Joint Committee on the Draft Charities Bill Minutes of Evidence

Examination of Witnesses (Questions 372 - 379)



  Q372  Chairman: Thank you for coming. I am sorry for the delay. We are going to have about 25 minutes with you. Could you briefly introduce yourselves, please?

  Ms Verney: My name is Helen Verney, I am the Vice Chair of the Charity Finance Directors' Group, which is a membership organisation of over 900 members. I am also the Finance Director of the Multiple Sclerosis Society, and previously Finance Director of Crisis, the homeless organisation, and an active volunteer with three different organisations of varying sizes.

  Mr Framjee: I am Pesh Framjee, I am head of the charity unit at Deloitte but I am here in my capacity as Specialist Adviser to the Charity Finance Directors' Group, and I am also a Trustee of three charities.

  Q373  Chairman: Thank you. We want to concentrate on this whole issue of charities and trading. You are well aware of the background to this and the fact that the Bill that we have before us as drafted is different both in content and tone from the Strategy Unit Report produced by Number 10 Downing Street. I have one very simple question and then I will bring in other members. What is your estimate of the cost to the sector overall of the additional, as you see it, administrative complexity of the current arrangements as against the potential arrangements that you would like to see?

  Mr Framjee: I do not have an explicit figure for the sector as a whole, but there are a number of charities themselves that have given ideas of what it costs them. So, for example, on your parliamentary website there is the submission from the National Museum for Coal Mining, and there they say it is £30,000. When I have discussed this with many of my clients they say that it is anything between £10,000 and £20,000, and Helen has personal experience.

  Ms Verney: I would say probably around £10,000 for us. It is quite difficult to get a very accurate estimate because there are so many smaller factors running together.

  Q374  Chairman: What are the big factors?

  Ms Verney: Can I list them? There are so many I have had to write them down. I have had experience with both the charities I have worked with, where we have had to set up a trading subsidiary. To set up the separate company initially, you must have a Memorandum & Articles and there are legal fees relating to that. Companies House filing regulations, administrative costs. Filing regulations for company house returns and the annual filing of accounts requirements. Every Director and Secretary, as you know, has to be registered and any changes to those registered. We have to have an AGM in addition to   our other charity meetings and Charity AGM.  Corporate tax returns, separate audit or independent examination, consolidation, separate accounting, separate reporting, meetings with additional Directors, including their travel expenses. Separate stationery, separate bank accounts, signatories, mandates, inter-company agreements with the charity. VAT implications within the company arrangements, separate invoicing, cost allocations that have to be done. Separate VAT registration, so that is another four VAT returns per year to complete in addition to the main Charity's. As well as other quirky things with some charities, where they have to have indemnities with their bank because people do get confused; they assume it is the charity—they do not understand that there is a trading subsidiary—and they often write their cheque for something that is trading in the name of their charity and you have to have an indemnity with your bank to be able to bank that, and so on. Then there are the extra costs of explaining to your supporters and to your staff and to donors the difference, and why you need them to write cheques for something, or to go through a different process than usual. So that is some of the administrative work, and there are obviously costs associated with a lot of that. The main cost is staff resources, splitting the teams who have to work to duplicate a lot of systems for what is a particularly small proportion of the whole organisation's activity. Trading in most charities is going to be a much smaller percentage than the whole. In the two organisations I have worked with the turnover on the trading subsidiary is probably around £100,000 compared to total income of, say, £25 million or £5 million in the two different organisations.

  Q375  Chairman: Would it be unfair to say that all of that catalogue could be characterised as a nuisance but not, frankly, a disaster?

  Ms Verney: That might be one person's view of it.

  Q376  Chairman: I am asking you for your view of it.

  Ms Verney: I cannot see the benefit that is gained by having to go through all of that. If I could see the benefit then it might well be justified. Of course we are dealing with compliance with legislation all the time and a lot of it is absolutely warranted and I would not want to change that; but I do not see the benefits in relation to trading subsidiaries.

  Q377  Ms Keeble: In your evidence you say that risky and therefore larger ventures should anyway be channelled through a separate trading company, so at what level do you think that the cut-off point should be?

  Ms Verney: It would not be a particular level, it would be based on the complexity of the particular arrangement.

  Q378  Ms Keeble: You are already allowed up to £50,000 a year, are you not, non-primary purpose trading, so where do you think the level should be, because the smaller organisations, where the regulatory burden would be too great, the administrative burden, they should be already exempt, should they not?

  Ms Verney: The risk is connected with the type of transaction as opposed to the amount of money involved, and if we sell £100,000 worth of Christmas cards it is not actually a high risk transaction, whereas if we were going into the realms of a new activity—I am trying to think of an example—where it is very uncertain whether there will be a return or not, that is the sort of thing you would want to separate.

  Q379  Ms Keeble: So in terms of the legislation we cannot just say high risk stuff should be separate and low risk stuff should not, because you cannot in legislation say what risk is; it is hard to do. A simpler way is to set a financial limit, so what do you think the financial limit should be, given that you think the larger, riskier one should be in separate trading companies?

  Mr Framjee: It is not just large. In the Cabinet Office submission they talked about an explicit duty of care. The fact is that at the moment charities, whether they are doing the activity within the charity or doing it within the trading company, already should exercise a duty of care. They, Trustees might decide to put something into the trading company even if there was not a tax reason; they may put some primary purpose activities in the trading company if they are trying to hive it down for some other purposes such as risk. For example, if a charity gets a donation from a company and decides to put the company's logo on published material the rule simply says that it is now trading, and that donation has to go through a trading company. It might be a small amount but when you add them all up you might large amounts. For example, if the charity gets 10 amounts of £6,000 it would go over the £50,000 limit, and you have to set up a trading company for that sort of activity. Really, it serves no benefit at all; there is no tax gain or loss in any way, this might sound like heresy from a professional adviser but the only people who benefit out of this structure are professional advisers.

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