FINANCE NEWS: Directors call for trading reform

Finance directors are calling for liberalisation of regulations on trading to compensate for ministers' refusal to implement plans to allow charities to operate without trading subsidiaries.

Two weeks ago, the Government said it would not be taking forward a proposal from the Strategy Unit report on charity law to permit charities to undertake commercial activities entirely in house.

It was the only major recommendation that the Government did not endorse and was rejected despite the backing of 84 per cent of the consultation respondents.

The Government argued the change would give charities an unfair competitive advantage over private sector firms, and it was also concerned that it could endanger the "public nature" of charities.

But many charities are arguing the Government can still do much to ease the complexity of the relationship between parent charities and trading subsidiaries, even if the demarcation remains.

The Charity Finance Directors' Group is "strongly advocating a relaxation of the rules" according to policy officer David Sinclair.

Among the reforms being mooted are plans to allow subsidiaries to keep more of the surplus they generate without paying tax, and to raise the threshold below which smaller charities are not obliged to form a trading subsidiary.

Helen Verney, finance director at the MS Society, said funding trading subsidiaries was a real problem for many charities, and could be eased by giving trading companies the right to retain more of their profits.

Currently they can only keep £10,000 a year tax free.

"The key problem is finding working capital," she said. "In order to get them going, the parent charity has to arrange loans at market rates with interest and have a repayment plan in place."

"A recent Budget allowed a small sum to be retained by the trading company, but it isn't enough to grow the firm or to pay off its loan to the main charity in most cases. I advocate removing the restriction - it's not as if subsidiaries exist other than to act in charities' best interests and, as such, should not be bound by the tax rules that apply to private companies."

Nick Kavanagh, finance director for Save the Children, feels raising the threshold enabling charities to undertake a limited amount of trading in-house could also help. "The Government could increase it to allow more charities to trade in this way," he said.

Kavanagh also wants a reclassification of some trading activities as charitable so they could be undertaken by the parent charity. These include larger fundraising events, which are designated as trading by the Charity Commission because they are considered riskier.

The Home Office indicated that it was prepared to listen. "We recognise the separation of the trading subsidiary puts additional bureaucratic burdens on charities. We are willing to look at proposals for easing this, without affecting the level playing field for private companies," said a spokesman.

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