Charity Commission 'wrong' on shares

Let industrial and provident societies that issue share capital register as charities, says Charity Law Association

Charitable industrial and provident societies that issue share capital should be allowed to register as charities, contrary to the view of the Charity Commission, says the Charity Law Association.

IPSs that are established for community benefit are currently treated as exempt charities for tax purposes by HM Revenue & Customs. Under the Charities Act 2006, exempt charities with annual incomes of more than £100,000 will have to register with the commission later this year.

However, the commission argues that issuing share capital is inconsistent with charity law, which forbids organisations from distributing profits to non-charities (20 August, page 4). Earlier this year, some experts said charitable IPSs might have to convert their shares into loan stock (20 January, page 4).

But a CLA working group chaired by Michael Lynch, a partner at Wrigley's Solicitors, has argued that the share capital of an IPS is recognised in law as akin to loan finance.

The group's report, sent to the commission and seen by Third Sector, says there is no real difference between issuing share capital with a limited rate of return and taking out a loan at a reasonable rate of interest.

It says it might even be preferable for an IPS to issue shares, because it would then have to pay interest only when it could afford to do so.

"It would be imprudent and not acting in the best interests of the charity for charity trustees to accept money as a loan carrying a higher rate of interest, rather than issuing shares with a lower cost to the charity," it says.

"The public benefit of further resources for the charity could outweigh the private benefit to holders of the securities."

It also points out that IPS shares do not give their holders any special rights, are non-transferable and can be repaid only at their cost price if the IPS is wound up.

A spokeswoman for the Charity Commission said the regulator was considering the report and would respond publicly in due course.

FACT FILE

Industrial and provident societies have been a legal form for 150 years.

The Financial Services Authority requires 'community benefit societies' - a kind of IPS - to operate for the benefit of people other than their members.

The FSA is unsure how many such organisations exist, but they include a number of Community Development Finance Institutions.

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