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Financing trading activities 120,000 reasons you need to be aware of Data Protection… Extension of Freedom of Information to charities on the cards...again! Forthcoming Events Client Focus – Save the Children Are you fit and proper? A reminder!
Working with the Not-for-Profit Sector Winter 2012
Financing trading activities The recent emergence of new opportunities for service-providing charities has seen many charities establish thriving trading operations. At the same time, however, many other charities’ trading subsidiaries have experienced a steep decline in income. Because trading subsidiaries attract tax on any profits they retain, few have significant reserves to draw upon when trading conditions deteriorate or when investment is required to exploit new opportunities. In these circumstances, the trustees of the parent charity may find themselves faced with difficult questions concerning the financing of their trading activities.
Background Trading subsidiaries are generally safe and tax-efficient vehicles for charities to carry out trading activities. However, they may require financial support from their parent charity for a variety of reasons ranging from start-up costs, to the development of new services and sources of income, to support to get them through short-term cashflow difficulties. Because subsidiaries generally donate all of their trading surplus to their parent charity (in order to avoid paying corporation tax on the surplus), the trustees of parent charities and the directors of trading subsidiaries themselves are often faced with difficult questions concerning the funding of subsidiaries.
The duties of charity trustees Charity trustees have an overriding duty to act in the best interests of promoting the objects of their charity. When considering activities of trading subsidiaries, they must
are various subsidiary duties including the duty to exercise proper stewardship over the charity’s assets and to avoid, or deal appropriately, with conflicts of interest. The use of charity funds to support trading that does not advance the charity’s objects is an investment decision. In relation to investments, charity trustees have an even higher level of duty than that described above: they must take such care as “a prudent man of business would take in dealing with the affairs of a person for whom they felt morally obliged to provide.” Where a trading subsidiary is struggling, therefore, it may be difficult for trustees to conclude that it would be proper to continue to invest in it.
The Charity Commission’s approach The Charity Commission takes a strict approach to trustee decisions of this sort. It does recognise that the situation may be complicated where a charity has already invested a great deal in an existing trading subsidiary. Nevertheless, relevant guidance states:
therefore always put the interests of the charity first.
Inherent in the duty to act in the best interests of the charity
Financing Trading activities –continued
“If the trustees sink further funds into supporting an ailing
However, HMRC does recognise that investing in trading
trading subsidiary at a time when it was reasonably clear that
subsidiaries represents a special case. Its guidance on this
the failure of the subsidiary was likely, this could constitute a
subject states: “Where an investment is made in, or loan to,
breach of trust on their part, putting them at personal risk to
such a subsidiary company, the charity is unlikely to be able to
make good any losses to the charity…”.
obtain normal security for the investment or loan. In such cases
The HMRC’s approach The tax implications of investment in a trading subsidiary must also be considered. In order to avoid a tax liability, any investment must qualify as a “qualifying investment” . HMRC guidance states that as a general rule, an investment or loan is for the benefit of the charity (and qualifies for these purposes) when it is made on sound commercial terms. It continues:
“whether or not an investment is made on sound commercial terms depends on the circumstances prevailing at the time
[HMRC] may ask to see the business plans, cash-flow forecasts and other business projections which informed the charity’s decision to make the investment or loan.” HMRC will therefore look to assess the robustness of the parent charity’s decision making, on the basis of the factors referred to above. In summary, if a robust investment case can be made, the tax position should follow (although it will also be necessary to obtain tax advice from a qualified advisor).
the investment is made… there is no one test of commercial
If your charity is considering how its trading subsidiary can
soundness and each case is to be viewed on its facts. Where
be financed, or you have any questions relating to the issues
a loan or investment: carries a commercial rate of interest;
discussed above, please contact the writer of this article.
is adequately secured; and is made under a formal written agreement which includes reasonable repayment terms we will normally accept that the investment or loan is for the benefit
Tom Murdoch Solicitor TomMurdoch@stoneking.co.uk
of the charity.”
120,000 reasons you need to be aware of Data Protection… On the 9th June 2011, the Information Commission released a
web as a means of accessing and obtaining information, comes
Monetary Penalty Notice to Surrey County Council for serious
an increased risk of data protection breaches. Whilst incidents
breaches of the Data Protection Act. The Council were fined
such as Surrey County Council are likely to be rare, it is important
£120,000 in this instance, but the Commissioner has the power
that organisations regularly review their Data Protection policies
to award fines up to £500,000.
and procedures, and ensure that all staff who deal with personal
On three separate occasions between May 2010 and January
data are aware of their obligations.
2011, employees of the Council sent sensitive personal data to
Stone King can offer a data protection audit – a chance to review
external e-mail lists by mistake. The Commissioner took the view
that this was a serious breach of the Data Protection Act, in that
other areas where you have concerns. If this an area you would
the Council had failed to put in place appropriate training and
like assistance with, please contact Vicki Bowles.
security measures to prevent breaches like this, and the breach was likely to cause substantial distress to the data subjects. With the increased reliance on information technology and the
Vicki Bowles Barrister VickiBowles@stoneking.co.uk
Extension of Freedom of Information to charities on the cards… again! As long as there has been Freedom of Information legislation,
subject. Funding for the project comes from a number of
there has been a debate about its scope, and whether it should
sources, including a government grant. The government grant
apply to the charitable sector. As a practitioner who has dealt
does not specify a particular use for the funds – just that it go
with requests on behalf of the Charity Commission, I have
towards this project – and it makes up about 25% of the total
experienced firsthand the complications of the legislation itself,
funding required to run the project for a year. All other sources
and the additional administrative burden that it can place on
of income are private.
an organisation. This latest suggestion, however, rings alarm
Under the new proposals, what information is the charity
bells because it is not as straightforward as simply applying the regime to the whole sector, and this article explores the potential consequences of this.
obliged to release under FOI? All information relating to the project, or just information which it can trace back to the public funding? If it is all information about the project, is it right that
The Local Public Data Panel (LPDP – an independent panel
private funders are caught by the provisions in relation to this
that advises Government on issues relating to the release and
project, but not another identical project that has only private
effective use of local public data) has suggested that to improve
transparency in government, any organisation that receives
The question of what information becomes subject to the
public funds should be subject to the Freedom of Information Act (FOI) in respect of those funds, and that information relating to those funds should be automatically published.
FOI regime is not as simple as perhaps the LPDP suspect, and could cause an administrative nightmare for charities involved. Although FOI provides exemptions for confidential
The idea behind the proposal is that transparency should follow
and commercially sensitive information, it may be that private
public money. At present, many public services are carried out by
funders become wary of investing where public funds have been
non-FOI bodies (including charities), and this presents a method
committed, and this could have a dramatic, and completely
of avoiding the reach of FOI by outsourcing certain services.
unintended effect on the way charities are funded in the future.
The proposal does not address how this would work in practice.
More importantly, the LPDP has not considered the fact that
Charities obtain funding from a number of different sources
charities are already accountable to the public. Although the
– including public bodies – often for the same project. It is
information currently published in annual reports and accounts
not clear whether the receipt of public funding in relation to
would not be as detailed as that which would potentially
a particular project makes all information held by the charity
be available under FOI, the fact remains that charities are
subject to FOI, all the information relating to the project itself
already publishing some information, and as such are being
subject to FOI, or just information relating to the public funds. If
transparent. Would the additional burden of FOI actually add
only part of the information held by a charity is to be subject to
anything to the public’s understanding of how public money is
the FOI regime, the LPDP do not say how this is to be managed.
spent? Furthermore, the regulation of charities by the Charity
Consider Charity A Charity A begins a large project (one of several that it is carrying out simultaneously) that involves promoting the study of textiles in schools. As part of the project, the charity produces educational resources, trains teachers in the use of some of out a series of workshops in schools promoting textiles as a
which charitable funds are put is scrutinised, to ensure they are used only for charitable purposes, so what would the additional layer of FOI actually add? In reality, I suspect that the issues identified above, along with many other issues that other sectors will highlight, will mean that the proposal in its current form will not be put into
the more innovative programmes it has developed, and carries
Commission and, to an extent, HMRC, means that the use to
practice. Whether the scope of FOI will be extended to charities
wholesale, however, is another matter, and one which Stone
Vicki Bowles Barrister VickiBowles@stoneking.co.uk
King are keeping an eye on. For the moment, no need to panic, but if you do feel strongly about the effect that the LPDP’s proposals would have on your charity, please do contact them
Forthcoming Events Stone King has a full programme of seminars/workshops for 2012 which will include Charity, Education and Employment Law Update Workshops. We are also often involved in joint events with third-party charity professionals from time to time. Please contact Helen (01225 324436; e-mail firstname.lastname@example.org) or Charlotte (020 7324 1758; e-mail email@example.com) for further information or check Events on our website at: www.stoneking.co.uk
14th Feb 2012 –
Landlord Property Event - Stone King LLP, 16 St John’s Lane, London, EC1M 4BS
15th Feb 2012 –
Health & Safety do’s and don’ts - Stone King LLP, 16 St John’s Lane, London, EC1M 4BS
22nd Feb 2012 –
Charity Workshop with Ian Beever - Stone King LLP, 16 St John’s Lane, London, EC1M 4BS
Client Focus – Save the Children Our vision is a world in which every child attains the right to
Education has the power to
survival, protection, development and participation.
transform children’s lives. In
Our mission is to inspire breakthroughs in the way the world
countries like Afghanistan –
treats children, and to achieve immediate and lasting change in their lives. We work in the poorest countries, where children are dying from completely avoidable causes. Our global campaign to save children’s lives, EVERY ONE, aims to give every child the chance to survive.
where armed conflict keeps children out of the classroom – we’re building schools, training teachers and providing essential supplies. Over the last five years we’ve got 1.6 million more children into school in countries
We provide medical aid, food, water and safety for children
afflicted by conflicts, but this is Haiti General School
in the toughest circumstances; when disasters like floods,
just the start.
famine and wars endanger their lives. Although such crises are unpredictable we can and will act quickly.
In 2010, we reached more than 100 million children worldwide, but our work alone won’t be enough to stop
Millions of children around the world are in danger of abuse,
children dying for good. We’re mobilising people all over the
neglect and violence. We’re keeping the most vulnerable
world to challenge world leaders to help the poorest children
children safe from harm. We reunite children with their
survive and develop to fulfil their potential.
families; we protect children who are refugees and those who have been exploited by adults.
For further information go to www.savethechildren.net.
Are you fit and proper? A reminder! Last year, HMRC introduced an additional requirement for charities claiming gift aid – not only must you be able to demonstrate that you are a charity entitled to UK tax relief (usually by showing that you are registered with the Charity Commission), but also that your charity is managed by “fit and proper” persons. The intention is to extend this to additional tax reliefs and exemptions from April 2012, so all charities need to start to become aware of the requirement if you claim any form of charitable tax relief or exemption. As a reminder, there are two aspects to the test: ◆◆ Who do you have to show is “fit and proper”? ◆◆ What does “fit and proper” mean?
The “who”, are the managers of the charity – not just trustees but also those who have influence in the general control and management of the charity. This is likely to include the CEO, and finance director, but no further guidance has been supplied on exactly to whom this might apply. As a precaution, we would advise any senior staff be included to ensure that you are prepared should any questions arise. In terms of the meaning of “fit and proper”, again there has been no further guidance issued. Generally, HMRC considers people who have been involved in tax fraud to be unfit and improper, but as a reminder, other attributes they are not impressed by include: ◆◆ Suspension and/or removal by the Charity Commission; ◆◆ History of involvement in tax or other fraud; ◆◆ History of involvement in abuse of tax systems; and ◆◆ Disqualified from acting as a director;
“HMRC has stated that they presume all persons managing a charity to be fit and proper until they are told otherwise” you have asked all the questions that they expect, and it is likely that the charity would have discharged its obligations to HMRC by doing this. Of course, if you later come by some information which suggests that the declaration may have been signed fraudulently, and you do nothing about it, you could be in further trouble – but hopefully that situation would never arise!! HMRC have used the test, but they do not keep records of how many times it has been applied, and therefore could not provide details of any reasons given for a decision that charity managers were not fit and proper. Had they kept such details, it would have provided some useful guidance to charities and trustees on what attributes HMRC are looking at, but we are not quite there yet. In terms of extending the test to all reliefs and exemptions, HMRC has issued drafts of the relevant legislation required to
What should you be doing?
do this, and has invited comments on these by the 20th January.
HMRC has stated that they presume all persons managing a
If you are affected by this, we highly recommend that you get in
charity to be fit and proper until they are told otherwise, but
touch and give your views. More details can be found at www.
if there was a query on your charity’s gift aid declaration, you
hmrc.gov.uk in the news section on the charities page dated
may be asked to demonstrate that your trustees and senior
management team are fit and proper. How do you do this? The simplest way, is to ask your trustees and senior employees to sign the model declaration form (available on HMRC’s website www.hmrc.gov.uk). By using their form, you are ensuring that
Vicki Bowles Barrister VickiBowles@stoneking.co.uk
Your Contacts Charity: Michael King Partner Jonathan Burchfield Partner Robert Meakin Partner Ann Phillips Partner Stephen Ravenscroft Partner Alexandra Whittaker Associate Vicki Bowles Barrister Sarah Clune Solicitor Hannah Kubie Solicitor Tom Murdoch Solicitor Darren Hooker Solicitor Reema Mathur Solicitor Amy Gordon Trainee Charity Legacy Team: Jonathan Burchfield Partner Robert Meakin Partner Paul Sutton Partner Child Protection: Steven Greenwood Partner Commercial Property: Hugh Pearce Partner Stephanie Howarth Partner Hugo Greer-Walker Partner
Catherine Sanderson Senior Associate Joanne Burton Associate Sally McFadden Associate Andrew Small Associate Daisy Barnett Solicitor Chris Sharpe Solicitor Tamsin Simmonds Solicitor Sarah Lawson Paralegal Alison Pearce Trainee Corporate & Commercial: Roy Butler Partner Caroline Leviss Associate Dispute Resolution: Paul Sutton Partner Alice Wood Solicitor Antony Pidgeon Solicitor Jon Moore Solicitor Health & Safety: Andrew Banks Partner David Milton Associate Solicitor Education: Roger Inman Partner Graham Burns Partner
Richard Gold Consultant Michael Brotherton Senior Associate Kate Grimley Evans Solicitor Nicola Berry Solicitor Lydia Brookes Solicitor Emer Hughes Paralegal Myles Taaffe Paralegal Employment: Nick Watson Partner Peter Woodhouse Partner Jean Boyle Associate Tamsin Wilkinson Solicitor Victoria Blake HR Consultant Sarah Turner HR Advisor Kathryn Williams Trainee Housing: Geraldine Winkler Legal Executive Trust and Taxation: Andrew Mortimer Partner Alison Allen Partner David Ainslie Partner Charles Hayward Partner
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ÂŠ Stone King LLP 12/2011
The Spotlight deals with some current legal topics. It should not be used as an alternative to specific legal advice on the individual circumstances of a particular problem. Stone King LLP - registered limited liability partnership no OC315280, registered office 13 Queen Square, Bath BA1 2HJ
Published on Feb 17, 2013