The Commission recognises that many close partnerships between charities and non-charitable organisations are a crucial part of helping charities deliver their objects. The new guidance aims to encourage trustees to take a risk based approach and ensure charities' relationships with non-charitable organisations never advance non-charitable interests.
The most common such relationship for charities that operate independent schools is between the charity and a trading subsidiary. Many schools have trading subsidiaries to carry out substantial activities that fall outside the objects. They are known as "non-primary purpose trading" and would give rise to potential tax liabilities if they were carried out by the charity itself. Such activities typically include short term lettings of the school site to third party users, running the school shop or in some cases licencing intellectual property in connection with international franchising.
The new guidance has a wide scope and applies not just to relationships with trading subsidiaries but also to:
- charities with a non-charity as a sole or significant member
- charities which regularly fund or receive funding from a non-charity
- those charities which frequently work with a non-charity to deliver services/campaigns/projects etc
This is not an exhaustive list, but it illustrates the reach of the guidance, which comes as a result of growing concerns that some relationships between charities and connected non-charities have not historically been managed with sufficient care.
Six Principles Charities Should Apply
The guidance highlights six principles to ensure arrangements for working with a linked body sufficiently protect the school's interests and do not compromise independence:
- Recognise the Risk
Risks to the charity should be recognised and properly recorded. Examples of risk include giving support outside the charity's purposes, not recognising and/or managing conflicts of interest, inappropriately benefitting or becoming indistinguishable from the third party.
- Do not further non-charitable purposes
Your charity's resources and activities must not support non-charitable purposes, and any benefit to the non-charity must be no more than a minor necessary result of furthering the charity's purposes.
With specific reference to trading subsidiaries, the charity’s money, or other resources, should only be used to set up a non-charity where the purpose of doing this would benefit the charity by:
- providing a return on its investment in the non-charity. For example, where the non-charity trades to raise money for the charity
- carrying out activities which the charity could carry out itself to further its objects
- managing the administration of the charity or its resources, more effectively
Performance of the subsidiary and the financial support a parent charity provides to it by must be regularly monitored, ensuring the charity's interests always come first and that conflicts are properly managed.
A charity can still invest in its trading company, but the same considerations apply as to any other investment of a charity’s resources, in that the charity must have adequate investment powers and governors should follow normal rules and policies for investment. This applies whether you are investing for the best financial return or making a social investment.
Governors should also bear in mind that if you make investments and loans to prop up a failing trading company, this might not meet your investment duties.
- Operate Independently
The charity must be independent of any connected non-charities it works or operates with and governors must only run the charity in the interests of its beneficiaries.
- Avoid Unauthorised Personal Benefit and Address Conflicts of Interest
It is long established that governors cannot benefit directly or indirectly (including through a connected party) unless authorised, for example by the Commission, or by the charity's governing document.
As such, conflicts that may potentially arise between a charity and a third party must be anticipated, and there should be a sufficient number of governors who have no connection with the third party (so are not its directors, employees, or contractors, for example) to form a quorum.
- Maintain Your Charity's Separate Identity
It must be clear internally which organisation is which. From an external perspective, there should be transparency about how the charity works with the connected party. Any shared use of names/branding/websites etc. must be in the charity's best interests and should be regularly reviewed.
- Protect Your Charity
All decisions should be carefully taken based on sufficient information, ensuring your position is protected through written agreements about the arrangements made.
The Commission expects charities to create a clear audit trail of how the above principles have been applied when dealing with connected third parties. The guidance will be used as a "tool to hold charities to account" in the words of the Chair of the Commission, a comment which sits amongst wider concerns in the sector about the ever increasing amount of guidance that volunteer trustees are being required to follow. Nevertheless, it seems clear the Commission intends to regulate these standards.
To discuss how your charity is affected by the new guidance, please contact Barney Northover, in our Independent Schools team, on 0117 314 5395 or complete the below form.