New guidance released for charities with a connection to non-charities

The Charities Commission has released some new guidance for charities who have a connection to a non-charity. This can cover a range of scenarios, but the most common one we see is charities with a trading subsidiary.

The Commission have identified 6 principles for managing your connection:

1. Recognise the risks – three of the main risks of a trading subsidiary are that:

a. the charity provides an inappropriate level of support or investment in the subsidiary,
b. the charity supports work outside its charitable purpose, and
c. it’s hard to tell the charity apart from the trading subsidiary, which could have reputational impacts.

These risks should be reviewed and actively managed at least monthly.

2. Do not further non-charitable purposes – it’s really important that charitable funds are not used to further non-charitable purposes in a trading subsidiary. This can cause an issue where the charity provides the funding to start up a subsidiary. If the parent charity is investing in a subsidiary it’s important that the company is providing a return on the investment in line with the charity’s investment policy. To prevent any tax liabilities, we would always recommend setting up a formal agreement, which shows the charity is obtaining a return on its investment.

3. Operate independently – you must ensure that the charity exists only to further its charitable purpose for the public benefit. The decisions the charity makes have to be best for the charity, not the trading subsidiary.

4. Avoid unauthorised personal benefit and address conflicts of interest – each trustee has a responsibility to declare any conflicts of interest e.g. where they may personally benefit or have a loyalty/duty to the subsidiary. Often the directors of the subsidiary will overlap with the trustees of the charity, which allows for good oversight by the parent charity. However, if the director is receiving a salary or benefit from the subsidiary, then you must check that the charity’s governing document allows this, or obtain advance approval from the Charities Commission. A trustee receiving a salary from the subsidiary is definitely a conflict of interest and the charity must ensure there are procedures in place to address this.

5. Maintain your charity’s separate identity – it’s important to make sure all finances are recorded and managed separately. If the subsidiary is to share an identity with the charity through a similar working name, website etc. then it’s important to ensure you are open and clear with the public regarding the structure, and that you have a suitable licencing agreement if you are sharing a logo and branding.

6. Protect your charity – always make sure risk assessments are completed when setting up a subsidiary company (and that these are regularly reviewed) and that there are written agreements in place for any arrangements with the subsidiary. Where there are shared resources between the charity and its subsidiary, recharges should be made at a market rate unless it is in the charity’s best interests not to do so. Always record the reasons for your decision. And finally, make sure you are compliant with GDPR and other data protection laws.

This is just a whistle stop tour of the guidance, which can be found here.

There is a really useful checklist for trustees here.

If you need any further guidance in this complex area, please do not hesitate to contact our Charities Specialist, Carrie Jensen.