Why the Third Sector may be contracting

Charities have undoubtedly been hit as hard as any sector by Covid-19, with a devastating loss of funds aligned with an increased demand for their services.

A lack of opportunity for fund-raising events to be staged and an enforced separation of charity leaders and trustees during our lockdowns has led to a more fractured sector.

Indeed, Helen Stephenson, chief executive of the Charity Commission, said as much at the Institute of Chartered Accountants in England and Wales’s (ICAEW) virtual charity conference this earlier this year.

The commission, the Government’s charities watchdog, registers and regulates charities in England and Wales, to ensure that the public can support them with confidence.

Stephenson said the pandemic had taken a devastating toll on the charity sector, although it could be years before the true nature of the full impact of the crisis would become known.

With less money forthcoming yet demand for services skyrocketing, some charities were making painful decisions to reduce or suspend their work entirely as they were unable to finance them.

One of the perhaps lesser known repercussions of Covid-19 is the potential for charities to merge – although the general perception surrounding this is that it indicates a failure of one side or the other. We don’t think that’s entirely fair – there are many reasons why a merger may occur.

The good news is that Stephenson reported that any increase in the numbers of organisations which were becoming insolvent or the amount of sector consolidation was not as high as had been envisaged.

However, Government statistics updated last month list around 300 mergers registered during 2020.

Given that there are around 168,000 registered charities in England and Wales the 300 may seem like a drop in the ocean.

But it could be argued that it is indicative of what may be happening to a sector officially valued at £17 billion a year.

Are trustees and boards making Covid-influenced decisions to consolidate similar charities to save costs and perhaps form a stronger organisation?

Anecdotal evidence suggests that Covid-19 has been a factor in a fifth of charity mergers with action accelerated by the pandemic’s impact.

At HWB Chartered Accountants we have a strong team looking after our charity clients, some of whom are themselves trustees to charitable or not-for-profit organisations, giving them added insight when seeking to provide practical solutions to common problems.

Our clients range from new start-up charities to centuries-old associations and from clubs and membership organisations to social enterprises.

Only one of our third sector clients has gone through the merger process, but we should not forget that on the south coast our charities are quite resilient.

Managing the finances of a charity requires a pragmatic approach with a clear understanding of the compliance issues of the sector.

If that realistic and sensible perspective indicates that a merger might well be the way ahead then we wouldn’t hesitate to recommend such action – only if it is in the best interests of the client.