Clarity on charity

The Home Office's response to the Cabinet Office strategy unit's review of the laws for charities and not-for-profit bodies should be required reading. Published last month, it promises all sorts of good things: more clarity on charitable purposes, including making the provision of social housing a charitable object; to rationalise the law on industrial and provident societies; to make mergers easier; to create community interest companies; and to improve the position on personal liability of trustees.

Most of the 61 recommendations were accepted, with the notable exception of tax reform to allow trading within the charity without the need for a subsidiary trading company. That means the continuing additional expenses and problems of using the subsidiary to carry out the non-charitable activity. Why? Because, says the government, trading within the tax-exempt structure of charities would offend the principle of a level playing field with the private sector.

At the end of July we also heard that there would be no VAT reform for charities, leaving many registered social landlords with VAT recovery problems in many areas – good news for the accountants but, with the Housing Bill proposing to give private developers access to social housing grant, it will be interesting to see whether the Office of the Deputy Prime Minister gets out the heavy roller to make sure the grant playing field truly is level.

Is the not-for-profit sector really in such a privileged position compared with the private for-profit sector? Take the acquisition and development of a typical residential site in an urban area. The private sector developer will want to be in and out quickly – it will use a special purpose company, subcontract the works, offer a National House Building Council warranty but not accept any ongoing liability and sell the management of the estate to an agent. It will develop to the minimum standard necessary to comply with NHBC and statutory requirements and do whatever it thinks will sell the homes.

To compare like with like, let us look at an RSL development that is not grant-funded and is a cross-subsidy transaction. Let us ignore tax. The RSL is in for the long term – it will use a non-registered subsidiary for the outright sales units but, although the Housing Corporation guidance on group structures suggests otherwise, it knows that it cannot treat the unregistered subsidiary as a fly-by-night special purpose vehicle because the RSLs that will be managing the mixed development are accountable to its assured tenants and shared ownership lessees and will bear the cost of a substandard development.

Then there are the assured tenants' and lessees' charters (remember that, unless one is careful, outright sale long leases can be assured tenancies). On top of this, there is the independent housing ombudsman – who can predict his response to a complaint by a lessee or even a freehold purchaser from a subsidiary of an RSL?

RSLs are often too timid, frightened by the cardboard tanks of regulators, and too ready to accept the expensive and negative advice of consultants without question

In short, whatever vehicle the RSL has to use for tax efficiency, it cannot walk away when the last unit is sold. This means it has to build into its development cost and pricing some provisions for long-term potential liabilities, something private developers can ignore.

Then there's tax – if the private developer cannot by adroit use of cross-charging offshore havens, remuneration packages and so on, reduce tax to a level at least on a par with the costs the non-taxpaying RSL has to bear, it should change accountants.

Finally, there are the compliance costs RSLs (and arm's-length management organisations, if they have development ambitions) have to bear – auditors, internal and external, regulators (at least two and sometimes four) stakeholders, funders, politicos, interest groups, the EU, EP, SORPS, CORPS, FSA, SLA, HRA, RAs and ODPM.

Is it like that in the private sector? No, they always insist on a voluntary code, ignored where inconvenient or costly. If the code is mandatory, private developers will defy it, then settle cheaply.

RSLs are too often too timid, frightened by the cardboard tanks of regulators intervening beyond their powers (often because they don't grasp the issues involved), and are too ready to accept the defensive, expensive and negative advice of consultants without question, or without requiring them to come up with other solutions.