Memorandum from Mills & Reeve Solicitors
(DCH 313)
1. Mills & Reeve is a midlands-based
law firm of over 60 partners. It has an extensive charities practice
and has many clients in the Universities and Further Education
sector.
2. Charity Trading—We note
that the draft Bill does not include the recommendation in the
Strategy Unit consultation paper that charities should be allowed
to trade as part of their normal activities. We welcomed the initial
recommendation but shared the concerns expressed about the risk
to charity assets and, more widely, the risk to public confidence
in charities.
3. The Government rejected the Strategy
Unit recommendation on the grounds that it would offend the principle
of a "level playing field" with private sector businesses.
However, the current provisions for Gift Aid relief mean that
charities do enjoy de facto tax exemption on their trading
activities, albeit at some administrative cost.
4. We agree that the Bill should not include
provisions to allow charities to trade as part of their normal
activities. However we submit that, in order to simplify tax administration
for charities, the Government should create the concept of a group
tax exemption for trading by charities and their wholly owned
subsidiaries. We appreciate that this would involve the amendment
of tax legislation governing charities.
5. This change would be of great practical
benefit to charities running trading subsidiaries because it would
remove the need for such subsidiaries to Gift Aid their trading
surpluses to the parent charity in order to avoid the charge to
corporation tax. The current Gift Aid system often causes financial
and accounting difficulties for trading subsidiaries because it
creates a strong incentive to make Gift Aid payments which weaken
the subsidiary's financial viability. This is not conducive to
good financial management.
6. Investment powers—We submit
that the Charities Bill should include provisions to clarify the
powers of investment of charities. Larger charities, and particularly
universities and other educational charities, are engaging increasingly
with the world of business, for example in the commercial exploitation
of intellectual property.
7. Investments and loans by charities must
be made "for the benefit of the charity". There is currently
a grey area in the powers of investment between charitable benefit
arising as part of the primary purpose of the charity and commercial
benefit to put the charity in the position to carry out a primary
purpose.
8. As charities come to operate in an increasingly
commercial environment they are becoming more involved in investments,
whether education or scientific, which are neither purely charitable
in nature nor purely commercial, Rather they may be a hybrid of
the two.
9. We submit that the Government should
take the opportunity provided by the Charities Bill to clarify
the powers of investment of charities to cover investments which
are considered to be in the interests of the charity whether by
virtue of the potential advantage to the charity in the discharge
of its functions, directly or indirectly, or by virtue of the
economic return to be derived therefrom, or a combination of the
two.
10. We further submit that the Government
should take the opportunity provided by the Charities Bill to
clarify the powers of investment of charities with respect to
derivative investments as a means of risk management in investment
portfolios.
11. If you have questions arising from this
submission, please contact Ted Powell (Tel: 01223 222297; e-mail
ted.powell@mills-reeve.com).
July 2004
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