Regulatory update: keeping your charity trading subsidiary at arm’s length

21 February 2020

The findings from a recent regulatory compliance case by the Charity Commission contain salient lessons not just for armed forces recreational and training charities, but for all charities with trading subsidiaries.

The issue in context

It is not uncommon for a military charity to open up its facilities, such as sporting or recreational facilities, to paying members of the public (although in our experience the Charity Commission is becoming less open to the idea). Having civilian users is not necessarily a problem, provided that it furthers the purposes of the charity, which will usually involve promotion of the efficiency of the armed forces in some way.

If, for example, civilians are being trained in a physical activity by members of the armed forces, it might be argued that the charity's purposes are furthered because conducting the training helps to keep the serving personnel fit for active duty. In more limited circumstances, it might also be argued that civilian use of a military charity's facilities (the horses of an equestrian charity, for instance) furthers its purposes on the grounds that, were it not for the additional civilian use, the assets would diminish in value or effectiveness, or would end up not being available for military use at all.

National Rifle Association regulatory compliance case

Where there is no clear link between civilian use of an armed charity's facilities and the furtherance of its purposes, however, difficulties can arise. The National Rifle Association ("NRA") is an armed forces charity which was established "to promote and encourage marksmanship throughout the Queen's dominions in the interests of defence and the permanence of the volunteer and auxiliary forces, naval military and air". It furthers these objects by running marksmanship courses, providing target shooting facilities and organising competitions for members of the armed forces.

Until recently, however, the NRA supplemented its military activities by running competitions for civilians at its National Shooting Centre at Bisley Camp in Surrey. This led to the charity becoming the subject of a regulatory compliance case by the Charity Commission, which found that it had acted outside its charitable objects.

It used to be possible for gun clubs to register as charities on the basis that the teaching of good marksmanship better equipped individuals for the armed forces, thereby contributing towards the defence of the realm in times of national emergency. By the mid-1990s, however, the Charity Commission had reached the view that, while teaching marksmanship to serving members of the armed forces was charitable, teaching it to civilians was not as, in practice, most club members did not go on to serve. Consequently, those civilian gun clubs that had previously been recognised as charities were removed from the register.

According to the Commission's report into the NRA, which was published earlier this month, "there is only the most tenuous, if any, connection between civilian recreational rifle and pistol shooting and the NRA's charitable purpose of promoting the efficiency of the armed forces for the defence of the realm".  The Commission issued the trustees with a formal action plan in May 2019, under which they are required to report quarterly on whether the participants in its marksmanship events are members or former members of the armed forces, the police or other emergency services, or members of the cadet force.  They must also monitor the figures and measure the extent to which the charity's activities are furthering its purpose.  If the reports show little involvement of the appropriate individuals, the Commission has said it will expect the trustees to take "appropriate action" and, although as things stand the Commission is satisfied with progress, the charity remains subject to "close scrutiny by the regulator due to the seriousness of this issue".

Would a trading subsidiary have helped?

There is nothing to prevent charities generating funds through a trading subsidiary, provided that the relationship between the two entities is managed carefully and that the activities of the subsidiary do not take the charity's focus away from the furtherance of its charitable objectives. 

The NRA has a trading subsidiary, National Shooting Centre Limited ("NSC"), which operates rifle and shotgun ranges at Bisley, and provides armoury, accommodation and hospitality services. Had the civilian competitions clearly been run through NSC, the charity might have avoided the Charity Commission's scrutiny. However, the Charity Commission found that way that the NRA was managing its relationship with NSC fell below the standards required. In the Commission's view, because there was so much overlap between the activities of the NRA and the NSC, it was unclear to members of the charity or of the public that the two organisations were in fact separate. It was also unclear how conflicts of interest and loyalty could be managed given that the NSC's only director (and therefore decision-maker) was the chief executive of the NRA, although this situation has since been rectified.

Learning points

There would appear to be two key points to take away from the case, whether or not your charity is an armed forces charity. First, wherever there is a possibility of a contemplated activity falling outside a charity's objects (which will always be the case if the activity is intended purely to raise funds for the charity, rather than further its purposes), it should be run through your trading subsidiary. Any profits from the activity that are them passed up to the parent charity will be exempt from corporation tax, provided that they are used to further your charity's purposes.

Secondly, ensure that there is sufficient separation between your charity and its trading subsidiary – otherwise there will be a risk of any non-charitable activity being treated as having been carried out by the charity, even if your intention was for the trading subsidiary to carry it out. You can help to maintain the appropriate level of separation by ensuring that the trading subsidiary is funded in an appropriate manner and that the two entities are independently operated.

Your charity must have an arm's length relationship with its trading subsidiary when it comes to operational matters. It is clear from the NRA regulatory compliance case that, even though the trading subsidiary will be under the charity's sole control, it must remain - and be seen to operate as - a separate entity. Its board will therefore need to meet just like any other board, and their meetings should be held independently of the charity's board, with separate minutes being kept.

While it is common for there to be some crossover between the membership of a charity's board and that of its trading subsidiary, it is important to bear in mind that this will invariably give rise to conflicts of interest – particularly when it comes to questions of funding and other transactions between the entities, such as staff sharing agreements. In these circumstances, the interests of the charity will conflict with those of the trading subsidiary and it will be impossible for someone who is closely involved with both entities to act in the best interests of both. For this reason, there must be sufficient independent directors on the board of the trading subsidiary to form a quorum, so that valid decisions can be made whenever conflicts arise.

If you have any questions about charity trading subsidiaries, or would simply like an informal chat with one of our experts, please use the form below to get in contact.

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