Legal Brexit Comparisons

Last Updated November 01, 2016

Contributed By Withers LLP

Authors



Withers LLP is the only UK law firm with dedicated charity/exempt organisation expertise in UK, US and Asia. The UK charities and not-for-profit team act for more than 50% of the UK's top 50 charities. Particular areas of expertise include medical and healthcare charities; for instance, in addition to the medical charities the British Red Cross Society, Cancer Research UK, Macmillan Cancer Support, the Royal British Legion, the Salvation Army, and SSAFA Forces Help, the team acts for many of the largest NHS charities (including Guy's and St Thomas' Charity), are standing advisers to the Association of NHS Charities, and wrote the Department of Health's guidance on NHS charity conversion. Other charities include educational charities, such as the Girls' Day School Trust, which runs 24 independent schools in the UK, and top US universities including Syracuse and MIT, arts (museums and galleries – including TATE), sport (British Olympic Foundation and many others; philanthropy), advising philanthropists and their foundations ( for instance the Novak Djokovic Foundation and Paul Hamlyn Foundation). A key strength is the team's knowledge and understanding of US-UK charity issues as the only UK charities' practice with US attorneys working in-house in London and in the USA (East and West Coast). Lawyers are notable for their expertise on US-UK 'dual qualified' charitable structures; we advise organisations wishing to fundraise from US taxpayers here and abroad, as well as donors and philanthropic institutions on tax-efficient giving internationally.

Introduction

When asked in July 2016 by Tom Watson, the Deputy Leader of the Labour Party, to assess Brexit's potential effect on funding for charities, Rob Wilson, the Charities Minister, replied:

"The UK has a strong and diverse charitable sector. It is too early at this stage to make a full assessment of the potential effects for charities resulting from the outcome of the EU referendum... These will depend on the arrangements agreed for exiting the EU, and different types of charity are likely to be affected in different ways." 

Quite so. This vague response reflects not only the current general state of uncertainty about next steps in the Brexit process, but also the sheer range of variables affecting charities:

  • Even within the UK, they already have different regulators and similar, but subtly different, laws governing them (depending on within which nation of the UK their principal base is registered);
  • They take different constitutional forms (companies, trusts, unincorporated associations, charitable incorporated organisations, royal charter or statutory corporations), all subject to different legal regimes here and different legal treatments in other jurisdictions;
  • They have widely varying aims and sectoral specialisations – education, health, religion, arts, sciences, welfare, humanitarian relief, overseas aid, animal protection, community development and many more;
  • They may derive their funding from investments, public fundraising, corporate sponsorship, government or other grants, or from trading profits (either directly or through trading subsidiaries);
  • Their activities may involve grant-making, service delivery, advocacy and/or research;
  • They may have a sophisticated structure with many premises and employees (here and abroad), or be run from someone's home entirely by volunteers.

What they have in common is what makes them charities – they are established exclusively for purposes which the UK law recognises as charitable and which provide public benefit. But their interface with the law in their particular sphere will be specific to each charity, as will be the impact  of Brexit on them.

Given the numerous variations and the impossibility of covering all aspects, this chapter focuses on areas where EU law affects charities now and/or where Brexit will have legal consequences, and considers the current legislative framework and the impact of transitional and post-Brexit arrangements.

Cross-border donations

Immediate commentary on Brexit's implications for charitable giving has focused on the sterling's fall in value and house prices, combined with increasing costs and general uncertainty, leading to a loss of consumer and market confidence, and so to the likelihood of reduced charitable contributions from individuals and companies. So it will be prudent for charities to budget for a downturn in donations generally. But will the legal, and specifically fiscal, framework of those donations be affected?

Cross-border donations (specifically intra the EEA)  constitute one of the rare charity-specific areas where EU law has had a direct effect:

  • Traditionally, the UK took a 'territorial' approach to charitable tax reliefs, including in relation to lifetime and testamentary gifts. That is, relief was available to UK taxpayers only to the extent that gifts were made to resident charities formed under a UK nation's law.
  • However, in the Persche case, the ECJ treated charitable gifts as movements of capital subject to free-movement principles and therefore effectively introduced a 'non-discrimination' principle to cross-border charitable giving in the EU.
  • Although initially resistant to the Persche principle (and vocally so), the UK ultimately implemented Schedule 6, Finance Act 2010 as amended ('FA 2010'), extending UK charitable tax reliefs to qualifying organisations formed in the EEA – that is, EU Member States, plus Iceland, Liechtenstein and Norway.

If the UK remains in the Single Market on broadly similar terms as the other non-EU EEA states (the 'Norwegian Model'), maintaining the FA 2010 status quo will be consistent. If, however, the UK merely remains in the European Free Trade Area ('EFTA') (the 'Swiss Model') or, indeed, the UK creates a new arrangement entirely ('Hard Brexit'), Parliament may be tempted to return to the traditional territoriality of charitable reliefs (as the Gift Aid scheme involves repayment of tax to eligible charities, rather than a straightforward income tax deduction or credit for the UK donor). But since in practice HMRC has registered fewer than 10% of foreign charity applications to date, amending FA 2010 may be a low fiscal priority; very little is being paid out to foreign charities at all.

The ability of EU-based donors to give tax efficiently to UK charities may be affected as soon as the UK ceases to be an EU member.  Unless otherwise agreed, tax relief will cease to be available for EU donors who rely on the Persche case's direct effect for local tax relief, and those whose tax authority gives its tax reliefs narrowly (that is, to organisations in EU Member States only), immediately the UK ceases to have that character. In practice, this is unlikely to have much impact on UK charities (very little of their income probably derives from this source), and there will be some donors – for instance those in the Netherlands, which took an expansive approach to implementing Persche - who should not be affected at all.

In summary, any change to FA 2010 legislation is likely to be largely symbolic of the government's attitude, rather than having a material financial impact on UK charities or HM Treasury.

EU funding

As already noted, charities look to a wide variety of sources for funding. In the run-up to the EU referendum, the Britain Stronger in Europe campaign reported that 249 UK charities received GBP217 million from the EU in 2014 (www.thirdsector.co.uk/charities-lose-200m-funding-brexit-says-pro-eu-campaign/finance/article/1385211).

The principal funds to which the UK currently has access are European Structural and Investment Fund, European Regional Development Fund, European Social Fund, Fund for European Aid to the most Deprived and Youth Employment Initiative.

Their structural funding rounds occur in seven-year cycles, so there are two distinct periods to consider:

  • The first is the period up to 2020, for which funding has already been allocated. On existing arrangements, projects which have been selected to benefit will have until 2023 to claim the funds allocated. Such funding is, however, contingent upon the UK's continued contribution to the EU budget; should the UK leave the EU before 2020, or indeed before 2023 when the last of the funding for the present round can be claimed, the EU may (depending on the terms agreed) withdraw all funding at that point. Given that much of the funding is provided as reimbursement, rather than in advance, this will create particular difficulty for charities which have already committed large amounts to EU-funded projects. So charities should, as far as possible, take account of such eventualities in budgeting decisions for the short- and mid-term and, where necessary, actively seek assurances from the UK government that any shortfall in already-agreed funding will be underwritten by HM Treasury. Additionally, they should be aware that there is increased risk in investing in new projects before 2020 on the promise of EU financial support.
  • Assuming the UK completes its exit negotiations, it will no longer be automatically eligible for the structural funding round running from 2021; participation (or not) by UK-based projects will depend on Brexit's terms.

An analogy may lie in the Horizon 2020 programme, through which the EU provides funding for scientific research and innovation. This is clearly targeted at EU members, but a number of non-EU countries, including Norway and originally Switzerland, have been granted ‘Associated Country’ status: they contribute to the programme's budget proportionally to their GDP, in return for which their researchers and organisations can apply for Horizon 2020 projects on the same basis as those from EU Member States. Associated Country status is open to EFTA countries and EU candidate nations, but the terms of association differ country by country. Additionally, institutions and researchers from other countries can apply to, and participate in, EU programmes and, in some circumstances, receive direct funding. These 'third countries' are usually required to provide matching funds.

The Erasmus programme offers another analogy: Norway is a participant but Switzerland is not (having refused to accept unrestricted freedom of movement). It remains to be seen what position the UK will adopt, but it is likely that acceptance of the EU's core principles may well be a pre-condition.

There will also almost certainly be financial implications for the UK, if participation is to continue – both directly to the EU budget and by way of matched funding (which the current EU funding model requires). Will the UK government be prepared to do this, or will it have other pressing priorities for its monies?

Applicant projects will also need to satisfy existing pre-conditions - that they relate to EU policy and demonstrate added value from a European perspective. How easy will that be to do once the UK is no longer in the EU?

Therefore, charities currently in receipt of EU funding are advised, if possible, to hold greater levels of reserves and certainly to review their financial plans.

Some charities may consider setting up subsidiaries or affiliates in another EU Member State in order to apply for funding, going forwards. An organisation may need to have been established for a minimum of two years before it can benefit, so this should be considered urgently by charities relying on EU funding.

However, this may not resolve the problem entirely. If the application involves the subsequent transfer of funds to the UK, or if the new entity is considered a mere add-on to a UK charity, the funders may not choose to assist, either because of the UK connection or because they will prioritise organisations more closely identified with EU Member States.

Data Protection

Personal data relating to a charity's supporters is crucial to the fund-raising that is the lifeblood of many charities. In addition, a charity will hold such data on its staff, volunteers and beneficiaries.

Two pieces of domestic legislation are particularly relevant:

  • Data Protection Act 1998 (DPA) governs data controllers' processing of personal data (and so affects charities' use of the personal data referred to above) and;
  • Privacy & Electronic Communications Regulations 2003 (PECR) affect the collection and use of personal data by organisations through telephone, fax, email, SMS and other electronic commerce, and so particularly impacts charities' direct marketing and fund-raising activities.

Each of these implements an EU Directive (from 1995 and 2001 respectively), and accordingly, Brexit has thrown their future application into question. A further complication is that the Data Protection Directive (and so the DPA) is due to be replaced by a new EU General Data Protection Regulation (GDPR), taking effect in May 2018. 

With Article 50 not likely to be triggered before the end of 2016, and so the disapplication of EU legislation to the UK unlikely to be fully effective until the beginning of 2019 at the very earliest, the GDPR is likely to have direct application to charities processing personal data in the UK for at least a limited period. In the meantime, the DPA and PECR remain fully in place.

The form of Brexit chosen will determine what data protection laws are adopted in the UK. However, it is unlikely that we will see a major sweeping-away of applicable rules. Rather, the UK's having an EU-style data protection regime is likely to be a prerequisite to a trading relationship with the EU/EEA. Looking at each potential model in turn:

  • Norwegian model: within the EEA, Norway, Iceland and Liechtenstein are required to adopt EU data protection rules in full, including the GDPR. If this were the Brexit arrangement selected, very little would change.
  • Swiss model: Switzerland's data protection regime is very similar to that of the EU. If the UK adopts a Swiss model, therefore, a bilateral deal is likely to include adoption of similar data protection rules.
  • Hard Brexit: in this event, the UK, as the USA before it, is likely to find that the application of EU rules has to be considered to allow UK organisations to transact with EU/EEA counterparts. This is primarily due to restrictions under the Data Protection Directive and GDPR that impact on exports of data from the EEA to any external countries unless those countries have 'adequate' data protection laws themselves, or data controllers act to implement adequate protection of the personal data they share with their trading partner. The importance of this issue is illustrated by intensive intergovernmental negotiations that have taken place recently over EEA-US data transfers, culminating in the adoption of the EU-US Privacy Shield Framework in July 2016.

It is also worth remembering that the UK has had a data protection law in place since 1984 – more than a decade before the EU Directive. It seems unlikely, therefore, that the UK would sweep away data protection laws that have much of their origins in UK domestic law. Nevertheless, charities will need to be alive to the differences in applicable systems developing. The safest course for charities operating across borders will always be to comply with the most rigorous standards of data protection. 

Value Added Tax (VAT)

VAT is an EU tax, charged on goods and services within the EU and deriving principally from a 2006 EU Directive. National VAT rates must be within a certain range, with each Member State contributing a small proportion of its VAT-take to the EU in the form of a levy. The co-ordinated administration of VAT within the EU VAT area is an important element of the Single Market.

Whilst charities are exempt under UK legislation from most taxes, this is not the case with VAT. There are various exemptions and zero rates which apply to them, but the charity sector has long complained about the burden of irrecoverable VAT incurred on goods and services purchased to support non-business activities. So there has been much recent speculation about the impact of Brexit in this area.

At present, of course, the EU VAT rules continue to apply to the UK. This is true until the day following our actual exit from the EU. Our rules cannot be interpreted in a way that conflicts with EU law; any change in EU VAT legislation will have to be mirrored by a change to UK law, and UK courts are required to refer questions of doubt to the ECJ (although, it seems likely that, as we get closer to actual exit, our courts may become more self-reliant). There is no reason to think that any of the special rules applying to charities within the discretionary aspects currently determined by the UK government are going to be under threat prior to exit.

What happens subsequently will be determined by our negotiated trading position, but we shall, once we are outside the EU, also be outside the EU VAT territory (unless a unique exception is agreed to include us). This means that goods passing between the UK and an EU Member State will be liable to import VAT at the point of entry. In practice, this should not greatly alter the overall burden of VAT, but will require a change in charities' procedures and may affect who is liable.

Norwegian model: although the EEA treaty by which Norway, Iceland, and Liechtenstein operate in relation to the EU, and which gives them access to the EU Single Market, does not directly deal with VAT, the effect of its obligations has caused them to choose to adopt very similar systems, with the court set up by the EEA treaty (so-called EFTA Court, rather than the ECJ) overseeing issues arising between EEA states.

Swiss model: Switzerland rejected membership of the EEA in the early 1990s but negotiated a raft of bilateral treaties with the EU and also adopted a very similar indirect tax system (albeit with a very low standard rate of 8%). Switzerland is not subject to the ECJ or the EFTA Court.

Hard Brexit: in theory, VAT could be abolished (although this seems very unlikely, given the UK government's financial needs).

The UK government would be free to determine its own rates and exemptions, and so enable the charity sector to put forward its own charity-specific proposals.

Equally, however, a hostile UK government could legislate to abolish or change some or all of the charity reliefs. In the current position, exemptions - such as for education, culture, and welfare - are enshrined in EU law which limits the UK’s room for manoeuvre. But this would go following a complete removal of EU authority.

Assuming VAT to be retained in the UK in some form post Brexit, it is debatable whether previous ECJ decisions will remain influential. It seems inconceivable that all precedents would simply be jettisoned, since that would create a very confusing vacuum. But whether there will be a gradual winnowing-away (as domestic legislation changes) remains to be seen.

As a general comment, if there is an overall trend in world indirect taxation, it is towards uniformity (resisting “beggar my neighbour” policies applying on a state-by-state basis). It is unlikely that full discretion over VAT will ever be achievable by an independent UK, although the speed at which the world moves towards this level of uniformity cannot be predicted.

Employment and the movement of peoples

As in all organisations, a charity's staff is a key consideration and, in the immediate period, employment rights remain unchanged by the Brexit vote.

In terms of subsequent impact, it is worth remembering that there are broadly three categories of rights – those which are purely domestic in origin; those which are purely European without any domestic equivalent; and those which are domestic rights but have subsequently been elaborated by EU legal principles. Some employment rights, such as the right to join a trade union, are protected by the UK's status as a signatory to the ECHR, rather than by its EU membership.

This complex picture means that there will be no automatic falling away of existing employment rights once Brexit is finalised. The precise form of Brexit will, however, determine the extent to which existing EU regulation and jurisprudence will impact on domestic legislation in the future.

A hard Brexit would theoretically make it possible for the UK government to repeal or amend rights that have a purely EU origin, such as the law on business transfers (TUPE), working time rights (including the right to paid annual leave), the Agency Workers Regulations and some of the characteristics protected by discrimination law (age, religion or belief and sexual orientation). In practice, a wide range of non-legislative influences that have become embedded in organisations' employment practices may limit the scope and political and business appetite for substantial deregulation, even if a future UK government were otherwise free to amend the law. Social attitudes have progressed to the extent that it is very difficult to conceive of repeals to discrimination law. There are less drastic options, however, that might appeal to a future government - such as capping compensation available in discrimination cases or introducing exemptions for small businesses or charities.

A less drastic form of Brexit is likely to leave the government with little scope for amendment of existing EU-derived rules. All members of EFTA and the EEA currently adhere to EU social and employment regulation and the EFTA Court is bound by relevant decisions of the ECJ. The reasons for this are partly economic (avoiding the creation of a competitive advantage for a member with lower levels of employment regulation). Attempts to negotiate a special employment regime for the UK are therefore likely to meet with resistance.

For many charities, free movement of workers will be the most important right. It is particularly relevant to charities that provide health or social care (for instance hospitals and care homes), educational and research institutions (such as schools and universities), and many working in the arts or other creative industries. The future of this principle is likely to follow a similar pattern to that described above: the 'harder' the Brexit, the more tightly the UK will be able to seek control of immigration. As things stand, participation in the EEA or EFTA is likely to entail agreement to free movement of workers.

Reporting

September 2017 is the due date for the first automatic exchanges of information relating to tax within the EU under the Common Reporting Standard ('CRS'), resulting from the Ecofin revision of the Directive on Administrative Co-operation  ('DAC'). The UK has implemented the DAC through domestic regulations, and charities can be effected as 'financial institutions' - in particular philanthropic foundations, since they are likely to derive their income from investments.

Although imposed in the UK by the DAC, the CRS derives from OECD  agreements, the idea being based on the USA's FATCA  legislation. Post Brexit, some change will be necessary to implement the CRS without reference to the DAC, but the UK is stated to be committed to the CRS and tax transparency more generally, so it seems unlikely that the CRS regime will be abandoned entirely.

Conclusion

In order to manage the analysis in this chapter, we have been contemplating the effect of the Norwegian, Swiss and hard Brexit models of future relationship, but Theresa May in her July 2016 tour of European capitals has stressed that the UK's model may not be on the shelf already – given that she is seeking a solution that "addresses the concerns of the British people about free movement while getting the best possible deal in goods and services". And Charles Grant of the authoritative Centre for European Reform has suggested that we shall need not one but at least six agreements.

So no one knows exactly what relationships – in areas of trade, law, tax and duties, intelligence or security – the UK will have in the future with the EU, its Member States, or other countries, or indeed whether the UK itself will remain intact. Each charity is likely to have its own specific concerns in this situation; it may be able share these with others operating in a similar field, but it will be essential for each one to keep the situation under regular review.

This chapter opened with a quote from Rob Wilson, the Charities Minister. He kept his job in Theresa May's reshuffle, but was moved from the Cabinet Office to the Department of Culture, Media and Sport and required to take on additional responsibilities – an implicit demotion of charities in the government's ranking. In the development of the new law and policies inherent in the creation of the new relationships referred to above, account must be taken of charities' interests, however hard it may be to catch government's attention. Campaigning by charities in order to achieve this will be justifiable – emphasising how changes may affect their beneficiaries; there is much to be gained by ensuring that charities' concerns are listened to, and much to be lost if not. 

Because of the diversity of the charity sector – in size, form, purpose and activity – it will be difficult for it to speak with one voice. But it is crucial to avoid additional complexity affecting their operations. It is, after all, charities which assist when there are shortfalls in government funding – whether welfare, health, education, arts, sciences, environment and many more – and that harness the goodwill and commitment of many UK residents for the public benefit.

Charities have a potential wider role in relation to Brexit. They tend to be inclusive in outlook, aware that their charitable purposes, whether local in focus or involving overseas' interests, are 'public goods' the world over. That is not to say, of course, that everyone working in a charity voted 'remain', but given the political division, social disharmony and general uncertainty currently associated with Brexit, charities have a role when engaging with government and the community at large to show how change can happen cohesively.

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Authors



Withers LLP is the only UK law firm with dedicated charity/exempt organisation expertise in UK, US and Asia. The UK charities and not-for-profit team act for more than 50% of the UK's top 50 charities. Particular areas of expertise include medical and healthcare charities; for instance, in addition to the medical charities the British Red Cross Society, Cancer Research UK, Macmillan Cancer Support, the Royal British Legion, the Salvation Army, and SSAFA Forces Help, the team acts for many of the largest NHS charities (including Guy's and St Thomas' Charity), are standing advisers to the Association of NHS Charities, and wrote the Department of Health's guidance on NHS charity conversion. Other charities include educational charities, such as the Girls' Day School Trust, which runs 24 independent schools in the UK, and top US universities including Syracuse and MIT, arts (museums and galleries – including TATE), sport (British Olympic Foundation and many others; philanthropy), advising philanthropists and their foundations ( for instance the Novak Djokovic Foundation and Paul Hamlyn Foundation). A key strength is the team's knowledge and understanding of US-UK charity issues as the only UK charities' practice with US attorneys working in-house in London and in the USA (East and West Coast). Lawyers are notable for their expertise on US-UK 'dual qualified' charitable structures; we advise organisations wishing to fundraise from US taxpayers here and abroad, as well as donors and philanthropic institutions on tax-efficient giving internationally.

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