DCH 174 Association of Chief Executives
of Voluntary Organisations (ACEVO)
Supplementary Evidence on Trading Subsidiaries
1. On 8th June Stuart Etherington
(NCVO), Stephen Bubb (ACEVO), Mary Marsh (NSPCC) and John Low
(RNID) gave evidence to the Joint Committee on the draft Charities
Bill. During the course of that evidence we were invited to provide
additional information in a short note on a number of specific
issues.
2. During the course of that evidence we were
invited by the Committee to provide additional information in
support of our argument that the Strategy Unit's recommendation
on trading, rejected by government, should be revisited. The four
parties agreed that ACEVO would provide this note. ACEVO and NCVO
have also provided additional comments in a separate note to this,
agreed by all four organisations that gave evidence.
2.1. The recommendation was "to amend charity
law to allow charities to undertake all trading within the charity,
without the need for a trading company. The power to undertake
trade would be subject to a specific statutory duty of care."[1]
2.2. The recommendation applies to trading for
the purpose of generating income, rather than "primary purpose"
trading undertaken in direct pursuit of charitable purposes. There
is a currently a de minimis of £50 000 on such trading,
enabling charities to trade on a small scale without a subsidiary.
2.3. The recommendation
attracted support from 84% of the 297 respondents to the consultation.
This included support from key umbrella bodies including ACEVO,
NCVO, and the Charity Finance Directors Group.
The burden placed on charities by the current
law
3. The current necessity to establish trading
subsidiaries places a considerable burden on charities.
3.1. Establishing trading subsidiaries involves
considerable costs, including professional advice and fees, additional
financial transactions, compliance costs, and staff transferrals.
These are of particular significance to smaller charities;
3.2. Managing trading subsidiaries demands double
accounting procedures with respect to VAT, management accounts,
and tax returns. This makes allocating costs and apportioning
charity reliefs complex and problematic.
3.3. To avoid tax charges, subsidiaries must
donate their entire taxable profit to the parent charity, making
it difficult and expensive to build up working capital;
3.4. Advice from government on trading subsidiaries
is problematic, and inconsistent. Examples of problems and complexities
include:
3.4.1 Although the Inland Revenue recommends
using share capital to finance subsidiaries, the Charity Commission
recommends financing through loans, since it disallows share capital
as unsecured investment.
3.4.2 Some fundraising events should be accounted
for through the trading subsidiary and some should not be. This
can depend on the charity or the size of the event.
3.4.3 Strictly speaking, 80% of the initial donation
relating to affinity credit cards should be routed through the
charity, and 20% through the trading subsidiary.
3.5. These examples indicate the difficulties
currently experienced by charities in registering and managing
trading companies. These require considerable resources and investment,
representing an unnecessary diversion of charitable funds from
their purposes.
3.6. Charities require staff with extensive specialist
skills and knowledge to manage these complexities, providing a
barrier to organisations that wish to undertake trading.
3.7. Despite these structural complexities, almost
all trading activity is presented and recognised by the public
as activity directly associated with the charity concerned. The
associated bureaucracy therefore has no impact on preserving or
increasing public trust in charities.
Government referred to four concerns raised by
respondents:
"THAT THERE COULD BE INCREASED RISKS TO CHARITY
ASSETS. CHARITIES' ASSETS WOULD BE AVAILABLE TO CREDITORS TO MEET
TRADING LIABILITIES. IN EXTREME CASES THIS COULD FORCE CHARITIES
TO REDUCE THEIR SERVICES TO USERS AND BENEFICIARIES, SINCE ASSETS
USED IN THE COURSE OF CHARITABLE WORK MIGHT HAVE TO BE DIVERTED
INTO PAYING OFF THE DEBTS OF FAILED TRADING VENTURES;"
THE DUTY OF CARE PROPOSED BY THE STRATEGY UNIT INCLUDED
"A DUTY TO GIVE PROPER CONSIDERATION TO THE NEED TO STRUCTURE
THE TRADE IN A WAY WHICH DOES NOT EXPOSE THE ASSETS OF THE CHARITY
TO SIGNIFICANT RISK". THIS DUTY OF CARE WOULD MAKE IT GOOD
PRACTICE FOR CHARITIES TO CONTINUE TO ISOLATE UNTESTED, SPECULATIVE,
OR RISKY VENTURES THROUGH A TRADING SUBSIDIARY.
THE RECOMMENDATION WOULD IN NO WAY COMPEL CHARITIES
TO UNDERTAKE RISKY TRADING WITHIN THE CHARITABLE STRUCTURE. THE
RECOMMENDATION WOULD, HOWEVER, ENABLE CHARITIES TO UNDERTAKE LOW-RISK,
WELL-ESTABLISHED TRADING ACTIVITY MORE EFFICIENTLY, BY BRINGING
IT WITHIN THE CHARITABLE STRUCTURE.
IF THE RECOMMENDATION IS REINSTATED, THOSE CHARITIES
THAT WISH TO LIMIT RISK BY CONTINUING TO CONDUCT TRADE THROUGH
TRADING SUBSIDIARIES SHOULD BE ALLOWED TO DO SO.
FINANCIAL RISK IS NOT THE ONLY RISK INVOLVED IN TRADING.
WHERE A SMALL TRADING SUBSIDIARY FAILS, THE PARENT CHARITY CAN
EXPERIENCE CONSIDERABLE REPUTATIONAL DAMAGE. THIS RISK IS COMPOUNDED
BY THE PRESENT DIFFICULTIES ASSOCIATED WITH BUILDING WORKING CAPITAL
WITHIN A SUBSIDIARY. REINSTATING THE RECOMMENDATION WOULD ENABLE
CHARITIES TO MANAGE THIS RISK MORE EFFECTIVELY.
"THAT THE BOARDS OF MANY CHARITIES PRESENTLY
LACK TRUSTEES WITH THE COMMERCIAL EXPERIENCE AND ACUMEN TO ESTABLISH
AND CONDUCT TRADING OPERATIONS;"
THE CHARITY COMMISSION RECOMMENDS THAT TRUSTEES "BE
SELECTED ON THE BASIS OF THEIR RELEVANT EXPERIENCE AND SKILLS."[2]
CHARITIES THAT WISH TO UNDERTAKE TRADING SHOULD THEREFORE RECRUIT
TRUSTEES WITH THE RELEVANT COMMERCIAL EXPERIENCE AND ACUMEN.
THE PRESENT REQUIREMENT TO ESTABLISH TRADING SUBSIDIARIES
DOES NOT ENSURE THAT THEIR DIRECTORS HAVE THE RELEVANT SKILLS.
IN MANY CASES THE TRADING SUBSIDIARY IS SIMPLY A "SHELL ORGANISATION",
AND THE TRUSTEES OR SENIOR MANAGERS OF THE CHARITY ARE ALSO DIRECTORS
OF THE SUBSIDIARY.
"THAT TRUSTEES OF UNINCORPORATED CHARITIES MIGHT
BE MORE EXPOSED TO PERSONAL LIABILITY, SINCE THEIR LIABILITY WOULD
ALSO EXTEND TO TRADING DEBTS;"
IN GENERAL, CHARITIES SHOULD INCORPORATE WHERE THERE
IS A RISK OF PERSONAL LIABILITY TO TRUSTEES. THE PROPOSED "CHARITABLE
INCORPORATED ORGANISATION" LEGAL FORM SHOULD REMOVE SOME
OF THE BARRIERS TO INCORPORATION.
THAT SOME CHARITIES MIGHT DEVELOP TRADING TO SUCH
AN EXTENT THAT THEY BECAME TO ALL INTENTS AND PURPOSES TRADING
OPERATIONS WITH A CHARITABLE SIDELINE. THIS WOULD NOT ONLY BRING
THEIR CHARITABLE STATUS INTO QUESTION BUT, IF WIDESPREAD, IT COULD
ERODE IN THE PUBLIC EYE THE PRESENT CLEAR DISTINCTION BETWEEN
CHARITIES AND COMMERCIAL ORGANISATIONS. THIS COULD DAMAGE PUBLIC
CONFIDENCE IN CHARITIES.
MANY CHARITIES ALREADY CONDUCT CONSIDERABLE NON-PRIMARY
PURPOSE TRADING THROUGH SUBSIDIARIES, UNDER A BRAND NAME CLEARLY
ASSOCIATED WITH THE CHARITY. THE PUBLIC RECOGNISES THIS AS FUNDRAISING
ACTIVITY BY THE CHARITY, RATHER THAN AS A SEPARATE COMMERCIAL
OPERATION, WITHOUT SUFFERING THE FEARED EROSION OF CONFIDENCE.
CONDUCTING TRADING WITHIN THE CHARITY WOULD PROVIDE GREATER TRANSPARENCY,
MAKING THE PURPOSE AND NATURE OF TRADING ACTIVITY CLEARER TO THE
CHARITY'S STAKEHOLDERS.
MANY OTHER CHARITIES ALREADY DERIVE MUCH OR MOST
OF THEIR INCOME THROUGH PRIMARY PURPOSE TRADING, PARTICULARLY
THOSE SELLING SOCIAL, EDUCATIONAL, OR HEALTH SERVICES TO GOVERNMENT.
IT MIGHT BE ARGUED THAT SUCH TRADING BLURS THE DISTINCTION BETWEEN
CHARITIES AND COMMERCIAL ORGANISATIONS, BUT IT IS A LARGE AND
GROWING AREA OF CHARITABLE ACTIVITY. THERE HAS BEEN A 40% INCREASE
IN GOVERNMENT FUNDING OF VOLUNTARY ORGANISATIONS (EXCLUDING HOUSING)
IN REAL TERMS SINCE 1982.
THE CONCERN THAT NON PRIMARY PURPOSE TRADING MIGHT
RENDER CHARITABLE ACTIVITY A SIDELINE COULD BE MET BY RETAINING
A CEILING FOR TRADING, BUT MAKING IT MORE FLEXIBLE. FOR EXAMPLE,
TRADING "INCIDENTAL" TO THE CHARITY COULD BE PERMITTED
WITHIN THE CHARITABLE STRUCTURE. THE THRESHOLD COULD BE DEFINED
FOR ALL CHARITIES AS IT CURRENTLY IS FOR THOSE WITH A TURNOVER
OF BETWEEN £20,000 AND £200,000, AS "LESS THAN
25% OF THE CHARITY'S TOTAL INCOMING RESOURCES".
Fig.1 There are special rules to help charities that
wish to carry out small amounts of non-primary purpose trading,
when all the profits from the trading are to be used by the charity.
The limits of what is "small" are set out in the following
table.[3]
| Total of all incoming resources in a particular tax year of charity
| Maximum permitted trading turnover in that tax year
|
| Under £20,000
£20,000 to £200,000
Over £200,000
| £5,000
25% of charity's total incoming resources
£50,000
|
5. Recommendations
5.1. ACEVO would welcome the reinstatement of the recommendation
to allow charities to undertake all trading within the charity.
5.2. However, if the joint committee shares government's concerns
about higher levels of risk, and maintaining a level playing field
with small business, it might instead a sliding scale de minimis
level of trading, expressed as a percentage of total income
or using the accounting concept of "materiality".
5.3. Regardless of whether the recommendation is reinstated,
The Joint Committee should strongly advocate a relaxation of the
administrative burdens for charities in setting up trading subsidiaries.
Annex 1 - Illustrative comments from ACEVO members
1.
The Charity has an annual income of approx £3 million. Its
trading company has an annual turnover of approximately £220k.
If the two were run together this would save approximately £5,000
per year, made up of Audit Fees for the Trading Company, extra
accounts staff time for preparing two ongoing sets of accounts
plus additional management time.
With that £5,000 the charity could produce 3 more information
leaflets for people with epilepsy in minority languages.
In addition, our Trading Company has £30,000 of retained
profits, used to fund working capital. Changing the need for a
separate company would immediately release that money to spent
on charitable activity.
This of course ignores the set up costs for a new Trading Company,
along with the hugely complex rules and guidance on funding trading
companies which cause vast expenditure and time for Charities
trying to set them up today.
2.
The CEO of the National Coalmining Musuem has written to the Committee
with detailed evidence and costings. To make that museum viable,
she runs conferences and a shop with a turnover exceeding £50
000.
Under the current system, she therefore has to set up a separate
trading company to run the shop and the conference facilities.
The staff members are the same but, to keep the subsidiary at
"arm's length" from the charity, staff activities must
be apportioned between the two organisations.
She orders in, on average, 20 loaves of bread a day, but has to
have two separate order books, several invoices: 12 loaves for
the conference facility, eight loaves for the café
and A record is kept if there a sandwich is exchanged between
the trading subsidiary and the charity. This costs the charity
about £30,000 in staff time.
1
Strategy Unit 2002 p44 (Para. 4.47) Back
2
Charity Commission 2002,
CC3 Responsibilities of Charity Trustees
Back
3
Charity Commission CC35, para 9. Back
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