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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

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

your privacy policy, data protection notices, training, and any

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

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

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 or Charlotte (020 7324 1758; e-mail for further information or check Events on our website at:

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.

©Susan Warner

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

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 in the news section on the charities page dated

may be asked to demonstrate that your trustees and senior

25 November.

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 By using their form, you are ensuring that

Vicki Bowles Barrister

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

Stone King LLP 13 Queen Square Bath BA1 2HJ Tel. 01225 337599 Fax. 01225 335437 16 St John’s Lane London EC1M 4BS Tel. 020 7796 1007 Fax. 020 7796 1017 Wellington House East Road Cambridge CB1 1BH Tel. 01223 451070 Fax. 01223 451100 New Hall Market Place Melksham Wiltshire SN12 6EX Tel. 01225 337599 Fax. 01225 335437 email:

Š 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