To them that hath . . .

Barbara Gunnell finds that charity has become a vehicle for the poor to give to the rich, and that t

"No one would remember the Good Samaritan if he'd only had good intentions; he had money, too," said Margaret Thatcher in 1986, propounding the trickle-down theory that if we encourage the rich to become richer, they will have the money and the will to help the worthy poor.

It was Thatcher's skill to make memorable soundbites out of dry economic theories, but her example was as flawed as her philosophy. Equally memorable is the parable, in St Mark's Gospel, of the widow's mite. The poor woman gave all she had to charity: a higher proportion of her wealth, therefore, than the Samaritan.

Latest figures from the National Council for Voluntary Organisations (NCVO) suggest that this latter pattern of charitable giving persists in modern Britain. Not only are the poor more generous in their donations to good causes, but the beneficiaries of charities are frequently richer than the donors. Charity in 21st-century Britain is a vehicle for the poor to give to the rich.

This is less to do with our philanthropic failings than because the scope of charity regulation ranges over hostels for the homeless to, literally, the playing fields of Eton. Notions that charity involves dropping coins in a box to help those worse off than ourselves are as outdated as the legal framework that regulates the sector.

The main law governing charities predates even the King James Bible in which, doubtless, Thatcher read of her Good Samaritan. The Charitable Uses Act 1601 specified four categories, all of which survive today: education; advancement of religion; relief of poverty; and other public benefit. As a result, the education of the sons of the gentry, private hospital care and religious observance rank equally with feeding the starving as "good causes".

This would matter less if the charity sector was generally seen as well regulated and effective, but public trust is easy to damage and hard to rebuild. Earlier this month, a critique of 165 charities by the Directory of Social Change suggested that the fundraising costs of many major charities are twice as high as the public has been led to believe.

The charity world had already suffered a barrage of media criticism about lack of transparency and aggressive fundraising. Last June, the government told the Cabinet Office's performance and innovation unit to carry out an investigation of the sector in England and Wales. (Scotland has already had a separate inquiry.) Its report is due next month, and is likely to propose changes to the legal framework.

The government has good reason to try to foster public trust in the voluntary sector. As Chancellor Gordon Brown struggles to find new ways not to raise taxes, the contribution the voluntary sector could make to public services is the subject of a separate Treasury review. The Chancellor's hope is that public/voluntary partnerships could harness the sector's energy (and, cynics might add, its free or cheap labour) to tackle social problems that state funding is unable (and private finance unwilling) to reach.

In the mid-1990s, charitable donations slumped to an all-time low. Not only were fewer people giving, but their average contribution also fell. Now, according to the NCVO, charitable donations, helped by improved tax concessions, have started to recover; in 2000, they totalled £6.58bn, the highest level since 1993. Rather than handing over spare change on the street or in the pub (still the commonest form of donation among men), more of us are giving by payroll or direct debit.

Overall, however, the number of donors is falling. In 1994, eight out of ten people gave to charity; now it is fewer than seven in ten. Particularly reluctant to give are the under-24s. The hard-headed modern answer would be that, so long as the pot gets bigger, who cares.

But some charities fear that bad publicity about fundraising is undermining the future of giving. The concerns coincide with the growth of face-to-face methods (pejoratively labelled "in-yer-face fundraising"), which most of us will come across while travelling to and from work, or in shopping precincts. Private companies (not subject to charity laws) take on a contract for a charity to raise money, usually by personal interviews intended to secure direct debit commitments. The canvassers are paid by results, which, critics say, has led to more aggressive encounters than you would expect from old-style amateur tin-rattlers. Charities say that the technique encourages "charity virgins" (those who have never given to charity before), that the canvassers are well trained, and that those who dislike being stopped in the street can easily walk by.

However, the charge that the cost of this fundraising is higher than donors think is more serious. The Directory of Social Change found wide variations among charities, but reported an average 19p-per-pound fundraising cost, as opposed to the 9p widely quoted by the charities themselves. The Directory added that the accounts of many charities lack transparency on this and other issues.

Simon Collings, head of fundraising at Oxfam, believes that the press emphasis on how much charities spend on fundraising, in particular on personal fundraising firms, has been obsessive. Oxfam uses a private firm called Personal Fundraising Partnership, but itself trains any representatives who hit the streets on behalf of Oxfam.

"I could collect some money, stuff it in an envelope and send it off to an African village," Collings says. "But it wouldn't be very effective." League tables of ratios of fundraising to donations are particularly unhelpful, he believes, and fail to take account of what the charity is achieving. The important thing to supporters is whether their contributions are making an impact, he says.

Not all fundraising initiatives are necessarily looking for quick returns. One fundraising priority for Oxfam, Collings says, is to engage the under-24s. Initially, this might cost money, but it would be absurd for the future of the charity not to do it because the fundraising ratio was unacceptable to critics. He hopes that the major charities have got this point across to the performance and innovation unit.

Other charities have come under attack for expensive publicity campaigns aimed at publicising particular issues. The National Society for the Prevention of Cruelty to Children was severely criticised - including in the leader column of the Guardian - for its Full Stop [to violence against children] campaign in 1999. The next year, it reported an income of £75m, £20m of which went on Full Stop, reflecting partly the cost of TV adverts and celebrity events. Critics argued that this was an unacceptable ratio which deceived donors. Yet for many the cammpaign may be the only thing they remember about the NSPCC's operations. Is that success or waste?

Such campaigning also runs the risk of breaching laws on political campaigning. Charities whose aim is to change the law or government policy are specifically excluded from charitable status. Yet a former chief charity commissioner, Richard Fries, recently argued that any review of the sector needs to revisit this question. Charities, he said, have a duty to contribute to political debate on issues of particular concern to them. Many do, within the law: for example, Shelter on housing, and Oxfam, Save the Children and others on official development aid policy. But many of the charities say it is a difficult balancing act.

Can the official reviews resolve all these issues? Clearly, the 1601 act's four planks - education, advancement of religion, relief of poverty and other public benefit - have little relevance today.

What, for example, apart from their tax status, do charities concerned with the alleviation of poverty in the third world have in common with those that educate the children of the rich? It might have been reasonable to support all schools in 1601, but now that we have an open state system, isn't this an unjustified tax perk for the rich? And why continue to give privileges to the advancement of religion (albeit not to Druids) when few of us have any religious beliefs at all and may even see the propagation of faith as positively against the wider public interest?

Enormous confusion reigns about what charity is, and should be. Most observers believe the government review will recommend extending the "public benefit" criterion to cover all charities, as the Scotland review has already recommended for Scottish law. In other words, religious or educational foundations might be accorded charitable status, but would have to show that their activities were of general public benefit. Fine - but "public benefit" is a broad concept which could generate a new problem for every one it solved.

Yet if the voluntary sector is to handle large sums of public money, then the government will have to seek greater scrutiny and financial transparency. It may also feel it necessary to take a more rigid position on "political" campaigning.

For their part, most charities would welcome auditing or better self-regulation of the sector. Many also think that the Charity Commission, with its 500 staff and budget of £22m, could itself benefit from a little scrutiny. But among the campaigning charities that see themselves as constructive critics of government, there must be fears of too close a relationship.

The ever-expanding third sector now accounts for about 7 per cent of gross domestic product and around half a million jobs. Charities are just one inchoate section of that. A legislative framework that tried to accommodate everything from the Women's Royal Voluntary Service to the National Trust to Eton College to Save the Children may be asking too much of any review. It might be a poor exchange if, in embracing this source of volunteer energy and cash, the government squashed the life out of effective charities.