Examination of Witnesses (Questions 372
- 379)
WEDNESDAY 23 JUNE 2004
MR PESH
FRAMJEE AND
MS HELEN
VERNEY
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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