Examination of Witnesses (Questions 380
- 399)
WEDNESDAY 23 JUNE 2004
MR PESH
FRAMJEE AND
MS HELEN
VERNEY
Q380 Ms Keeble: At the moment there
are three possible courses of action. One is that it is separate,
one is that it is all done through the charity, and the one that
you are supporting is one which says that the big and riskier
should be through a separate trading company, but you have not
defined that, and we do not have anything in front of us that
actually does that. Would it be possible that you could give some
thought to it and say what the alternatives should be?
Mr Framjee: I would not want to
see a financial threshold used because presently trustees can
carry out very large amounts of trading through the charity, which
may be very risky. So you might see a charity, which has a primary
purpose of providing residential care, providing residential care
and deriving all its income, and maybe tens of million pounds
of income from this. It can already do that through the charity,
but that is no more or less risky than something else. So I do
not think a financial threshold is what we would need; I think
we would like to see the explicit duty of care, which anyway exists,
being such that the charities' trustees have to make the judgement
and be accountable for the judgement as to what they deem should
go through the charity or through a trading company.
Q381 Ms Keeble: For non-primary purpose,
I mean.
Mr Framjee: I am talking about
primary or non-primary purpose trading; it is really the same
when looking at risk.
Q382 Ms Keeble: Could you put it
down in a form of words that we can actually consider it in terms
of what we have to look at for legislation, because just saying
that the charities should decide which is which—
Mr Framjee: I understand. The
proposals, as they were couched in the Cabinet Office report was
that there would be an explicit duty of care and that charities
should be allowed to trade through the charity or through their
trading company—not required to or have a duty to, but simply
that they would be allowed to trade without using a trading company.
Q383 Ms Keeble: Part of the argument
seems to be that the end justifies the means; that because it
is for a charitable purpose therefore the charity should be able
to engage in unrelated forms of business, as a charity, ie the
Christmas cards stuff, when people think it is about raising money
for education or such like. To be honest, I think that needs a
lot more clarity because it means competing with ordinary businesses.
It had all this regulatory burden and had to take that, and we
have to be very clear as to why one organisation should be exempt.
Mr Framjee: On the issue of competition,
I cannot see it being increased if you allow charities to trade
through their charities; charities are already trading through
their trading companies. Simply removing the burden and removing
the administrative need of having a separate trading company it
would not effect the competition status quo that exists.
Charities already do not pay tax on that sort of trading because
they do it through a trading company and they are profit shedding
the profits to the charity. So saying that if we get rid of the
trading company and allow trading to be done by the charity would
automatically mean that there is more competition is an argument
I find that difficult to sustain.
Q384 Ms Keeble: Then you are saying
that any company that gives all its proceeds or its profits to
charity should be regarded as the charity and treated as such,
and not as a company. Equally, I find that quite hard to accept.
Mr Framjee: That is the present
position where no tax is payable.
Q385 Mr Campbell: I would like to
come in on that one because I think it is an issue of perception
here. Helen has listed a list of administrative burdens, which
the Chair has characterised as more a nuisance than anything else.
Were that not the case, is there not a danger that charities would
be stepping over the line here and that the perception of the
public about what charities are about and therefore why people
buy things from them? They might just be Christmas cards, but
there is a concern there about the kind of transactions that take
place in charity shops, for example. There is a concern.
Ms Verney: What I am confused
about is that that is a discussion about whether or not charities
should be trading at all, not about whether they should be doing
it through a trading company or a charity. The public do not see
a distinction between the two.
Q386 Lord Phillips of Sudbury: Who
says?
Ms Verney: In the majority of
cases they do not. We need to try and give evidence. I can only
go on my personal experience and in a lot of cases we have great
difficulty, however much we communicate to our donors, even to
get them to write the cheques out not in the name of just the
charity. I do not have any more solid evidence than perhaps that.
Q387 Lord Phillips of Sudbury: And
if that trading is wholly unrelated to the selling of Christmas
cards or second hand goods and it is, let us say, selling air
pistols or something, because that was profitable?
Ms Verney: That is not a typical
example for the majority of the cases.
Q388 Lord Phillips of Sudbury: No,
but we have to deal with the untypical.
Mr Framjee: Think about a catalogue
operation, which sells items that are completely in competition
with the private trader. The fact is that members of the public
who buy from the WWF catalogue or the Save the Children catalogue
do not think that they are transacting with the trading company,
they believe that they are transacting with the charity. Simply
saying that you could channel that through the charity would not
in any way erode public confidence or change the public perception
because at the moment they already believe that they are transacting
with the charity. When you actually explain to them that in some
cases they have to write separate cheques and do certain things
because of the structure, they are confused. A charity shop may
be selling some donated goods and selling some bought-in goods,
the bought-in goods go through the trading company and the donated
goods go through the charity. But the person who is writing the
one cheque or using one credit card they think that all the money
is going to the charity.
Ms Verney: Can I give an example
around sponsorship, which is a particular bugbear of mine and
has caused a particular administrative nightmare at times? We
had a situation at Crisis, for example, where a corporate supporter
wanted to give us funds instead of sending Christmas cards. This
was the fundraising idea we were using—do not send all your
customers Christmas cards, give us a donation instead and we will
publish your Christmas message to your customers in a national
newspaper, which would seem to be a purely charitable non-trading
activity. At the moment, as the legislation stands, that is a
trading activity; it is seen as selling advertising space. Even
though the FT would donate a page to us and we were using donated
space, what we then had to do was to try and estimate how much
would be a nominal charge for a logo message in a proportion of
a page, estimate that, add VAT, put it on a separate trading company
invoice, explain it to the donor, who just wants to send you a
cheque for £10,000, separate off the donation part, put that
through the charity, and explain that Gift Aid is now gross and
not net and, at the same time, explain it to all parties and then
deal with all the administration and the queries that we are getting
from that. What would seem like a simple transaction becomes incredibly
complex.
Q389 Mr Foulkes: What I do not understand
is, if you and your colleagues managed to persuade the hard headed
people in the Number 10 Strategy Unit that this was a good idea,
why do you think that it is the one aspect of that report that
the Home Office has not accepted?
Ms Verney: I honestly believe
that there has been some confusion, the issues that have been
raised are about competition with small businesses. That is a
huge, separate debate, because that is about whether charities
should be doing more trading in different types of ways. That
is not about whether they should be doing it through a subsidiary
or the main charity; that is just a location discussion. I really
believe that there has been confusion between the two so that
people are debating whether or not charities should be getting
involved in normal trading activity, rather than whether they
should have to go through a lot of rigmarole.
Q390 Chairman: Is it a problem of
perception about what this is all about?
Mr Framjee: Reading the Government
response as to the reason why this proposal was turned down, if
you read the four or five points that were there in the government's
response as to why they discarded the trading position, we think
it was a perception issue and our written submission responded
on the particular points. The perception focuses on public confidence;
it focuses around this issue about competition, and what we are
saying is those issues seem to matter not a whit.
Q391 Mr Foulkes: The FSB seem to
be objecting to you having any shops at all, not whether it is
done through a trading subsidiary or through the charity itself;
is that right?
Mr Framjee: Absolutely.
Ms Verney: Yes.
Q392 Chairman: May I clarify one
thing? Are you saying that the changes that you advocate would
ease the administrative burden and remove the complications that
Helen outlined in her long list?
Ms Verney: Yes.
Q393 Chairman: Would they be completely
and totally tax neutral?
Mr Framjee: If a charity treated
it wrongly then at the moment it would not be tax neutral. For
example, if a charity traded and did not put it through the trading
company and did not properly pass up profits there would be a
tax liability. This would go away. If one uses the structure that
has been well proven and most charities are using. If the charity
set up a trading company to shelter profits, there is usually
no tax payable.
Q394 Chairman: To be absolutely clear,
in the proposals that you are advocating it would give no tax
advantage at all to the charity; is that right or wrong?
Mr Framjee: It would give no tax
advantage to the charities that are at the moment doing it through
a trading company. If there were a charity, which chose not to
do this through a trading company, and then was assessed for a
tax liability, they would obviously be benefiting from the proposal
because then they would not have a tax liability. What we are
saying, in almost every case that I know of, and certainly with
all the cases of our members, they all adopt this route of using
the trading company, simply to shelter the tax profits and rarely
other reasons.
Ms Verney: We are saying no tax
implications for this debate, but there remains VAT issues here
and certainly for a lot of the trading activity, as for a lot
of the activity within charities. There is about half a billion
pounds a year in irrecoverable VAT suffered by the sector.
Mr Framjee: Putting it through
the charity or the trading company will not usually affect the
VAT that has been charged.
Q395 Chairman: That is a completely
separate issue.
Mr Framjee: Absolutely.
Q396 Lord Phillips of Sudbury: That
last question, talking about tax, you did not mention rates.
Mr Framjee: The fact is that Section
43 of the Local Government Finance Act states that if the premises
are not used wholly or mainly for charitable purposes they get
their mandatory rates relief removed. I know of very few cases
where a rating authority is assessing, for example, a charity
shop, or other premises being part used by the trading company
because invariably the trading company operates out of the same
premises as the charity, uses the same staff, uses the same computer
systems, et cetera, and is deemed to fall within the wholly or
mainly legal test.
Ms Verney: So it would make no
difference.
Q397 Lord Phillips of Sudbury: For
example, if you run a shop, and if you take charity shops which
are on the whole moving away from donated goods and more and more
to bought-in goods, if you imagine the charity shops deciding
that they are going to diversify generally, just become shops,
under the proposals that you countenance those shops, dealing
in unrelated goods and unrelated trades, just as shops, chemists,
for example, run by the charity, will get 80% mandatory rating
relief.
Mr Framjee: It would not be difficult
to make those shops be susceptible to rates in the same way.
Q398 Lord Phillips of Sudbury: As
things stand there is no proposal in the Bill to say that if we
introduce into the Bill what the Strategy Unit was suggesting,
there would have to be additional provision to make a level playing
field for unrelated trade carried on by charities.
Mr Framjee: As at the moment there
is the wholly or mainly for charitable purposes test, you would
simply say that if it is not wholly or mainly for charitable purposes
it is not eligible for the rates relief, so it would fall within
the existing regime.
Q399 Lord Phillips of Sudbury: I
think as things stand you have to accept that there are huge rating
differences. I would like to take you, if I may, to one of the
nub issues, and in your very helpful paper you say on the issue,
"Having due regard to the specific duty of care charities
. . . "—and this is the specific duty of care, the
sole protection of charities getting into deep waters by being
able themselves to engage in a wholly unrelated trade. That is
the one line of defence, is it not, that they would be subject
to a statutory duty of care, so that the trustees, before expanding
their shops to take in chemists and other things, they would have
to satisfy that test? You say with regard to that, ". . .
charities would channel any speculative or risky forms of trading
through a trading company." You assert that. You go on, "There
is much evidence to show that whilst there are some failed trading
companies most are quite successful." I put it to you, the
fact that simply to assert that, because there is a specific duty
of care, charities would have Solomon-like wisdom and channel
risky ventures into a trading company is hope over experience,
because many trading companies, when you start off with them,
look fairly safe, and they run away with you, and they run away
with money. You yourself, if I may say so, because we have common
clients, know of many trading companies where, even with the restricted
trade that they currently engage in, they gobble up the cash which
comes from the charity because for a variety of reasons they do
not meet the hopes and expectations of the charities that set
them up.
Mr Framjee: That is precisely
the point. At the moment it makes not a whit of difference. Those
charities which set up separate trading companies do not go out
and get funds from the public, they do not do share issues, to
get their money, they get fundes to set up as trading companies
from the charity. So if they are gobbling up cash, as you say,
they are gobbling up the charity's cash, whether those activities
are carried out in the charity or in the trading company.
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