Money and a note saying 'Make a change' in two outstretched palms

The potential impact of Brexit on the third sector

In Charity and Third Sector by Jen Steadman

Brexit is set to impact all sectors in the UK, including charities. In fact, almost half of charity workers say they are already seeing the effects of Brexit. While these are unprecedented times, and it’s impossible to know the full impact, we spoke with some experts on the topic to find out more and see how charities can best prepare for a post-Brexit era. Below you’ll find insight from:

  • Caron Bradshaw, Chief Executive Officer at the Charity Finance Group (CFG)
  • Elizabeth Chamberlain, Head of Policy and Public Services at the National Council for Voluntary Organisations (NCVO)
  • Duncan Spokes, Strategic Markets Manager at YPO
  • Gary McIndoe, Immigration Lawyer and Managing Director at Latitude Law
  • Chris Willis Pickup, Charities and Social Ventures Partner at Taylor Vinters

A work team putting their hands together in the centre of a table

Brexit: The big issues

1. Workforce

One of the most pressing issues facing charities is how future immigration policy may affect their workforce and volunteers. And it appears these changes are already happening. Between June 2016 and June 2017, while the charity sector workforce grew as a whole, the number of European staff in the sector fell by 20%. “Although we don’t know for sure what is causing this, it could be in part a reaction to the referendum result,” says Elizabeth.

Caron agrees that the Brexit debate could have contributed to some EU nationals’ decision to leave the UK. “Although there have been some positive noises about EU nationals already here retaining rights to stay and work, there is a high level of uncertainty about their status,” she says. “The impact of the Brexit debate has had, anecdotally, a negative impact on some EU nationals and their desire to remain in the UK,” she says.

But what will it mean going forward? Gary is an immigration lawyer and he told us that the end of Free Movement on Brexit should not affect existing EU staff and won’t prevent them from continuing in their paid roles. “However they will need to establish their immigration status by 1st July 2021. Volunteers are a little more complicated; if they don’t derive income from their charity or any other work they may qualify as economically self-sufficient, but will have to prove access to funds if they are to maintain UK residence,” he says.

Ultimately, it seems like Brexit is likely to make things more challenging for charities with EU employees. “More complicated immigration processes and a feeling of ‘not being wanted’ are likely to result in a decrease in the EU workforce in the UK. Charities could be faced with the big challenges in recruiting, and possible shortages of staff, particularly in sectors that rely heavily on staff from Europe, such as health and social care and international and overseas organisations,” says Elizabeth.

2. Economic uncertainty

No matter one’s position on Brexit, it has certainly cultivated a climate of uncertainty. And economic uncertainty is a big issue for charities at present, as so much remains unclear in this area. “Charities should be planning for financial uncertainty – we don’t yet know what the economic impacts of Brexit will be, but there is a widespread expectation that we will enter tough times. For example, if Brexit does mean that the pound loses value, charities that work overseas could end up being able to deliver less work for the same costs,” says Elizabeth. “Charities should think about what financial planning they need to do to get through a period where income could dwindle while costs and demand could rise. In short, the healthier an economy is, the healthier the charity sector should be. Government focus on economic stability during and after leaving the EU will be incredibly important in reducing the impact of Brexit on charities.”

Not only does it mean charities may have to do more with less, but it could also result in lower levels of giving. “It is expected that the impact on the UK economy may affect charitable giving in the future due to the fact many are expecting wages to be affected which will in turn reduce disposable income and individual giving. The impact is unlikely to be immediate, with issues developing on a long-term basis with individual giving and limitations in terms of EU funding streams,” says Duncan.

It has also been hypothesised that people will have less time available to spend volunteering, which will naturally adversely affect charities.  “As the nation’s disposable income shrinks, so will their leisure time and capacity to support charities on a voluntary basis. This is likely to reduce resource in areas which are traditionally under resourced and limit the skilled expertise available from board members who may be under increased pressure from their day jobs,” says Duncan.

3. Funding

“The charity sector receives funding direct from EU institutions. Without a deal to continue this or replace it from national funds, charities will have a shortfall and will need to reduce services. There are various estimates for the financial impact – well over £300 million per year according to NCVO,” says Chris.

And even charities who don’t receive EU funding are not necessarily immune to this loss. “This might impact charities indirectly because they are the beneficiaries of another’s EU funding e.g. a lot of regeneration and community building that is supported by EU funding will also result in support for local voluntary sector organisations. The Directory of Social Change (DSC) estimated that the loss of funding would be in the region of £250 million for charities and around a further £500 million to a range of businesses and social enterprises,” says Caron.

Pound coins4. Partnerships

One lesser discussed aspect of Brexit is the potential loss of partnerships with similar EU organisations. “Charities have built effective partnerships with similar organisations around the EU and these groups have worked together to have a greater impact globally. The international aid sector is a good example, and one where UK charities are recognised experts. There is now doubt over whether and how these relationships continue, as the UK moves away from the EU, legally and perhaps, culturally. There have been some reports of warnings to UK charities in new EU funding rounds. There have been challenges, but are likely to discourage effective collaboration,” says Chris.

5. New rules

From speaking with the experts it appears that Brexit offers one major positive to charities: the opportunity to develop new rules and improve the current landscape.

“There are some areas where Brexit that, if managed well, could support the sector. For example, changes to the state aid, procurement rules and VAT legislation could improve the environment for charities,” says Caron.

One area of particular interest would be changes to VAT rules as it’s currently estimated that each year the charity sector loses around £1.5bn of irrecoverable VAT. Caron says, “Freedom to change the VAT rules – if you accept that it was the EU who prevented a solution being found – would be positive. But the sector would only benefit if the UK government decided to makes the amendments necessary to reduce this VAT loss to the sector.”

Another opportunity for improvement lurks within the government’s newly pledged Shared Prosperity Fund, which has been suggested as a replacement for the European Social Fund. “NCVO sees the Shared Prosperity Fund as a real chance for the government to iron out some of the difficulties that were associated with ESF by reducing bureaucracy and improving access to the scheme. We’ve worked closely with leaders from organisations who work with disadvantaged groups, private sector organisations, as well as frontline providers of ESF to outline how we believe its successor should function,” says Elizabeth.

Duncan also thinks Brexit could offer a chance for improvement where public procurement regulations are concerned. “Brexit could be a catalyst for reforming public procurement regulations and place a greater emphasis on social value and social outcomes. The topic of social value has received increasing media attention and there is ambition across the Public Sector and increasing desire for there to be less focus on price within procurement to allow social value to be at the forefront of considerations. This in turn could create an opportunity for charities to develop service opportunities in partnership with Local Authorities and Health,” he says.

Ultimately, all of the above hinges on the sort of deal the UK gets and whether or not the government chooses to prioritise the third sector. “Some have argued that leaving the EU could make things better for charities, by unlocking financial resources and ‘cutting red tape’: see CFG briefing of 28 July 2017. I agree that it could make improvements in some areas, but it wholly depends on what Brexit deal is done with the EU, and what the UK government does next. It relies on the UK government choosing to, for example, simplify and improve the VAT regime for charities, and adopt a more flexible state aid and public procurement regime to improve charities’ access to funds and supply to public bodies. But all of this relies on a Brexit deal giving the UK this flexibility to set its own rules, and the UK choosing to use flexibility to help charities,” says Chris.

Woman at the front of a meeting, putting post-its on a board

How charities can plan for Brexit

1. Prepare for a no deal

“At this point, charities should be reviewing their operations – especially people, funding and partnerships – and working out what would happen if the UK exits the EU in March 2019 with no transactional deal. For many charities the impact will be quite limited, for others it could be existential. It’s important to know where you sit, and to come up with a contingency plan if there would be a big impact,” says Chris.

“No one can really pinpoint just how likely a no deal scenario is, but it’s far from inconceivable so charities do need prepare for every eventuality. If your charity needs specialist goods or equipment from overseas, you need to be making contingency plans for this in the event that a no deal outcome results in trade problems,” says Elizabeth.

2. Stay hyper aware

“Brexit has created a huge amount of uncertainty and complexity over the future legal and regulatory environment. It’s important for charities to keep an eye on any changes that will affect their operations or their beneficiaries – such as consumer or human rights legislation or environmental protections,” says Elizabeth, while Duncan suggests, “While research and assessments are ongoing, charities should be looking to understand the ways in which the Government could be changing the way in which social value is evaluated within the public sector. This is likely to create an opportunity for the sector and charities should be prepared to transform and organise themselves to take advantage of the opportunities that will arise from this change.”

“Charities often need to check compliance with EU state aid rules as part of grant applications from public funds. The government has said there will be UK state aid rules in future, and the Competition and Markets Authority will take the lead. Charities should be looking out for these new rules, and seeking to improve them. As the CFG has said, more flexible state aid rules for charities would be a big help,” says Chris.

Man reading newspaper while woman on a laptop checks her phone

3. Press for a sectoral assessment

Duncan says, “Charities trying to plan for post-Brexit outcomes will need to press Government to undertake a sectoral assessment. The assessment should review the expected impact of Brexit on charities and the Voluntary Charity Sector (VCS) which in turn could impact on public well-being and the public sector itself. Similarly, Parliamentary Committees will need to be lobbied to undertake assessments and provide recommendations for charities to safeguard their services, which by their nature support the most vulnerable in society.”

4. Conduct internal assessments

“It is important for the sector to also commission and develop their own assessments which can guide their preparations and highlight any concerns with the VCS and government stakeholders. The research from assessments will provide charitable organisations with relevant data should they need to speak out against policies and potential agreements that could be damaging to the sector, its beneficiaries and society,” says Duncan.

5. Research funding

As Caron points out, “It may be tempting for charities to assume that Brexit won’t impact them because, for example, they receive no funds direct from the EU. However, there may be an indirect impact, so it is wise to examine all these areas. In the example of funding – who are the charities funders and do they suffer if funding is cut from the EU? Will it change the local authority’s funding? Will businesses change their support of charity due to funding shortages? Will donors have less to support their cause? Charities need to look beyond the obvious and think about the more seemingly remote risks.”

6. Review all contracts

“It is worth charities checking any major contracts they signed before the Brexit referendum, and that will last beyond Brexit. These contracts were probably signed with the assumption that the UK would stay in the EU – they may therefore need updating for Brexit. This is quite a detailed exercise and depends partly on what Brexit deal is done (if any), but charities can start to identify any key contracts and do some scenario planning,” says Chris.

Two people looking at contract details7. Identity future employment needs

“While the British government has set out its position on EU workers, this has yet to be fully approved by the EU-27 with whom they are negotiating.  The challenge for charities will be to identify future employment needs early – both in terms of paid and unpaid roles – and stay up to date with the changing immigration landscape,” says Gary.

8. Help EU employees

“Charities need to be thinking about how to guide existing staff through the proposed settlement process for European citizens. They also need to plan for a tighter labour market in the future,” says Elizabeth.

Gary’s advice is for charities to move quickly: “They would be sensible to help their EU workers to secure settled immigration status sooner rather than later, and in line with the usual right-to-work checks that any employer must conduct, to ensure non-EU workers comply with their visa requirements to the letter.”

9. Prepare for the specifics of your charity

“Charities should map out their own positions in relation to the economy, tax, skills, public spending and regulation. Depending on how much impact there could be on the charity, discuss with the trustees the position (and regularly review any changes), discuss cross organisation at exec level these areas, engage with stakeholders –  like local government and funders –  and generally follow the debate (making adjustments in their own planning as things become clearer).  For some charities this will be a large issue (e.g. due to funding or workers) or others it will be an issue that has less of a direct impact thus being aware of possible changes in their risks, funding and operating environment will be all they can do at this stage,” says Caron.

10. Be vocal

Chris supports a proactive approach to effecting change. He says, “I would encourage charities to be vocal about their needs and ambitions for the charity sector post-Brexit. If Brexit is to have any positive impact for charities, this requires the UK government to build into its negotiations with the EU now, and its plans for new UK-specific laws. The CFG has made a good start with this, but needs wider support.”

Man posing with cardboard megaphone while his colleagues watch

In conclusion…

Brexit has brought forth many issues that charities need to consider. Future immigration policies may impact the current workforce and economic uncertainty could result in funding issues, lower levels of giving and a lack of volunteers. Certain EU partnerships may also be under threat which could impact the collaborative work done in this sector globally. The good news is that Brexit brings with it the opportunity for improvement too, such as addressing the rules surrounding irrecoverable VAT.

While these issues are far from finalised, there are a number of steps charities can take to start preparing for a post-Brexit era. From staying as informed as possible and being vocal about their needs to reviewing all contracts and preparing for trade issues, charities should feel empowered to take positive steps forward to prepare for a post-Brexit era.

Given the issues outlined above, it may prove easy to feel disheartened. But Caron has some wonderful advice for taking this situation and turning into a golden opportunity: “Brexit arguably happened because of communities feeling left behind, disconnected from the benefits enjoyed by many. Brexit has highlighted deep divides in our communities and across the UK. The UK is crying out for a social solution to the hard to resolve issues like social mobility, health and wellbeing and equality. This is the sector’s space. This is where we thrive. Charities’ place of operation is where markets have failed and where solutions are beyond the state or private sector – so this is the sector’s moment to shine. We can build better communities and, if included in the reshaping of the UK, play a significant part in healing those divisions.”