The opportunity to pursue commercial activity is a clear advantage of academy status and, for many reasons, it is usually done through a wholly owned subsidiary trading company.
Academies are exempt charities in law, therefore setting up a subsidiary is a sensible precaution for an academy looking to carry on any substantial and permanent taxable trading activities since it allows an academy to:
- ensure governors are not acting ultra vires, that is outside the scope of (i) the academy’s charitable objects, helping to maintain a clear distinction between educational work and trading activity and (ii) the governors’ conferred powers under the articles of association;
- separate the academy’s substantial permanent commercial trading activities from its charitable work, as required by charity law;
- protect the academy’s assets that might otherwise be exposed in the event of the commercial activity or venture leading to financial difficulty;
- comply strictly with the ‘non-primary purpose’ (i.e. commercial) trading restrictions imposed on charities by HMRC;
- retain the proceeds of commercial ventures tax efficiently by making effective use of corporate Gift Aid, under which taxable profits are passed back from the subsidiary to the academy at least annually (had the profits been retained by the subsidiary, they would be subject to corporation tax);
- optimise input VAT recovery (that is, the VAT which is charged to it by suppliers of goods and services) on commercial ventures and therefore mitigate the levels of what could otherwise be irrecoverable VAT. It should also be noted, however, that academies are afforded special dispensation under s33b of the VAT Act 1994, to recover input VAT incurred in providing education.
While each scenario will ultimately turn on its facts, with sensible planning a group structure can be advantageous for an academy, both in terms of observing good governance and separating its core educational activities from commercial income streams.
To discuss the advantages of setting up a trading subsidiary, contact John Devine on 0191 211 7905.