to a firm of lawyers?

Then there are the ongoing costs of paying for an audit or an independent examination each year. This is vital to show the charity is discharging their affairs to donors, but it can easily take up more than 10 per cent of donations each year. Trustee expenses will equally need to be paid and then perhaps there is a need to pay an administrator.  Over 50 per cent of income can be lost in administration expenses.

The tragedy is that there exists much cheaper and less onerous alternatives to setting up your own charity. Surely the first point of call is to check if an existing charity is already doing that work. With some 200,000 registered charities in the UK, one might just exist! But there is an even easier alternative which is to consider a Donor Advised Fund.

These are registered charities in their own right which can hold charity accounts and administer them for charity purposes.  The long standing Charities Aid Foundation and PRISM are two DAFs that for a modest fee will save separate registration and take care of all the administrative work.

In most areas of the UK there are now Community Foundations who undertake similar work. Some wealth managers like Hoares Bank and UBS have developed a DAF for their clients and make no charge at all which ensures 100 per cent of their client’s philanthropy goes to the charity and is not spent on legal and audit fees.

'An alternative?'

Whilst I have the greatest respect for the military charities and diversity argument, do we really need two Victorian Cross charities to look after graves?  The well respected and long established Victoria Cross and George Cross Association, whose Patron is the Queen and President the Prince of Wales, suddenly finds itself competing for donations with the Victoria Cross Trust established at the end of 2012. I am sure the trustees and the supporters of the new charity believe they are doing valuable work. But they have raised £29,771 in the first year and spent more than half - £16,871 – on management and administration. It raises the question of whether that is a good destination for your donation.

The Charity Commission says it now asks new charity applicants to ‘think carefully’.  The first question anyone will come across when registering as a charity (CC21a) is to decide if a charity is the right option or whether there is an alternative.

However, the guidance is written in a very passive style. There are some good links, for example to UK Community Foundations, but only one for DAFs is given. Clearly it is still early days and the effectiveness of this advice will only be known when we are able to compare new registrations numbers.

If it does not work then perhaps the Commission needs to go further and move the emphasis. Perhaps people promoting new charity promoters should have to justify why existing market options cannot meet their need.

If regulatory action is not sufficient to stop duplication, legislation might be the answer. An attempt to stop duplication was initially incorporated in the 1916 Act, but it failed. There are several problems: it is hard to define what you mean by duplication, it is hard to phrase it in legislation and it is not clear who would prevent duplication if you did legislate.

Is the cost of diversity, competition and civil society freedom a premium worth paying?

Professor Paul Palmer is the Director of the Centre for Charity Effectiveness at the Cass Business School, City University London.