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Charity begins at home

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It’s been an interesting week here at BHP. We are coming to the end of the audit season for many of our charity clients and as a trustee of Leeds Community Foundation I have been on both sides of that audit line.

The financial reporting burden put on charities has become ever more complex and the need for charities to show clarity and objectivity over the use of their considerable funds ever more important.

One issue which can keep trustees and senior leadership teams awake at night is the appropriate use of a trading subsidiary. Seems simple, but I have seen situations where trading in the subsidiary was part of the primary purpose of the charity, offered at a substantial discount rendering the subsidiary insolvent without the continued support of the charity itself.  The outcome can be significant amounts owed to the charity by the subsidiary which can never be repaid.

The trading subsidiary is often set up as part of planning to ensure the charity does not render itself liable to corporation tax. In some cases, the intention is to ring fence risk. Reasonable, but the charity must consider the investment decision very carefully by reviewing business plans and forecasts for example. Activities that are not intended to generate profits, because the activity is charitable, may only add additional costs of administration, confusion over where contracts and costs should be accounted for and lack of clarity over the charity’s activities. Thorough planning is therefore essential.

We have advised many charities on the appropriate use of trading subsidiaries and even been involved in a charity being a member of an LLP – this situation arose from two charities having a “joint venture” arrangement. It should be borne in mind that unwinding complex group structures can be problematic and expensive, requiring input from the charity’s financial and legal advisors.  In addition, the trustees should consider how the unrestricted funds are being applied and whether the organisation can be restructured in a more efficient and transparent fashion.

Therefore, I would urge the Finance Committee in your charity to consider the current structure and whether it is fit for purpose and not just a financial burden.