What is a Charitable Purpose and how much does it receive?

Under the 1939 House to House Collections Act, a license to undertake charitable door to door can be refused if the proportion of proceeds going for “charitable purpose” is inadequate.

It is therefore really important to understand what constitutes a “charitable purpose” and equally importantly what is not a “charitable purpose”.

There are a number of legal acts and case laws where the term “charitable purpose” has been defined.  These include:

• 1601 Preamble to the Charity Uses Act;
• 1891 Pemsel Case which classified the Four Heads of Charity;
• 1939 House to House Collections Act;
• 1993 Charities Act – which obliged the Charity Commission to set up a register of charities.
• 2006 Charities Act – section 2 defines 13 purposes which are considered charitable in England and Wales

What is not a charitable purpose?

Commercial collection businesses that enter into partnership with charities are not charitable purposes, but neither are many trading arms of charities. A significant number of charities operate separate commercial profit making fundraising arms, which are often legally separate businesses registered at Companies House.

Many door to door clothing collections that are seemingly undertaken by a “charity” are actually undertaken by the trading subsidiary.  Where this is the case, the costs of undertaking a door to door clothing collection are met by the trading arm.  Once all the costs have been met by the trading arm, the remaining proceeds are usually passed on to the charitable purpose.

How much money does the charitable purpose receive?

To work out how much profit is realised by any fundraising activity the following basic economic formula needs to be applied.

To work out the amount of money being applied for charitable purpose, the following terms could be substituted and applied to the above formula, so that it would now read.

Therefore, in order to establish how much money is applied for charitable purpose, it is essential to know how much revenue is generated and what the collection costs are (whoever undertakes the collection).

Where all the collected clothing is exported for re-sale, the revenue per tonne generated will largely be controlled by the global market prices for used clothing and should be about the same for all collectors, whether they are undertaken by charities directly, their commercial arms or a commercial participator. Therefore the profits generated for charitable purpose are mainly controlled by collection costs.

What are the collection costs?

If the charitable purpose works with a commercial collection partner!

Where a charity engages the services of a commercial collection partner, it is usually quite clear how much money is being applied for charitable purpose.  Under the Charities Act of 2006, there is a legal requirement for the publicity to contain a solicitation statement which states how the charitable purpose benefits.  Although the 2006 Act does not specify what form such statements should take, many collectors will specify a minimum price per tonne of clothing collected.

In 2013, most charities with such arrangements are receiving around £50 to £100 for each tonne collected.  With such arrangements, some charities are receiving hundreds of thousands of pounds in income annually, whilst the substantial cost and the financial risks are all being met by the commercial collection partner.  In deriving the amount of money that the charity receives, the commercial partner would have already deducted the substantial collection costs (which in 2013 amounted to around 85% of the value of the clothing collected).  The commercial partner then passes on a substantial percentage of the remaining net profit onto the benefitting charity (usually in excess of 50%)   The remaining amount of the net profits goes to the business which can be employing hundreds of people nationwide and which provides very important environmental benefits.

If the charitable purpose does the collection itself or its commercial arm!

If the collection is being undertaken by the charitable purpose’s commercial arm, their collection costs are likely to be similar to those that would otherwise be met by a commercial collection partner.  That said, because they should be passing all their profits onto their “parent” charitable purpose, the amount being applied for charitable purpose, should in theory be higher.  In the early part of 2013, a charitable commercial arm running this type of clothing collection could make a profit of over £100 per tonne collected.

However, unlike arrangements where a charity engages the services of a commercial collection partner, they are not guaranteed an income, so if their collection loses money, the charitable purpose will receive no additional proceeds as a result of the collection.

If the charity has shops and puts some of the clothing collected for sale through their retail outlets.

Around 400 of UK registered charities operate shops.    Some of these charities choose to try and increase the value of the clothing that they collect door to door by sorting out some of the higher value clothing that they obtain through their collections and selling them through their shops.  Typically up to 50% of clothing collected door to door is usually sold in the shops.  However, the majority of the clothing collected is exported for resale in the same way as all other forms of used clothing collections.

In line with other forms of fundraising activities undertaken by commercial arms of charities, up to 80% of the revenue received by a charity shop goes back into the running of a charity shop, but even taking this into account, by running a door to door scheme efficiently and passing the better quality items through a charity shop, this has the potential to increase the revenue generated significantly. However,  this is only the case if the scheme is run well.  Like conventional retail chains, some charities are able to operate profitable chains of shops whereas others are known to operate at a loss.

For further information about charity shop fundraising visit the Charity Retail Association website.

In general

All charitable door to door clothing collections, whether undertaken by charitable purpose itself, its commercial fundraising arm or a commercial partner, have the potential to raise significant funds and contrary to some publicity put out by some charities, no collection method is distinctly better than another.

Charitable purposes that engage a commercial collection partner are contractually guaranteed an income.  Whereas if the charitable purpose undertakes the collection itself or uses its commercial arm, it is likely that its income will be greater, but so are its commercial risks and they may lose money.