As schools continue to evolve and grow, so too do their legal structures. For example, it has become common place for schools to run commercial activities such as letting school facilities. John Devine, partner and head of Muckle LLP’s charity legal team, looks at how trading subsidiaries can work for academies
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, so setting up a subsidiary is a sensible precaution for an academy looking to carry out any substantial and permanent taxable trading activities.
A trading subsidiary allows an academy to:
- ensure governors are not acting outside the scope of the academy’s charitable objects, helping to maintain a clear distinction between educational work and trading activity;
2. make sure governors are not acting outside their conferred powers under the articles of association;
3. separate the academy’s substantial, permanent commercial trading activities from its charitable work, as required by charity law;
4. protect the academy’s assets that might otherwise be exposed in the event of the commercial activity or venture leading to financial difficulty;
5. comply strictly with the ‘non-primary purpose’ (i.e. commercial) trading restrictions imposed on charities by HMRC;
6. 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 once a year (had the profits been retained by the subsidiary, they would be subject to corporation tax); and
7. optimise input VAT recovery, the VAT charged by its suppliers of goods and services, on commercial ventures. This mitigates 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.