The report, by an independent commission on the Future of the Voluntary Sector, said a new legal definition of charity based on 21st century ideas of public benefit was urgently needed. "The present situation does not make sense to the public and those organisations failing to qualify for legal definition as a charity miss out on advantages such as tax benefits.
"And where applications for charitable status are turned down, small grassroots organisations lack the time, resources and know-how to challenge decisions in the courts."
The call came amid concern that too many voluntary groups were excluded from charitable status under current law, including human rights organisations.
The study stresses the importance of protecting the independence of charities and other voluntary and community organisations. Radical changes have meant that national and local government have increasingly turned to voluntary organisations to provide services. Further changes in the system of providing welfare, the structure of the family, and continuing high unemployment are also set to have a big impact on the sector.
Professor Nicholas Deakin, commission chairman, said: "It would be fatal for the voluntary sector to be seen as an arm of government, and it certainly must never be seen to be used to carry out functions which are properly the role of the state."
The report, the first of its kind for 10 years, also calls for a Voluntary Sector Commissioner at the Law Commission to keep charity and voluntary sector law under review. An expert Charity Appeal Tribunal should also be set up to review Charity Commission decisions.
The report notes how there are 240,000 voluntary bodies in England, including 116,000 registered charities. The sector has an income of pounds 15 billion and 620,000 employees.
The Commission calls for voluntary groups to be managed efficiently, without deflecting from their purposes and aims. The report warns groups must be more accountable and claims some make no effort to involve service users. Organisations must be ready to "practise what they preach". Too many trustee boards or committees are dominated by "middle-aged white professionals".
Among its other recommendations, the 13-member commission calls for changes in the way National Lottery cash grants are made. These would include safeguards preventing grants being a substitute for Government handouts, and extend support to self-help groups.
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