Social Economy Legal

Charitable definition under the Charities Act (NI) 2008 Part 1

2011-02-25T17:46:00.001Z

Under the 2008 Act a "Charity" is an institution which is established for charitable purposes only. But what constitutes a "charitable purpose"? For the answer to that question we must examine section 2 of the Act.

Under section 2 the purpose must fall within one of the descriptions listed in Section 2(2) AND be for the public benefit.

The descriptions listed in s2(2) are as follows:

(a)the prevention or relief of poverty;.

(b)the advancement of education;.

(c)the advancement of religion;.

(d)the advancement of health or the saving of lives;.

(e)the advancement of citizenship or community development;.

(f)the advancement of the arts, culture, heritage or science;.

(g)the advancement of amateur sport;.

(h)the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity;.

(i)the advancement of environmental protection or improvement;.

(j)the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage;.

(k)the advancement of animal welfare;.

(l)any other purposes within subsection (4)

Subsection 4 goes on to include:

(a)any purposes not within paragraphs (a) to (k) of subsection (2) but recognised as charitable purposes under existing charity law or by virtue of section 1 of the Recreational Charities Act (Northern Ireland) 1958 (c. 16);.

(b)any purposes that may reasonably be regarded as analogous to, or within the spirit of, any purposes falling within any of those paragraphs or paragraph (a) above; and.

(c)any purposes that may reasonably be regarded as analogous to, or within the spirit of, any purposes which have been recognised under charity law as falling within paragraph (b) above or this paragraph..

In effect, the Act introduces for the first time a statutory definition of a charity. Any organistion contemplating the adoption of charitable status must satisfy one of the aforementioned descriptions. The organistion must only exist to advance or or more of these purposes.

The Pension Debate & Social Enterprises

2011-01-23T18:33:00.003Z

The Department of Health in England has been quick to point that that the transfer of NHS pensions to a 'Health-care providing Social Enterprise' does not set a new precedent for a uniform transfer of NHS pensions.

Over 1,000 employees have moved from the NHS to Anglican Community Enterprise and importantly, their NHS pensions have moved too. Many NHS employees have in the past been very reluctant to make the switch due to the fear that they would lose their pensions if they took up employment with such Government backed social enterprise initiatives.

The Government however finds itself in an awkward position. Giving a blanket assurance that all pensions will be protected would certainly give re-newed impetus to its "Right to Request" policy but would be an expensive measure. The approach at present appears to advocate pension transfer if certain criteria are met. Whilst the Anglican Community Enterprise was successful there is no guarantee that future NHS spin-out social enterprises would enjoy a similar result.

Whilst such uncertainty remains, considerable opposition will continue to be voiced, and social enterprise involvement in health and social care provision will be curtailed. Many NHS employees have yet to buy into the social enterprise concept in its present form. The onus is now on the Government to allay those fears.

Charity Act (NI) 2008

2010-09-13T15:06:00.001+01:00

The implementation of the Charity Act (NI) 2008 may now be delayed due to a technical issue with the legislation itself in the spotlight and the definition of a "charitable purpose" in particular coming under scrutiny.

When the legislation was originally drafted it incorporated existing legislation from both England & Wales and Scotland. However the law regarding the 'charitable purpose' differs between England and Scotland and so the the NI version in effect contradicts itself.

It now appears that the Act may have to be amended which will result in the new registration process for charities being delayed.

Can Charity Trustees be Paid?

2010-09-12T21:04:00.005+01:00

The short answer to this question is generally, no.

However, there are limited circumstances where a trustee can be paid by the charity for services provided to or on behalf of a trustee which go above and beyond the normal duties of that person in his or her trustee role.

A number of conditions must be met before any payment can be made:

-The charities governing documents must give an express power to remunerate the trustee.

-There must also be a written agreement between the charity and the trustee to be paid which should set out the minimum and maximum that the trustee can be paid. To avoid any conflict of interest the trustee should not sit partake in the decision made by the board to enter into the agreement.

-The payment must also be reasonable and must be in the best interests of the charity.

-The total number of trustees who are receiving payment must be in the minority.

-There is an onus on the board to adhere to the "duty of care" as laid out in the Trustee Act (NI) 2001 (2000 Trustee Act in England & Wales)

Trustees can of course recover reasonable out of pocket expenses.

Community Benefit Societies & The Asset Lock

2010-08-25T18:10:00.002+01:00

In recent years Community Benefit Societies (BenComm's) in England & Wales and Northern Ireland have had the option of introducing an 'asset lock' within their legal framework which ensures, that upon dissolution or amalgamation, the assets will be retained permanently for the benefit of the community. This also prevents the possibility of the assets being redistributed to members upon a conversion from a Society to a Company.

Protecting the Social Mission through your legal structure

2010-08-23T16:53:00.008+01:00

The social mission is the common strand which runs through every social enterprise yet it can quickly become subservient to commercial pressures as organisations become increasingly fixated on the financial bottom line. This may occur despite the best intentions of those who run such enterprises, but to avoid such potential dilemmas it is perhaps prudent to build in safeguards which will protect the social theme.

One way of acheiving this is to articulate the social mission in the enterprise's Memorandum and Articles of Association (the governing documents/constitution). Through clearly stipulating the social objectives of the enterprise such documents can help focus those in charge and maintain standards. The governing documents can also be drafted in such a way as to ensure that profits are retained to fund the social mission. Assets can also be 'locked in' to the enterprise so that their benefit will be retained for the community in the event of a sale/dissolution of the company.

Such safeguards are useful but have their limitations in a traditional company structure as it is possible for the board to remove such clauses from the constitution if a majority agree.

As such it may be beneficial for a social enterprise to employ the Community Interest Company structure as a security blanket with which to enfold the normal company arrangement. The Community Interest Company structure contains an asset lock which is legally enshrined and cannot be removed. There are also caps on the ways in which profits may be distributed and any social enterprise that wishes to adopt this structure must pass a community interest test which ensures that the company will carry out activities which benefit the community.This reporting obligation is on-going and must be prepared at the end of each financial year, thus ensuring that the enterprise does not take its 'eyes of the ball' regarding the social mission.

Another way in which the social mission can be protected is by ensuring democratic control of the enterprise. To this end a co-operative type structure (Community Benefit Society)may be employed which encompasses the concept of "one member, one vote". By allowing each member an equal vote regardless of their share capital it would be hoped that vested interests could not reduce the 'social scope'. The Community Benefit Society structure also prevents the distribution of profits to the members; they must be retained for the benefit of the community. Upon dissolution or winding up of such a society only the amount invested by members may be re-claimed. Any other assets must pass for the benefit of the community.

The social mission can be protected in different ways through the effective implemenation of varying legal structures. Which one suits your enterprise best will often depend on the your particular circumstances and goals.

Revised Guidance on 'Fit and Proper Persons Test'

2010-08-18T19:10:00.000+01:00

HMRC has released revised guidance on the 'fit and proper persons test'. This is not surprising given the uproar over the initial guidance published by HMRC.

More delays for Charitable Incorporated Organisation

2010-08-03T12:57:00.003+01:00

The Office for Civil Society has now announced that the introduction of the new Charitable Incorporated Organisation legal strucutre has been delayed yet again.

It now appears that the new legal form will be introduced next year at the earliest. Such a significant delay will adversly effect the many organisations which have shown an interest in adopting this structure.

The wait continues.......

Renewable Energy Co-Operatives

2010-07-23T14:40:00.000+01:00

Barely a day goes by without renewable or green energy being highlighed in the media and as the world frantically seeks to exploit these forms of energy to satisfy its insatiable appetite the question as to who should own the natural resources and the financial benefits of their exploitation come increasingly to the fore.

Many community organisations have successfully engaged in renewal projects across the UK and Ireland with one of the most obvious examples being that of Baywind Energy Co-Operative Ltd

The likes of Baywind have looked to the co-operative (Industrial & Provident Society) model when deciding upon a suitable legal structure which will deliver their stated ojectives.

A co-operative structure offers democratic control (one member/one vote) of the decision making process and involves the local community on a wider scale, putting them at the heart of the management of the enterprise. Doing this helps the local community buy into the concept from the outset which is important given the contentious nature of some renewable energy projects. Some people may argue for example against the erection of wind turbines but if those people are successfuly integrated into the project and see the economic, social and enviromental benefits produced for their community then they are less likely to oppose the enterprise before it has even become established.

The democratic control offered by the co-operative structure is further strengthened by the ability to raise much needed finances from the community by issuing shares. Those persons with shares may then see a financial return when profits are distributed, thus supporting the local economy and rural regeneration.

An asset lock may also be put in place to protect the assets and ensure that they are retained for the benefit of the community, although importantly it would be the choice of the community as to whether they wished to ensure this.

The co-operative model offers the best legal vehicle through which a community may engage in a renewable energy project.

Company Name Disputes

2010-07-09T19:05:00.000+01:00

Social enterprises, despite their often altruistic motives, are still firmly immersed in the commercial world and all the business related themes that entails. Consequently, social enterprises (and for that matter any commercial enterprise) should view the protection of their intellectual property as an integral part of the business process.

The ownership of ideas, products and services will often form part of the goodwill enjoyed by a company. That goodwill generates business which in turn helps enterprises to create profit and/or meet their social objectives.

One of the most important and obvious examples of the way in which intellectual property can generate goodwill is through the company name. The name affords the company a highly visible means of identification through which the enterprise can build a reputation and brand; vital components for any successful commercial entity.

Thus it is understandable given the importance of the name that disputes can, and often do arise between companies over ownership. The Company Act 2006 offers some legislative remedy to those disputes under the guise of section 69.

Under S69 (1) A person ("the applicant") may object to a company name on the ground that:

(a) the name is the same as a name associated with the applicant in which he has goodwill.

(b) that the name is sufficiently similar to such a name that its use within the UK would be likely to mislead by suggesting a connection between the company and the applicant.

If the applicant can satisfy one of the above then it is up to the other party ("the respondent") to put forward one of the accepted grounds of defence as laid out in S69(4) of the Act.

1. The first defence that may be relied on is if the name was registered by the respondent before the commencement of the activities on which the applicant relies to show goodwill. Therefore it would be prudent for any enterprise contemplating an objection of a company name to check when the other party first registered the name with Company House. (Sub-section 4(a))

This defence does not apply where the company name was registered in anticipation of goodwill or reputation being established by another company. An example would be where someone knows that a merger is about to take place between two companies and so registers one or more variations of the name that the newly formed commercial entity is likely to require. The registration(s) would be opportunistic in that the registration holder’s purpose in obtaining the registration was to cash in on the other entity’s fame. This is known as an opportunistic registration.

2. The second defence arises if the (respondent) company is operating under the name, or is proposing to do so and has incurred substantial start-up costs in preparation; or was formerly operating under that name and is now dormant (subsection 4(b))

This defence would not be available if the name was registered but the company never conducted business under that company title.

Like in the first defence if the applicant can prove that it was a opportunistic registration this will trump a successful defence under 4(b)

3. The respondent could also argue that the name was registered in the ordinary course of a company formation business and the company name is available for sale to the applicant on the standard terms of that business. (sub-section 4(c))

Again an opportunistic registration will defeat this defence whatever its merits.

4. The respondent can state that the name was adopted in good faith; that it was not carried out with some conspiracy in mind but that the similarities are mere coincidence and that the respondent's motivation and knowledge are beyond reproach. (sub-section 4 (d))

5. The last potential defence under S69 is where the interests of the applicant are not adversely affected to any significant extent by the fact that that the name is the same or is similar. (sub-section 4 (e))

Consequently a goodwill or reputation of little or no commercial significance would not be sufficient and would allow the respondent to mount a successful defence under this subsection.

In effect section 69 only afford protection to the applicant if (s)he can prove that the registration of another company name was opportunistic in nature and/or that it adversely affected the applicant's business.

The first port of call if you do feel aggrieved over another company name should be Company House. If you believe that an opportunistic registration has taken place then you should contact the Company Name Adjudicator.

Both organisations should be able to offer initial guidance and support.

Public Procurement Action Plan (Northern Ireland)

2010-07-08T11:31:00.003+01:00

The Department of Finance & Personnel have recently released their response to the Assembly's Inquiry into public procurement in Northern Ireland. The Response outlines how the Department will address many of the reccommendation made by the Assembly Committee in it's report.

New Legal Tool (Get Legal)

2010-07-07T16:17:00.005+01:00

The NCVO has introduced a new on-line tool which helps prospective charities, social enterprises and co-operatives to sift through the host of different legal structures available and to pick the one that best suits their respective needs and objectives.

Many organisation face the issue of choosing a legal structure with some trepidation so this tool will hopefully be of considerable benefit.

Rate relief for Charities in Northern Ireland

2010-06-15T18:44:00.000+01:00

Rate Relief

Charities typically enjoy full rate relief on property they own, resulting in substantial savings for the charity.

The property however must be must be occupied and used by the charity for solely charitable purposes. Such charitable purposes may include the 'advancement of education' or the 'relief of poverty'.

Confusion can arise where part of the property in question is used for non-charitable purposes. Land & Property Services will apportion the rate relief based on the proportion of the premises used for the respective charitable & non-charitable objectives.

Example: A charity shop does not have to pay rates if it sells only donated goods but if it was to sell goods purchased from a wholesaler then the value of relief is apportioned between the two uses.

Industrial & Provident Society Forms (Bona Fide & BenComm)

2010-06-10T19:10:00.001+01:00

An Industrial & Provident Society (IPS) can take one of two distinct forms, namely that of a Bona Fide Co-operative or a Society for the Benefit of the Community (BenComm).

A Society may register as an IPS if it:

(1) carries on any industry, business or trade, whether retail or wholesale AND

(2) is either one of the two aforementioned forms.

But what is the difference between a Bona Fide Co-operative and the BenComm?

Bona Fide Co-operative

A Bona Fide Co-operative is an incorporated society which acts for the mutual benefit of all of its members.

Whilst there is no statutory definition of a Bona Fide Co-operative certain criteria has been laid down defining this form:

(1) Members' benefits in the main stem from their participation in the business of the society

(2) Control of the society is vested in members equally, through the principle of 'one person, one vote'

(3) return on capital does not exceed a rate necessary to retain sufficient capital to carry out the society's objectives

(4) Any profits after payment of interest will, if distributable amongst the members, be distributed in proportion to the extent to which members have traded with or taken part in the society's business

(5) Membership will not be restricted artificially with the object of increasing the value of proprietary rights and interests.

The criteria is designed to ensure that members interest in the society is not based solely on the amount of capital they have put into the organisation.

Example: members of a social club serving current and former transport workers. The members interest in the club is a genuine community one shared with fellow and former work colleagues. A person does not join with the sole aim of obtaining some financial return, although that may occur in some circumstances.

Indeed, the legislation governing IPS states that a Co-operative society does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person. Such co-operative entities would likely incorporate as a company instead.

Society for the Benefit of the Community (BenComm)

Unlike the Bona Fide form, a BenComm will act for the benefit of the community rather than just its members.

Profits will not be distributed among members but will be returned to the community. A BenComm is one of the many legal structures employed by Social Enterprises. A BenComm may also be a charity although this will depend on its constitution and objectives.

Special reasons must be given as to why the society should not be registered as a company. Its rules should also prohibit the distribution of assets among members.

Example: Housing Associations are often registered as BenComms as they serve the interests of the wider community rather than the narrow spectrum of their membership.

Both forms must adhere to the general conditions relating to societies as governed by the Industrial & Provident Societies Act (NI) 1969 (The Co-Operative and Community Benefit Societies Act 1965 in England & Wales - formerly referred to as Industrial & Provident Societies Act 1965)

Intellectual Property and Social Enterprises

2010-06-02T19:11:00.014+01:00

Intellectual property is an integral aspect of any business and social enterprises are no different in this regard. Yet this often confusing legal concept can cause headaches for even the most savvy business as they attempt to grapple with the rights of ownership of their ideas, products or services.

So what is 'intellectual property' and how does it impact on social enterprises?

Copyright

Copyright is the protection of an idea which has been expressed in some tangible form. In general terms this can include paintings, music lyrics, novels, photographs architecture etc.

When a social enterprise creates an original piece of work then that work is automatically copyrighted. This work may include a operational manual for the running of the enterprise or an article in a magazine detailing the business model or the photographs found on the enterprises website.

A copyrighted work cannot be reproduced, altered or distributed by another party without the creators permission. To do so creates an infringement of the copyright.

There are important commercial implications for a social enterprise in protecting any copyrighted work. By protecting the integrity of the works, they then can then be licensed transferred or assigned by the social enterprise for a fee which would generate income for the business. An example of this in action would include the allowing of a social franchisee to use/adapt the social franchisors operations manual.

Patents

A patent can be defined as a Government licence giving an individual or body the sole right to make, use or sell an invention for a set period.

Whilst not giving automatic rights like that found in copyright it does provide protection against any other parties copying, manufacturing or selling your invention without your permission as long as the patent is registered with the relevant authorities.

Again the commercial opportunities enjoyed by any enterprise which holds a patented invention are significant. The patent could be sold or licensed for a fee or the enterprise could even use the invention as part of its business activities to increase profits.

Trademarks

A trademark can be defined as a distinctive symbol or word(s), legally registered or established by use, as representing a company, product or person.

Many of the most common examples of trademarks can be found in the logos of major companies: the Nike tick or the Adidas stripes.

The protection of trademarks are vitally important as they represent the very essence of an enterprise. If another party was to set up a business using your company name, logo and other trademarks it could pass itself off as another part of the original business. It would in effect be exploiting the goodwill which that business has built up over the years and which might otherwise be directed towards the original enterprise.

Legal Issues facing the social economy sector

2010-06-01T16:16:00.004+01:00

If there are any general legal issues facing the social enterprise sector which you would like me to post on please fell free to make a comment below, or alternatievely, you can email at the address provided.

Regards

Conor

Gift Aid for Companies and Wholly Owned Subsidiaries

2010-05-26T18:21:00.001+01:00

Donations Made By Companies to Charities

A company that produces profits will be subject to Corporation Tax. However the company can enjoy the benefits of corporation tax relief on a donation made to a charity.

If a company decides to give money to a charity it simply makes a payment to that charity. The donation will be treated as a non-trade charge. No tax is deducted from the payment and the company does not have to make a Gift Aid Declaration to the charity. The charity will consequently not have to make a Gift Aid tax repayment claim because no tax has been paid on the payment.

In order to obtain the corporation tax relief the company will then deduct the amount of the donation from the total profits for that accounting year prior to the calculation of corporation tax. The claim will be made in the Corporation Tax Self Assessment Return (CTSA).

The company should keep normal accounting records to support its claim for relief in the CTSA. Any other relevant correspondence should be retained by the company such as a thank-you letter from the charity for the donation.

The donations cannot be carried over into another accounting period in-order to reduce the taxable profit for that year.

Example:

Company A makes a donation of £20,000 to Charity B. Company A makes a total profit for the year of £300,000. The £20,000 donation is deducted from the £300,000 profits to leave £280,000. The corporation tax payable by the company is calculated against the £280,000 figure, not the total profits of £300,000.

A qualifying Donation:

A company may claim tax relief on any donation so long as it is a ‘qualifying’ payment. A distribution of profit such as a dividend will not qualify as a donation for the purpose of tax relief.

Other non-qualifying Gifts:

-Gifts that are subject to a condition such as repayment
-Gifts which are associated with or conditional upon the charity’s acquisition of any property from the donor or any person connected to the company (except by way of Gift)
-Gifts where the company or a person connected to the company has received a benefit over a certain value in return.

The benefits which a donor may receive in return for a donation are restricted as follows:

-for donations of £0-100: 25% of the donation
-for donations of £101-1000: £25
-for donations above £1000: 5% of the donation
-for donations above £10,000: £500

Example:

Company A makes a donation of £950 to Charity B. As a thank-you gesture Charity B decides to make a gift to the company. In order for the original donation to remain as a qualifying gift the charity’s own gift to the company must not value more than £25.

A company wholly owned by a Charity:

Many charities now establish subsidiaries companies to carry out trading activities. These non-charitable subsidiaries will of course be liable to corporation tax on their profits. However these companies can make payments to the parent charity equivalent to some or all of its taxable profits.

The payment will be treated as a non-trade charge and will be deducted from the subsidiaries taxable profits. Dividends paid to the charity will still be viewed as a distribution of profits and therefore will not qualify as a donation for the purposes of tax relief.

Normally a company cannot carry any donation into another accounting period but special rules apply for companies owned wholly by a charity. A wholly owned subsidiary has nine months from the end of the relevant accounting period in which to make a donation. Therefore if the payment is made within nine months of the particular accounting period it can choose to treat it as if was paid in that earlier accounting period

For Example:

The accounting period ends in April 2010. The subsidiary can make the donation up to nine months after the April 2010 date and it will still be considered as having been made in the April 2009/2010 year.

Deferring the payment can assist in the cash flow of the company as subsidiaries will often want to make payment of their entire profits. The timing of the Gift Aid payments is primarily a matter for the directors of the subsidiary.

A company partly owned by a Charity:

A charity can establish a ‘joint venture’ company with another company which will be jointly owned by the two entities. Joint ventures can make Gift Aid donations and claim tax relief. However unlike companies wholly owned by a charity the joint venture does not enjoy the nine month rule. The tax relief must be claimed for the accounting period during which the payment was made.

Any payment made by the joint venture to the charity in its capacity as a shareholder will not be viewed as a qualifying donation by HMRC. Whether the payment is classed as a distribution of profits with respect to shares will depend on underlying nature of the payment.

If the payment was made in direct relation to the shareholding of the charity then this would not qualify for Gift Aid purposes.

For example:

The joint venture makes a profit of £400,000. The charity owns 50% of the venture. If 50% of the profits are donated to the charity this could be well viewed by HMRC as a distribution of profits with no subsequent tax relief for the joint venture.

Sources

See HMRC website for detailed guidance on this matter.

The Fit and Proper Persons Test

2010-05-21T18:17:00.002+01:00

The newly introduced 'Fit and Proper Persons Test' has created an uproar within the UK charity Sector. The test, which scrutinises the suitability of directors/trustees has come in for scathing criticism. Many charities are understandably worried that they may be caught out by the new scheme and consequently lose their charitable tax status.

The HMRC have gone some way to allaying these concerns by publishing a Questions and Answers guide. The guide stresses that a charity will not automatically lose their charitable tax reliefs if one or more trustees/directors fail the 'fit and proper' test. The HMRC will work with charities to mitigate against such penalties arising.

The Guidance goes on to say that the HMRC approach will depend upon the individual circumstances in each case. It would be hoped that such flexibility would mitigate against the otherwise draconian measures introduced for any failings. Of course on the flip side such an individualistic approach may leave charities with little idea as to what may happen to their status right up until the HMRC makes its decision.

Social Franchise Agreements- key issues

2010-05-17T19:42:00.001+01:00

Social Franchise Agreements

Key Points:

A Franchise is only as good as the agreement underpinning it. It is essential that the franchise agreement be drafted in a thorough and robust way. It must cover all of the relevant issues and perhaps, even more importantly, all the possible eventualities.

What Should the Agreement Include?

The number of issues that must be covered is quite exhaustive but some of the key points can be summarised as follows:

1. The Grant: Will be found at the beginning of the agreement and in effect allows the franchisee to operate the business and use the intellectual property of the franchisor in a specific area. From the grant everything else flows.

1. Fees: The fees will likely include an initial set fee as payment for support during the start-up phase and also an ongoing fee which may be fixed or based on a % of revenue/profits. There may also be an annual fee to cover any advertising done by the franchisor on behalf of the franchise at large.

2.The Term: How long will the franchise last? Generally the agreement will be for a 5 or 10 year period. At the end of term the agreement should contain rights of renewal which will allow the franchise to continue unless a major breach of the agreement has occurred.

3. Exclusivity: A franchisee will want to know that they have exclusive rights to the franchise in a particular geographical area. If you set up a fast food franchise the last thing you want to see is another franchisee setting up just down the street.

4. Franchisors obligations: Can be divided up into the initial obligations such as start-up advice and training and the on-going obligations which will include the parting of general know how, advising on on advertising and the continued training of staff as and when required etc.

5. Franchisees obligations: The franchisee will be expected to meet its numerous obligations. They will include adhering to the franchise system, protecting the brand and maintaining standards etc.

6. Intellectual property: The intellectual property of the franchise will include:
-the business name
-the goodwill generated by the franchise
-the copyright of all manuals, websites, promotional materials, software and all other confidential information.
-the trademarks of the business

The franchisor should ensure that the agreement ensures the protection of all of the above.

7. Right to sell: The franchisee will of course want the right to sell on the franchise. From the franchisors perspective, they will want any agreement to give them a veto over any sale if they do not feel that the buyer meets the required standards.

8. Right to Intervene/Terminate: The franchisor may wish to intervene in a more direct fashion if the franchisee is not meeting required operational standards or they may simply wish to terminate the agreement due to major breaches of the agreement.

Useful Resources

For a number of interesting articles on social franchising/replication see the work carried out by UnltdVentures on the Unltd website

Northern Ireland Assembly debate on Credit Union Reform

2010-05-11T19:55:00.010+01:00

Fresh concerns have been raised about yet more delays to the proposed legislative reform of credit unions in Northern Ireland. The Assembly heard of the possible difficulties that may arise as the consequence of an incoming Conservative Government which has stated its intention to abolish the Financial Services Authority (FSA).

The proposed reforms for Northern Ireland are based on the proviso that Credit Unions here are to to be placed under the regulation of the FSA. This in turn would allow credit unions to drastically expand the services they can offer to their members and it would also afford greater protection for those members' savings (an issue highlighted all too starkly by the Presbyterian Mutual Society collapse).

Obviously any abolition of the authority would throw these proposals into limbo.

The Minister did stress that she would press both the Treasury and the new Secretary of State on the reforms.

Co-operatives & Community Interest Companies

2010-05-07T19:27:00.006+01:00

Community Interest Companies have generally been structured as Companies Limited by Guarantee or by Shares. However Co-operatives UK have now created a Co-operative template for those wishing to set up a CIC but who do not want to go down the traditional company route.

This once again highlights the evolving nature of the CIC structure.

Examples of Co-operative community interest companies include:

Rygbi Gogledd Cymru

Upstart

Charitable Incoporated Organisation (CIO)

2010-05-05T18:02:00.009+01:00

The new CIO legal structure is facing yet more delays, with its introduction now pushed back until the end of the year or possibly the beginning of 2011.

This will be of great disappointment to the many organisations that are eagerly awaiting the arrival of this new structure as a much needed alternative to the current legal vehicles employed by charities.

Many charities, particularly those small in size, will be constituted as either unincorporated associations or trusts. Although flexible and relatively straightforward they do not protect trustees from liabilities arising from the organisations operations. With no separate legal personality, trustees face serious personal risks if litigation were to arise.

In the past charities have often incorporated as Companies Limited by Guarantee as a way of avoiding liability. However incorporation in this form is not really suitable for small charities given the regulation and accounting requirements governing such forms. As an added headache, such legal forms suffer from the regulation requirements of both the newly formed NI Charity Commission and Company House. Many charities can as a consequence become suffocated by a mountain of red-tape.

The Government placed the two key tenets of unlimited liability and dual regulation at the forefront of their policy objectives underpinning the new CIO. The structure was designed to provide charities with a separate corporate personality (and thus reduced personal liability) and also end the dual regulation requirements.

Whilst the structure does appear to offer very real benefits to charities, its true worth will not be established until the final corresponding regulations governing the structure are published by the Government (Don't hold your breath).

Charity Commission (Northern Ireland) Timeline

2010-05-04T18:10:00.002+01:00

The Charity Commission (NI) has announced its timeline for the introduction of a charity register. It is hoped that new charities will begin registering from the end of June and that charities currently registered with the HMRC will register later in the year (with the largest going first).

Reform of Industrial & Provident Societies

2010-04-29T18:32:00.003+01:00

Much has been made of the proposed reforms affecting the Credit Union movement in Northern Ireland (quite understandable given its size) but to date discussion has been relatively muted regarding reform of co-operatives and community benefit societies (which have a significant presence among the housing and agricultural sectors here). This is likely to change with the publication later in the year of a joint Treasury/DETI consultation on Industrial & Provident Society (IPS) reform.

Meanwhile, two pieces of legislation have been introduced to give effect to the reform of Industrial & Provident Societies in Britain. With any reforms in Northern Ireland likely to mirror those changes across the water it is worth taking a closer look at the two legislative documents.

1. Legislative Reform (Industrial & provident Societies and Credit Unions) Order 2010

Some of the key reforms include:

- An end to the minimum age restrictions for membership of a society.
- Reducing the age limit to become an officer to 16
- Removal of the £20,000 limit on any members maximum shareholding. The restriction has removed the limit for non-withdrawable shares. Withdrawable shares are still subject to the maximum limit.
- allowing a society to choose its own year end date
-facilitating the easier dissolution of societies by easing the voting requirements to dissolve.

2. Co-operative And Community Benefit Societies And Credit Unions Act 2010

Some of the key reforms include:

-renaming the previously titled Industrial & provident Society Acts to the Co-operative and Community Benefit Societies Acts (In effect a brand change).
- requiring all new Industrial & Provident Societies to be registered as either a co-operative or community benefit society.
- giving HM Treasury the power to apply to IPS, with appropriate modifications, company law on investigation of companies, company names and dissolution and restoration to the register.

The reforms in a Northern Ireland context:

The removal of the limit on non-withdrawable shares and the flexibility regarding year ends would be of benefit to any agricultural co-operative operating in Northern Ireland.

The removal of the limit would allow members of agricultural co-operatives to invest greater sums of money to expand the business and increase profitability. Agricultural Co-operatives would also be able to link their financial year end to the agricultural cycle which would make greater financial and commercial sense than the current arrangements.

With the name changes and increased Treasury powers to apply company law, the Government seeks to address concerns by bringing the Industrial & Provident Society format into the 21st century. It is hoped that these changes will add new vitality to a legal structure which has fallen in popularity in recent years.

Charities & Trading Subsidiaries Part 6

2010-04-29T18:16:00.002+01:00

The final part of this series takes a look at the role of trustees in the everyday management and running of a trading subsidiary.

Part 6

Role of the Trustees

The trustee must scrutinise numerous funding and general financial/legal matters when a subsidiary is established (see parts 3 & 4). But their role also extends to the running of the subsidiary itself. The extent to which they should interfere in the management of the trading subsidiary is a delicate matter which can have repercussions.

It will be standard practice for the charity as majority/sole shareholder to appoint trustees of the charity to directorship positions within the trading subsidiary. This will allow the charity to monitor the activities of the trading subsidiary. Such persons will have two distinct responsibilities, both to the charity and the trading subsidiary. They will therefore have to be mindful of any conflicts of interest which arise from their dual mandate.

Whilst a monitoring role will be acceptable if undertaken with adequate safeguards the charity should not become actively involved in the management of the charity. The subsidiary board should be independent of the parent charity and the charity should not dictate instructions to the subsidiary. If it does adopt such an active management role then serious liability issues can arise for the charity if the trading subsidiary falls into financial difficulties.

Therefore those with a dual role should be in the minority on the subsidiary board and should heed the advice of non-conflicted board members when any possible conflict arises. Only by engaging such governance procedures will the difficulties associated with a conflict of interest be avoided.

Social Franchising

2010-04-25T17:01:00.017+01:00

Two scenarios:

1. You are a charity/community organisation which seeks a more sustainable means of funding. You want to establish a business which will generate profits and/or achieve social objectives and reduce dependency on grants. There is one small problem though, you don't have a business idea and even if you did, you wouldn't know where to begin to make that idea a reality.

2. You are an established social enterprise with a proven profit making business and strong brand. You want to grow as a business and maximise the social benefits but you are unsure as to how you can carry this out.

A possible solution?

Social Franchising

Similar in many respects to ordinary commercial franchising, social franchising can deliver the outcomes required in the two scenarios.

But what is it?

In effect franchising is where two parties enter into a contractual agreement in which one party (the franchisor) will give the blue-print (business model) for its successful business to the 2nd party (franchisee) which will set up a copy of that same business with the ultimate aim that both sides make a profit. Social franchising simply follows this formula and throws in the added social dimension.

In conjunction with the blue print comes a substantial support package which the prospective franchisee will utilise. This will include staff training, technical support, help with marketing/promotion of the business and access to the general know how that the franchisor has developed over the years to make their business a success.

Such support may prove particularly appealing to a charitable/community organisation which is entering the commercial world for the first time and which would otherwise be daunted by the complexities of starting a business.

But what does the franchisor get in return?

Generally in any franchise agreement the franchisee will pay an initial fee to the franchisor for the business model. The franchisee will then pay a % of turnover each year to the franchisor in return for its continued support and access. The franchisee will also invest its own money in the initial start-up which reduces the financial risk for the franchisor.

Such an arrangement offers real advantages to both parties but is not without its drawbacks.

Although the franchisee will operate the business on a day to day basis the franchisor will still exercise significant control over operations. It may dictate how services/goods are sold and marketed. It will also be keen to ensure that all activities undertaken by the franchisee do nothing to bring the brand/business into disrepute. Such control may not sit well with some prospective franchisees who would chaff at such restrictions. This will also be labour intensive for the franchisor as they must assiduously work on maintaining quality and standards.

Franchising your business model could soon become a nightmare if the franchisee destroys the painstakingly created brand through mismanagement and your lack of oversight. Therefore the franchisor must be prepared to invest the time and effort into making the franchisees operation a success.

Social franchsing is something we are likely to hear more of in the future.

Community Interest Companies (CIC's)

2010-04-21T13:23:00.013+01:00

Community interest companies (CICs) are limited companies with a number of additional features and regulations, created for those who want to conduct a business for the community benefit and not purely for private advantage. This is achieved by a community interest test and asset lock which ensures that the CIC is established for community purposes and the assets and profits are dedicated to those same goals.

The UK Governments stated objectives when drawing up this new legal model were to improve access to finance, create a strong new brand, provide protection from demutualisation (investors changing the aims and nature of the company) and preserve assets and profits for social purposes.

CICs will generally be structured as either a company limited by shares (CLS) or a company limited by Guarantee (CLG) although in practice the majority of CIC's register as the latter.

Setting up a CIC

When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC regulator will approve your application if your statement passes the community interest test - ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it. The test is whether a reasonable person could consider those activities to benefit the community.

Features of a CIC

CICs have to follow specific rules, including the following:

Asset lock

CICs must have an asset lock. This ensures that the company cannot generally transfer its profits or assets for less than their full market share. The exception being a transfer to another asset locked company such a charity or other CIC. It will also protect any remaining assets for the community if you dissolve the CIC. The lock is legally enshrined and cannot be removed under any circumstances.

Dividend Cap

If you set up your CIC as a company limited by shares, you will have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock and strike a balance between encouraging people to invest in CIC's and the principle that the assets and the profits of a company should be devoted to the benefit of the community.

There are three elements to the Dividend Cap:

1. maximum dividend per share limits amount of dividend that can be paid on any given share. Currently the limit is a flat rate of 20% of the paid up value of the share.

2. The maximum aggregate dividend limits the total dividend declared in terms of the profits available for distribution. Currently, the limit is 35% of the distributable profits.

3. The ability to carry forward unused dividend capacity from year to year to a limited extent. Currently the limit is 5 years.

It should be noted that these caps set maximums. They should not be taken as in any way suggesting that those who invest in CICs are entitled to a particular rate of return on their investment.

Performance Related Cap

CIC will generally have the same borrowing powers as any other company. On rare occasions the situation will arise were the interest payable on debts or debentures is linked to the performance of the CIC (also known as quasi equity). The ability to pay uncapped interest in this fashion would circumvent the Dividend Cap.

Therefore a cap exists on the maximum interest payable. It has been set as 10& of the average amount of a CICs debt or sum outstanding under a debenture.

Accounting

Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interests.

Whilst take up of the CIC structure has been relatively muted in Northern Ireland the structure does appear to have struck a chord with many social entrepreneurs and is unquestionably a useful addition to the social enterprise sector.

For further information see the CIC Regulator website: http://www.cicregulator.gov.uk/

Credit Union Reform in Northern Ireland

2010-04-18T17:28:00.008+01:00

The expansion of credit union powers is central to the proposed legislative reform in Northern Ireland. One of the more significant proposals put forth in the recently released joint Treasury/DETI consultation is the granting of investment powers which would allow credit union assets to be re-invested into community enterprises.

http://socialeconomylegal.blogspot.com/2010/04/credit-union-reform-in-northern-ireland.html

Credit Unions in the Republic of Ireland have had such powers for some time and have employed them to some effect, with the credit union movement now one of the biggest social finance providers in the state. Indeed the southern experience illustrates the relative merits of the proposed move in Northern Ireland

Aidan Stennett has compiled an insightful paper for the NI Assembly on the legislative framework underpinning these investment powers.

http://www.niassembly.gov.uk/io/research/2008/11608.pd f

This framework will undoubtedly provide a useful template for any legislative changes in Northern Ireland that may arise

Charities & Trading Subsidiaries Part 5

2010-04-18T11:31:00.000+01:00

Part 5

Transferring the Subsidiaries Profits

There are a number of ways in which profits generated by the trading subsidiary may be transferred back to the parent charity. The path taken will have tax implications and this will often be the deciding factor in choosing the appropriate method.

The two main methods are as follows:

- Funds may paid in the form of a share dividend pursuant to the share capital acquired by the charity.

- Gift Aid may be used to transfer the money from the subsidiary to the charity.

The payment of a dividend to a Charity, whilst retaining a certain 'prestige' factor will often not be the optimum way of transferring money. Whilst a dividend is not taxable in the hands of the charity, it does not reduce the trading subsidiaries taxable profits. Thus the subsidiary would be liable to corporation tax.

The most common method of paying funds therefore is through the Gift Aid Scheme. Like the dividend, the Gift Aid payment will be exempt from tax in the hands of the charity, so long as the money is used for charitable purposes. However where the Gift Aid scheme differs is that the payments do reduce the subsidiaries taxable profits. n fact it is possible for a subsidiary to mitigate its entire tax liability through paying all of the companies profits to the charity under Gift Aid.

There is nothing underhand with this approach, it is a perfectly acceptable way in which to reduce the amount of tax owed by the trading subsidiary.

However, giving all of the profits to the charity under the Gift Aid scheme can cause some difficulties. A transfer of all the profits may leave the subsidiary with a lack of working capital, with the cash-flow problems that would entail. HMRC do give subsidiaries wholly owned by a charity some lee-way in this regard but it may be prudent in some instances for the subsidiary to retain some of its profits to meet working capital requirements. The charity would have to accept the ensuing tax liability for the amount of profits retained.

Charities & Trading Subsidiaries Part 4

2010-04-14T11:01:00.009+01:00

As highlighted in part 3 of this series, a charity must adhere to the qualifying investment criteria if it wishes to avoid the potential tax penalties incurred by non-charitable expenditure. It cannot simply give a certain amount of money to a trading subsidiary as a goodwill gesture. Any investment must be commercially sound. This underlying requirement will therefore dictate the type of investment which a charity can make to the trading subsidiary.

Part 4

TYPES OF INVESTMENT

The two main types of investment are the acquisition of share capital and/or the provision of loans.

Share Capital

It may sometimes be prudent to subscribe only a nominal sum for the issue of share capital so as to satisfy company law. If a parent charity does subscribe a greater sum as a means of investment then that investment will be subject to risk if the trading subsidiary ultimately fails. This is because the repayment of share capital has a lower priority than the repayment of loans in the event of liquidation.

On the other hand the capitalisation of the subsidiary by loan carries its own risks. The provision of loans may expose the subsidiary to the risk of insolvency if it cannot repay its borrowings. It must be remembered that any loan by the charity must be on a commercial basis and offer commercial returns. the subsidiary would be obliged to pay a reasonable rate of interest in addition to the capital and this could cause some difficulties for a newly established subsidiary with marginal profit margins.

Therefore in this instance where profit margins are likely to be marginal it may be reasonable to pay more than the nominal amount for share capital.

Of course a trading subsidiary does not have to rely on the parent charity for sole funding. outside financiers can play a role in capitalising the enterprise. However, investment through the acquisition of shares is unlikely to prove attractive to such persons or organisations as they would be motivated by profit. This would sit uncomfortably with a trading subsidiary which gives all or most of it profits to the charity, leaving little or no dividend.

The charity could market the acquisition of shares to wealthy supporters who would be willing to invest and possibly fore go a commercial return.

Loans

HMRC guidance stresses the requirement that any loan from the charity to the trading subsidiary must be at arms-length and bear a commercial rate of interest with suitable repayment terms. It is highly unlikely that HMRC would tolerate a loan agreement with no rate of interest and a repayment schedule over a 1000 year time period!

The loan must also ordinarily be secured against any assets of the trading subsidiary. Where this is not possible, because the trading subsidiary has no assets, then HMRC will likely scrutinise the loan through an assessment of the business projections, cash-flow forecasts etc.

A trading subsidiary is of course under no obligation to obtain a loan from the charity. it may approach commercial entities in-order to acquire finance. This obviously puts the trustees of the charity at less risk as they wouldn't have to grapple with the many issues surrounding charitable investments as has been previously discussed.

However banks and other lenders may require guarantees/security from the charity itself as part of any loan agreement. This would expose, both the charities assets and the trustees themselves to risk if the subsidiary got into difficulty. Such commercial lenders may also stipulate repayment terms which would be in excess of what the charity would be obliged to charge under any loan agreement with the subsidiary.

Therefore loans from commercial lenders may not always be a viable option. Well-wishers and supporters of the charity could offer loans to the subsidiary on more favourable terms.

Charities & Trading Subsidiaries Part 3

2010-04-12T10:04:00.017+01:00

Part 3

FINANCING A SUBSIDIARY

A trading subsidiary like any newly formed business will require starting capital in-order to finance its activities before a profit is ever realised. Given the nature of the relationship between the charity and trading subsidiary it is normal to assume that the charity may wish to invest monies into the subsidiary. There are special rules that apply when a charity wishes to invest funds in a trading subsidiary which must be adhered to.

Firstly any trustees wishing to invest should insure that they have the requisite power to do under the charities constitution.

Any investment made in the trading subsidiary must be deemed a 'qualifying investment' for HMRC purposes. if it does not qualify then HMRC will view the investment as 'non-charitable expenditure@. This can be defined as expenditure on things that are not for the charitable purposes as set out in the charity's governing documents or any investments and loans made by the charity which are not qualifying loans or investments as detailed by HMRC regulations.

Any non-charitable expenditure may result in the charity losing its tax exemption on all or part of its income or gains. the amount is taxable at the same amount of non-charitable expenditure.

For example: A charity receives gross gift aid income of £40,000. the charity would normally be entitled to tax relief of £40,000. If £30,000 was spent on charity grants and administration and £10,000 on a non-charitable loan then the charity would lose tax relief on the same amount of the £10,000 loan.

The list of qualifying investments does not include investments in or loans to subsidiary companies per se. there is provision however that a charity can make a claim to HMRC to treat such investments as qualifying.

To satisfy this provision the charity must show that it was made for charitable purposes and that it is for the benefit of the charity, and not to avoid tax.

In order to achieve this, the investment should be commercially sound and the charity should ensure that the investments are secure, carry a fair rate of return and in the case of loans, provide for recovery of the amount invested in due course.

The trustees must be able to justify financial support for a trading subsidiary as an appropriate investment of the charities resources. The Charity Commission for England & Wales has stipulated the following guidance for trustees when considering the investment of charities resources, both in general and in the particular context of a proposed investment in a trading subsidiary which is used to carry on a non-primary purpose trade.

- be certain that the investment is within the charities investment powers;

- exercise such care and skill in the investment process as is reasonable in the circumstances;

- have regard to the suitability to the charity of investments of the same kind as the particular investment which it is proposed to make;

- have regard to the suitability of the particular investment in question, as an investment of the kind which it seems appropriate to make;

- have regard to the need for diversification of investments, as appropriate to the circumstances of the charity; and

- ordinarily obtain and consider advice about the investment from a person reasonably believed by the trustees to be qualified to give it by his or her ability in and practical experience of financial and other matters; the advice needs to have regard to the suitability and diversification points mentioned above;

- the trustees must reasonably consider that it is in the charities interests to make the investment, after making a fair comparison of this form of investment with other forms of investment which might be selected;

- this fair comparison must involve an objective assessment of the trading subsidiaries business prospects;

- the trustees must be satisfied as to the financial viability of the trading subsidiary, based on its business plan, cash flow forecasts, profit projections, risk analysis and other available information; and

- the trustees must ordinarily take appropriate advice on the investment, and the financial viability of the trading subsidiary. What is appropriate will depend on the circumstances: the cost of taking the advice is a relevant factor, and the cost should be commensurate to the size of the proposed investment.

- pay attention to the length of time over which funds may be tied up in an investment in a trading subsidiary, since funds needed in the short to medium term may not be easily realised when invested in this way;

- consider, and take suitable advice on, the possibility of obtaining independent funding as an alternative to funding by the charity.

Public Procurement & Social enterprises

2010-04-11T15:08:00.001+01:00

The NI Assembly recently published a Report on its Inquiry into Public Procurement in Northern Ireland:

http://www.niassembly.gov.uk/finance/2007mandate/reports/Report_19_08_09R.htm

The Committee for Finance & Personnel have made a number of recommendations which will be of interest to social enterprises engaged in the public procurement process.

Indeed the Committee states that implementation of the recommendations will achieve the objective of developing the social economy in Northern Ireland.

One of the more interesting recommendations is the support for the establishment of a public procurement brokerage service for social enterprises as advocated by the Ulster Community Investment Trust (Para 174).

As most social enterprises are small in scale it can be extremely difficult to break into the complex area of public procurement. The brokerage service seeks to address the key resource and knowledge limitations by offering professional support for the tendering of contracts. It is certainly a service that social enterprises should be watching out for in the year ahead.

Charities & Trading Subsidiaries Part 2

2010-04-08T12:48:00.012+01:00

Part 2

WHAT IS A TRADING SUBSIDIARY?

It is an independent commercial body, quite distinct from the charity. Its legal structure will usually take the form of a non-charitable company limited by shares or a non-charitable company limited by guarantee.

Although the trading subsidiary does not enjoy the advantages of charitable status, it is not burdened with the stringent trading restrictions that a charity must comply with. It will therefore be able to undertake trading activities which the charity cannot.

WHY USE A TRADING SUBSIDIARY?

- trading subsidiaries offer greater flexibility and fashion the opportunity to generate greater sums of money for the charity.

- The trading subsidiary will be able to carry out non-primary purpose trading on a larger scale and obtain tax relief through the gift aid scheme. If a trading subsidiary gives all or part of its profits to the parent charity then it will not have to pay any tax on those profits. This can result in very significant savings for the charity through the reduction or elimination of tax liabilities. Where the non-primary purpose trading does involve a significant risk the Charity would have to establish a trading subsidiary if it wished to continue that form of trading.

- To protect the charities assets from the risk of trading. If the trading is carried out within the trading subsidiary then the risks associated with any losses will be ring-fenced within the subsidiary itself.

- To protect the trustees of a charity from personal risks & liabilities.

- The directors of a trading subsidiary may be paid for their work unlike their trustee counterparts. Therefore a more commercially savvy person may be attracted to run the business. It must be noted though that the establishment of a trading subsidiary should not be used as a backdoor method of paying charity trustees.

It is important to remember that it is not only where non-primary purpose trading is undertaken that a subsidiary may be established. A charity may set up a trading subsidiary for the purpose of primary purpose trading if it so wishes.

DISADVANTAGES OF SETTING UP A TRADING SUBSIDIARY

Where the establishment of a trading subsidiary is not essential the benefits enjoyed must be balanced with the drawbacks that such a move would entail.

The disadvantages may include:

- The tax benefits may not outweigh all the extra costs associated with setting up and running a subsidiary.

- The additional administrative burden of a legal entity, quite separate from the charity.

- Difficulties that can emerge concerning the financing of a subsidiary.

- Possible cash flow problems for the subsidiary if all of the profits are donated back to the parent charity.

- The possible conflicts of interest arising where trustees of charities sit on the board of the subsidiary as directors.

These potential drawbacks will not be relevant in every case but trustees must be careful to avoid having their positions compromised.

In Parts 3/4 I will take a look at the financing of a subsidiary. This is often a difficult proposition given the numerous constraints placed on charities but it is essential that trustees are alert to the potential pitfalls.

Charities & Trading Subsidiaries Part 1

2010-04-07T09:29:00.005+01:00

Today sees the start of a 6-part series which considers the trading activities of charities and the role of non-charitable subsidiaries. This is a pertinent issue in today's climate as charities move towards sustainable funding models. In Northern Ireland where the various Grant monies have begun begin to dry up there will be an increased onus on local community and charity groups to utilise trading opportunities as a means of funding, as failure to do so could result in their very survival coming into doubt.

PART 1

TYPES OF TRADING CARRIED OUT WITHIN A CHARITY

Charities are allowed to trade by law provided that the trading falls within one of the following categories:

Primary Purpose Trading- covers trading which contributes directly to one or more of the objects of a charity as set out in its governing document. Also includes trading where the work is mainly carried out by beneficiaries of the charity (beneficial trading).

This form of trading is not subject to tax and is therefore an effective way of funding the charity.

Examples include: provision of education services by an educational charity or the charging by a hospital for health care services.

Work carried out be beneficiaries (beneficial trading) might include sale of furniture produced by those with learning difficulties.

Ancillary Trading- is not on its own primary purpose trading but is carried out as part (ancillary) of a primary purpose trade.

Examples include: a theatre charity established for the promotion of arts running a cafe bar which sells refreshments to those attending the performance or the provision of accommodation to the students by a University.

Again this form of trading is not subject to tax liabilities.

Non-Primary Purpose Trading- is a form of trading which does not contribute directly to one or more of the objects of a charity as set out in its governing document. A charity will be allowed to raise funds through the carrying on of a trade which is not primary purpose, but only if the trading involves 'no significant risk' to the resources of the charity.

There is however no tax exemption for non-primary purpose trading, subject to a small trading exemption.

Exemption for Small Trades

The exemption to tax is applied where total turnover from all non-primary purpose trading does not exceed the annual limit.

The annual limit is as follows: £5,000 or if turnover is greater than £5,000, 25% of charity's gross income, subject to an overall limit of £50,000

In Part 2 I will condsider the use of trading subsidiaries and their respective advantages and disadvantages.

Credit Union reform in Northern Ireland

2010-04-06T16:06:00.005+01:00

The joint HM Treasury & DETI consultation document on the reform of credit unions has recently been published:

http://www.hm-treasury.gov.uk/d/consult_ni_credit_unions.pdf

The proposals for regulatory reform follow the review of the legislative framework which was published in July 2009:

http://www.hm-treasury.gov.uk/d/review_legislativeframework_creditunions080709.pdf

The Treasury has put forward the following preferred option for reform of the sector in Northern Ireland:

The regulatory functions would transfer from DETI to the Financial Services Authority (FSA) whilst the registration of credit unions would remain within the remit of the DETI. The legislative functions would remain with the Northern Ireland Assembly.

The transfer to the FSA would enable credit unions to access both the Financial Services Compenstion Scheme (FSCS) and the Financial Ombudsmen Service (FOS). This would offer greater protection to credit union members in the event of a collapse of their credit union.

The FSCS currently provides up to £50,000 protection of savings per member in the event of a collapse.

Regulation by the FSA would also enable access to U.K Government initiatives such as the Growth Fund and Child Trust Fund.

Whilst much of the discussion has rightly focused on the FSA debate another interesting aspect of the consultation process is the scrutiny of credit unions investing their assets in their local communities.

Question 4 of the consultation document queries whether credit unions in Northern Ireland should be given powers to re-invest assets into community development and community enterprises. Such a power would go beyond that envisaged for credit unions in Britain and offer the kind of community investment powers currently enjoyed by credit unions in the ROI.

The ability to re-invest credit union assets into community enterprises could prove to be a big boost for the social economy sector in general with increased investment the result. There are numerous examples of this already occuring in the ROI to good effect and there will undoubtedly be calls for credit unions in Northern ireland to be able to wield such investment powers.

The consultation period will end on the 24 May 2010.

A New Blog

2010-04-05T14:50:00.000+01:00

I hope that this blog will be a useful tool and source of information for those people operating within the social economy sector in Northern Ireland and beyond.