Don’t let trading be too taxing!
Generating revenue is a positive way of future-proofing your finances, but what’s the most tax-efficient legal structure for academies? Chartered Accountant Phil Reynolds considers the options
F
or the purposes of tax, academy trusts are considered charities and will therefore not have to pay tax on any profits they make from trading that is either part of, or helps, the
charity’s primary purposes, i.e. educating children. However, if your trading has nothing to do with
your primary purpose then you may have to pay tax on the profits from that trade. I say ‘may’ because if your turnover from this trading is below the small trading tax exemption limit, you don’t need to pay tax. The small trading limits are shown below:
Charity’s gross annual income
Under £20,000
Maximum permitted small trading turnover
£5,000
£20,001 to £200,000 25% of your charity’s total annual turnover
Over £200,000 £50,000 If you exceed these limits then you might want
to consider establishing a trading company or a community interest company (CIC). Before deciding upon the best structure it is recommended that you speak to your financial advisors and that you have a clear strategic plan in place that sets out your future aims, which could include pupil number growth, student and staff wellbeing, and site expansion.
Trading company This option enables an academy trust to set up a trading arm so that they can separate income- generating trading activity from their core charitable activities. A trading arm is a self-sufficient limited company operating as a wholly owned subsidiary of the trust, but being run and financed independently. Typical examples are that of a separate nursery being
12 AUTUMN 2018 FundEd
run on commercial terms (i.e. with no government funding), or a sports centre being used for more than just standard lettings, e.g. gym membership. At the outset, a trust may wish to fund a trading
arm to ease cashflow while it establishes itself or to help with developing additional resources for the future, such as building expansion. If finance is provided by the trust, then it should be forecasting when repayment of such finance is to be made and monitoring this closely as trading commences. The trust should ensure there is a full recharge of any relevant costs to the trading subsidiary that it incurs on its behalf, e.g. light, heat and rates. This will help to protect against the performance of the trading subsidiary being hidden by the core charitable activities of the trust. Essentially, the trading entity should not be supported indirectly by the trust. The trading arm does not need to have the same
directors as the trust, in fact it is often beneficial to have different directors so that independent decisions can be made. A trading arm can pledge or gift aid its profits back to the trust and thus avoid having to pay corporation tax, but the trust should not use any of its money or resources to support or manage the company. The trading arm should, however, also consider retaining some profit (which will be taxable) for working capital going forward.
Community interest company This is a relatively new type of company created for those wishing to establish a business with a social purpose (a social enterprise) in a legal form. A CIC can adopt a co-operative, not-for-profit or general commercial company model, and will need to be approved by the CIC Regulator. There are, however, a number of obligations that a CIC has to meet, and continue to meet, in addition to those imposed on
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