When do Academy Trusts Need a Trading Subsidiary?
What circumstances mean an academy trust may need to set up a subsidiary company to carry out trading activity, in order to comply with charity law?
A recent blog post published by Companies House highlighted the work of a social enterprise set up by school pupils, which helps schools generate income by hiring out their facilities to individuals and local groups. This is just one strategy which academy trusts may pursue to generate extra income, as highlighted in this earlier Wrigleys article.
Such activities may be classed as trading, particularly where services are provided alongside the facilities, such as a cleaning, catering or security. Where this is the case, an academy trust may need to set up a trading subsidiary in order to undertake them.
What trading can an academy trust do itself?
The general rule is that an academy trust can only carry out trading activity which furthers its charitable objects, or which is ancillary to furthering those objects.
The objects are found in the academy trust's articles of association. The DfE model objects require an academy trust to advance education for the public benefit in the United Kingdom. For academy trusts with DfE model objects, they may therefore carry out trading which has an educational purpose, or is ancillary to an educational purpose.
In practical terms, this means that an academy trust can charge for educational activities such as music lessons (provided this falls within the DfE guidance on charging for school activities), and for ancillary activities such as school meals or uniforms.
Some academy trusts also have leisure and recreational charitable objects, which permit activities such as hiring out playing fields or serviced facilities to local sports clubs and other groups. However, DfE is now more reluctant to permit new academy trusts to be incorporated with this object.
An academy trust should therefore check what its own objects are, as a first step when reviewing the trading activities it carries out. Trading which is permitted by an academy trust's objects may be referred to as charity trading, or 'primary purpose trading'.
What if an academy trust carries out non-charity trading?
A charity is only permitted to carry out non-primary purpose trading (or non-charity trading) where this does not involve significant risk to the resources of the charity. Examples of activities which would fall within this category include selling services outside the academy trust, such as HR, IT and catering to other schools and academies. Although renting out land and buildings does not generally qualify as 'trading' for this purpose, in some circumstances it may, particularly where the facilities include services (e.g. catering or cleaning).
In trading terms, income generated by non-charity trading will usually be chargeable to corporation tax. However, there is a useful tax concession which helps to manage non-charity trading. This permits an academy trust to do a small amount of non-charitable trading, without becoming liable for corporation tax, provided that the income generated falls under a certain amount. This is currently up to £50,000 per annum and is known as the 'small scale exemption'. Any profits generated must be applied for the charitable purposes of the academy trust.
It is important to note that the amount of trading undertaken takes into account all of the schools within an academy trust. It is not done on a school by school basis. An academy trust therefore needs to regularly review the trading activities carried out by all the schools in its network.
You should bear in mind that everything a charity does should be within its charitable objects. The purpose of any non-charity trading activity it does should be purely to raise money for the academy trust to spend on its charitable purposes. If an academy trust undertakes activities outside its objects, it could lead to an academy trust losing its charitable status, which is a breach of the academy funding agreement (and would potentially result in personal liability for the trustees).
On a separate point, spending GAG funding on non-academy activities is also a breach of the academy funding agreement, so it is important that an academy trust can identify the source of any funds used in seed funding or supporting any trading activity.
Using a trading subsidiary
If an academy trust is likely to generate more than £50,000 per year from non-charity trading, it is customary to set up a trading subsidiary (a separate company wholly controlled by the academy trust). Non-charity trading is then undertaken by this trading subsidiary. Any profits generated can be transferred to the academy trust under the 'Gift Aid' scheme, reducing the liability of the trading subsidiary to corporation tax.
Even where non-charity trading is less than £50,000 per year, academies may choose to use a trading subsidiary anyway, to 'ringfence' trading activities from their core charitable activities, especially if the activities involve financial or reputational risks (such as running private events such as weddings or balls on school property).
Further information about the use of trading subsidiaries and the relationship between trading subsidiaries and the academy trust which controls it can be found on the Charity Commission website (as part of its generic advice for charities), available here.
Chris Billington, head of Wrigleys Education Team, comments "many academy trusts are still adjusting to life as exempt charities, and getting to grips with what compliance with charity regulation entails. It is important to understand what trading activities fall outside an academy trust's objects and manage them properly, in order to avoid adverse tax consequences".
The social enterprise featured on the Companies House blog is an inspiring example of schools diversifying their income sources. However, where academy trusts are considering undertaking such activities, they need to bear in mind their obligations under charity law.
Also see our latest update to this article 'When should an academy trust establish a trading subsidiary?'
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors