Gavin McEwan, partner and head of charities at Turcan Connell, writes about the changes charities will see after Brexit.

Charity law and regulation are matters which have remained largely within the control of the UK and Scottish parliaments, with little interference from Europe. As a result, there are no major upsets on the legal or regulatory front for charities expected in the immediate term as a result of Brexit. So what, if anything, will change for charities post-Brexit?

Stock markets and the value of sterling

It is obviously too early to say what the lasting impact may be of upsets in the value of sterling. Stock markets have certainly been more settled in recent days since the results of the Brexit vote were announced. But any lasting downward trend which did transpire would clearly affect investment portfolios and would be keenly felt by many charities, particularly endowment funds and grant makers who rely on investment returns to fund their activities.

Charity tax

As a result of European case law, charities within the European Union (EU) are eligible for relief from UK taxes and devolved Scottish taxes, provided that the necessary conditions are met. Similarly, tax relief is afforded to Scottish charities in other EU states. These mutual rights are also extended to Norway, Iceland and Liechtenstein given their membership of the European Economic Area (EEA).

Unless there can be an agreement with the EU or with individual EU member states, Scottish charities will no longer automatically qualify for tax relief in EU states, assuming that a full Brexit is affected. Equally, EU charities will only qualify for tax relief in the UK or (for devolved taxes) in Scotland if Parliament or the Scottish Parliament, as the case may be, decides to keep the current rules in place.

If membership of the EEA were the outcome of Brexit negotiations, then the chances are that these mutual charity tax reliefs will in fact continue. Cross-border philanthropists and charities working in multiple countries across Europe will therefore be keen to see how these changes pan out.

EU grant funding

Some charities have expressed the fear that EU funding routes, including the European Social Fund, will now be closed to them. This is a real risk. In theory it remains possible for the EU to make grants to non-member states. In March 2016, for example, the EU gave a substantial grant towards development work in Sri Lanka, and it would be possible for this principle to be extended more widely to all of the EU’s funding programmes.

This would need a deliberate decision by the EU and, despite the theoretical possibility, there is no certainty that this will be forthcoming. There was a clear development need in Sri Lanka which resulted in the EU’s spring grant – the EU may not see a justification for similar support to the UK post-Brexit.

Irrecoverable VAT

One of the taxes which charities can almost never totally avoid is VAT. The UK’s VAT system is closely aligned with equivalent taxes imposed in other EU member states. One effect of this is that the UK has limited powers to relieve charities of the burden of irrecoverable VAT on expenditure incurred. Brexit will afford an opportunity to the Westminster Parliament to amend the VAT system in order to grant charities relief from VAT. This is entirely dependent upon future government policy within the UK.

Other policy areas

A number of charities have been concerned about the loss of some EU protections and policies which UK charities presently benefit from. A key example is in relation to environmental protection and conservation, where the UK has benefited from coordinated EU-wide policies covering wildlife and fish stocks, water and air quality, energy and pollution. The existence of those EU-wide standards often underpins project work carried out by environmental and conservation charities.

Any change in environmental or conservation policy post-Brexit would require the UK deliberately to depart from existing EU standards: it is entirely possible for the UK government to continue to align itself with those standards and again this is dependent upon future government policy.

Scottish independence?

The threat of a second referendum on Scottish independence creates further uncertainty in relation to cross-border giving within the UK. In the lead up to the 2014 indyref, a number of English based grant-makers put their Scottish funding on hold until they saw the results of the referendum. This particularly impacted the higher education and culture sectors, although other grant recipients were temporarily also affected. If the direction of travel is towards indyref2, then these issues are likely to arise once again.

While the timing and outcome of the UK’s Brexit negotiations remain uncertain, we can only guess at what the eventual impact will be on the charity sector. Legal and regulatory impacts may be very limited, but real concerns around the financial impact of Brexit do exist across the sector.