On the afternoon of 9 September 2021, UNW held a Virtual Charity Briefing aimed at organisations that have recently embarked on or are considering venturing out into new income streams or activities and are grappling with whether to set up a separate subsidiary or just keep the activity within the existing charity.
Hosted by Anne Hallowell, Charity and Not-for-Profit Partner at UNW, we also heard from Mark Hetherington, VAT Partner at UNW, who addressed key VAT questions, and Charles Linaker, Tax Partner at UNW, who presented on how corporation tax may come into play, and how to minimise any potential liabilities. Our guest speaker, Simeon Ripley, Chief Executive of Linskill and North Tyneside Community Development Trust, ended the presentation by outlining the activities of the Trust and the structure of the group before setting out what is considered by management and board when diversifying into new activities.
Beginning the briefing with a look at the role of a trustee, Anne defined the position as someone who will act in the charity’s best interests, manage the charity’s resources responsibly and act with reasonable skill and care. She warned that any trading undertaken by a trustee within the charity should not endanger its assets. Whether or not a significant risk is involved in that trading will depend on the size of charity; the nature of the business; the expected outgoings; the turnover projections and the sensitivity of the business. Anne advised that trustees attempting something large scale and potentially risky would be better off placing that activity within a trading subsidiary.
Looking at what is classified as Trading and what is not, Anne ended with an elaboration on the definitions of Primary Purpose Trading, Ancillary Trading and Non-Primary Purpose Trading.
Primary purpose trading: providing goods and services for money but fully within your charitable objects.
Ancillary trading: harmonious with your charitable purpose but not necessarily within your charitable objects.
Non primary purpose trading: nothing whatsoever to do with your charitable objects.
Mark commenced his part of the briefing with a look at the question he’s received the most from clients in the wake of Brexit: what does the UK’s divorce from Europe mean for VAT, a form of EU taxation brought in as a requirement for membership of the Common/Single Market? Answering, Mark confirmed that VAT isn’t going anywhere, due in part to the amount of revenue it represents for HMRC and how well known a form of tax it is.
Although no significant changes are expected, Mark explained that as we are no longer governed by the EU VAT directive, the UK government should now have greater flexibility around the lower rates, such as 0% or 5%, representing good news in the charity sector. Considering this, Mark said we shouldn’t be surprised by an increase in lobbying for changes to the VAT rates in the charity sector post-Brexit.
After a warning to be careful with SLAs, Mark looked at some of the reasons for using a trade subsidiary. He stated that managing activities in a subsidiary would keep the charity out of the VAT net and avoid the charity having to do VAT returns. He also added that using a subsidiary can convert an otherwise VAT exempt activity into a VATable one, introducing or enhancing input tax entitlement (particularly on capital projects). Mark ended his presentation with a look at the common VAT exempt activities in the charity sector (education, welfare, sporting, fund raising events and cultural services), advising viewers to be careful around the term ‘eligible body’ as the definition changes for each of the exemptions.
Starting his part of the briefing with an appeal for charities to question whether their trading subsidiary is really necessary or whether the small trading exemption may apply, Charles went on to look at some of the issues associated with trading subsidiaries, notably: can you actually set it up, the relationship between the subsidiary and the charity, shared resources with the parent charity, charity trustees and subsidiary directors, funding of the subsidiary, and if the subsidiary makes losses.
Charles then looked at ‘Corporate Gift Aid’ – not donations by individuals that the charity can claim tax back on, but a cash payment from the subsidiary to the charity which can reduce the profits of the subsidiary and therefore hopefully reduce the corporation tax liability or eliminate it entirely. Charles emphasised that the critical difference, which is only allowed for 100% owned trading subsidiaries of charities, is that this payment can be made up to nine months after the end of the accounting period.
In the concluding part of the presentations, Simeon sketched out the history of the Linskill Centre in North Shields; from the adversity of near demolition in 2005, to the community fightback and public campaign that ended with its salvation in 2006, when the asset was transferred from North Tyneside Council to the independent charity Linskill Trust. One of the largest assets in the country and at the time the only asset transfer in North Tyneside, the Trust has since gone on to acquire two further satellite centres, at Battle Hill and Royal Quays, from the Council.
With a staff of 65, 35 regular volunteers, and reporting to a board of 9 trustees, 85-95% of the Trust’s income is generated through enterprising activity. Explaining why the Trust set up as an enterprising charity, Simeon stated the reasons as: the size of the building (huge and without prior investment, increasing the need for capital funding); the postcode (unfortunately falling in the ward of Tynemouth and making them ineligible for a lot of grants); and the lack of financial support.
He listed the ways in which the Trust has developed multiple and diverse income streams in his time at the helm, de-risking the organisation from solely relying on one or two sources of revenue. The Trust now generates income through room and hall hire; a catering function; events management; an Ofsted registered nursery; permanent tenants and consultancy work.
After detailing the structure of the Charity, Simeon alluded to the benefits of using the trading subsidiary: the advantages of the ‘Corporate Gift Aid’ scheme and the ability to place certain elements under the different arms for VAT reasons.
Simeon gave some insight on staff contracts before advising attendees to regularly review activity, which the Trust have undertaken at intervals, and will do so again after Covid and a period of growth.
Anne then opened the virtual floor for questions, prompting some detailed responses from Charles and Mark before the final question was put to Simeon on the future of the Linskill Trust. He confirmed that the ambition would be expansion, with the Trust exploring taking on other sites across the borough and grow the reach of both the charitable and trading side of the organisation.
A recording of the webinar is available to watch here.
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