Charities, Trading and the Law

Transcription

1 Charities, Trading and the Law Second Edition Stephen Lloyd Senior Partner & Head of Charity and Social Enterprise, Bates Wells & Braithwaite Alice Faure Walker Consultant, Bates Wells & Braithwaite Bill Lewis, Lawrence Simanowitz, Mairead O'Reilly, Alana Lowe-Petraske Bates Wells & Braithwaite IJ JO RDANS

2 CONTENTS Preface Chapter 1 Can charities trade? Social enterprise The challenges of trading How to use this book Chapter 2 Charity Trading - the Basics Primary purpose and non-primary purpose trading Is there power to trade? Objects and powers Changing the constitution The consequences of trading without appropriate powers Does charity law allow the activity? Exemptions Primary purpose trading Ancillary trading Fundraising events Donated goods Annual payments Small-scale trading What profit? How much tax? Use of a trading subsidiary Exempt supplies Zero rating Failure to register for Rate relief The charity SORP Charities Act

3 viii Charities, Trading and the Law Chapter 3 Primary Purpose Trading Examples of primary purpose trading The prevention or relief of poverty The advancement of education The advancement of religion The advancement of health or the saving of lives The advancement of citizenship and community development The advancement of the arts, culture, heritage or science The advancement of amateur sport The advancement of human rights The advancement of environmental protection or improvement The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage The advancement of animal welfare Other charitable purposes Constitutional and charity law issues Does the charity have power to trade? Charity law Work by the beneficiaries Exemption from tax UK charities only The test Option one: carrying out a primary purpose Option two: work by the beneficiaries The purposes of the charity Admission to cultural premises Ambulance services Educational supplies Research Sport Nursery and creche facilities Health and welfare services Rental and property Zero rating Rate relief SORP Charities Act 1993 Particular issues - rights of admission to charity premises Research Public benefit Fee-charging Private benefit Complying with the public benefit rules

4 Contents Fublic service delivery Are we operating under a contract or a grant arrangement? How to distinguish a contract from a grant Mission drift Negotiation of terms Public procurement State aid Ancillary trading Mixed trading What is mixed trading? Charity law Conclusion Chapter 4 Charity Sales Activity The sale of bought-in or manufactured goods Primary purpose trading Sales at fundraising events Small scale exemption Rate relief Trading companies The sale of donated goods Does the sale of donated goods constitute trading? Alterations and improvements Rate relief Use of a trading company for the sale of donated goods The gift aid scheme for sales of donated goods How does the scheme work? Rate relief Charity law Use of a trading subsidiary Conclusion Mixed sales activity The complications Rate relief Trading subsidiary What happens in practice? Charities Act 1993 Special cases Concessions Christmas cards 'Suggested donation' sales Charity catalogues and internet sales i n

5 x Charities, Trading and the Law Charity auctions 'Good' gifts Conclusion *T" 84 Chapter 5 Fundraising ' Is fundraising trading? 88 Profit motive 89 Repetition ^ Selling organisation 90 Method of acquisition 90 Nature of the asset 90 Whether work was done on an object before resale 90 Interval between purchase and sale 90 Existing connections 90 The source of finance 91 Primary purpose trading 93 Fundraising events 94 Is a fundraising event trading? 94 Is there power to trade? 94 Does charity law allow the activity? 94 The tax and exemption for 'one-off' fundraising events 95 Who does the exemption apply to? 95 What events does it apply to? 95 Number of events 96 What is a location? 97 Accommodation 97 Distorting competition 98 How is the exemption applied? 98 Direct tax 99 Other considerations 99 Challenge events 101 Direct tax Does the 'one-off' fundraising exemption apply? 102 Events run by a commercial operator 102 Events involving more than two nights' accommodation 103 Gift aid 103 Donation from travel company 104 and - conclusion 104 Other issues 105 Travel law 105 Professional fundraisers 106 Commercial participators 106 Partnerships with businesses 106 Cause-related marketing - use of a charity's name and logo 106 Constitutional powers and charity law considerations 107

6 Contents Commercial participators What is a commercial participator? Statements Written agreements Other provisions Terms of the arrangement Sponsorship Constitutional powers and charity law considerations Primary purpose trading 'One-off' fundraising exemption Small scale trading Is there a profit? Trading subsidiary Charitable foundations Additional services The agreement More complicated arrangements Affinity cards Charity law Charities Act 1993 Lotteries Conclusion Chapter 6 Income from Charity Property Is this trading? Where the activity is trading Is this primary purpose trading? Is there a profit? Charity law considerations Chapter 7 The Trading Subsidiary When should a charity establish a trading company? Charity law Risk Premises Sale of goods and consumer protection Other risks

7 xjj Charities, Trading and the Law Risk management '47 Limited liability 148 Administration 148 Management '49 Branding Working jointly 15 What are the disadvantages? Costs and administration Rating and other reliefs 151 Establishing a trading company 152 Forming a company 152 What is a trading company? 152 Memorandum of association 153 The objects clause 153 The capital clause 153 Types of shares 154 Dividends 155 Name 155 Articles of association 156 What is the authorised share capital? 156 What is the share structure? 156 How are the directors to be appointed? 156 Company law reform 157 Investment by a charity in a trading company 157 Power to invest 158 Trustees'duties when investing 158 The general duty of care 159 Standard investment criteria 159 Advice 160 Review 160 Trading subsidiary 160 considerations 163 Non-financial considerations 165 Complementary activities 165 Goodwill 166 Ethical considerations 166 How to invest 167 Loans by the charity 168 A proper rate of interest 168 Security for a loan 170 Repayment of the loan 170 Shares purchased by the charity 172 Converting loan finance into shares 173 Primary purpose trading 173 Third party finance 174 Guarantees 177

8 Contents xiii and groups 179 The board 179 Make-up of the board 179 Payment of charity trustees 182 Companies Act duties of trading subsidiary directors 182 Administration 185 The relationship between charity and trading company 185 Cost sharing 185 Name and logo 187 Data 188 Premises 189 Employees 190 Agreement 191 Transfer pricing 191 Bank accounts 192 Minutes 192 Accounts and company filings 192 Company information 193 Separate identity 193 Employee shareholdings/profit bonuses 194 ation 195 ation of profits 195 Shedding profits by management charges 196 Payment of profit by way of dividends 196 Payment of profit using gift aid 197 Joint ventures 198 Practical considerations 199 Gift aid 200 Investment 202 Community interest companies 202 Community interest test 203 Asset lock 203 Other features 203 Establishing a trading subsidiary as a CIC 204 Consolidation of accounts 205 Conclusion 206 Chapter 8 Contracts and the Regulation of Trading Contracts 208 General principles of contract law 208 Existence of a contract 208 Terms of the contract 209 Signing contracts 210 Buying and selling goods and services 210 Types of contract 210 Implied terms 210

9 xiv Charities, Trading and the Law Misrepresentation 211 Contracting out 212 The reasonableness test and the fairness test 213 Breach of contract 214 Breach by the seller 214 Non-delivery by the seller 215 Delay in delivery 215 Defective quality 215 Obligation to mitigate 216 Seller's remedies for buyer's breach of contract 216 The supply of services - additional points 217 Suitable materials 217 Reasonable period 217 Reasonable price 217 Standard terms of business 218 Checklist of standard terms and conditions 218 Liabilities to third parties 220 Contracts (Rights of Third Parties) Act Negligence 221 Limiting liability for negligence 223 Consumer protection and related regulation 223 Consumer Protection Act 1987 and the supply of goods 223 Consumer safety 225 The Consumer Protection from Unfair Trading Regulations Description of goods and services 226 Other regulations 227 Contracts made away from business premises 227 Food 227 Consumer Credit Acts 1974 and Financial services 227 Licensing 228 Company law 228 Internet and electronic trading 228 Website terms and conditions 229 The Electronic Commerce (EC Directive) Regulations The Consumer Protection (Distance Selling) Regulations Other regulation 232 Technical issues 232 Web-hosting 232 Setting up and running an online shop 233 Secure payments 233 Delivery 234 Contents of the site 234 Promotion 234 Advertising 234 Advertising Standards Authority (ASA) 235 Broadcast advertising 235 Non-broadcast advertising 235

10 Contents xv Misleading advertising 235 Comparative advertising 236 Offensive advertising 236 How does the ASA operate? 236 Other codes and legislation 237 Competition law Overview 238 Anti-competitive agreements 238 Abuse of a dominant position 239 State aid 239 Merger control 240 Chapter 9 Intellectual Property Rights and use of Information Copyright 241 Copyright infringement remedies 244 Possession or legal ownership 245 Flexibility of copyright 245 Dealing with copyright: assignment and licences 245 Moral rights 246 Rental and lending rights 246 Software and copyright 247 What will the purchaser get? 247 Who obtains copyright in the software? 247 Timetable and delivery 248 Price 248 Warranties 248 Additional work and charges 249 Acceptance 249 Installation 249 Indemnity 249 Limits on liability 250 Insurance 250 Purchaser remedies 250 Escrow 250 Maintenance contracts 251 Software leasing contracts 252 Names and logos 252 The commercial exploitation of names 253 Trade marks 254 What is a trade mark? 254 What cannot be registered as a trade mark? 254 Why have a trade mark? 255 How do you register a trade mark? 255 Can registration of a trade mark be revoked? 256 Licensing of trade marks by a charity to its trading company 256

11 xvi Charities, Trading and the Law Trade marks outside the United Kingdom? European Community The Madrid Protocol Domain names Costs in relation to domain names Issues to consider when registering a domain name Searches Domain names and trade marks - a comparison Trade mark infringement and domain name disputes Patents What is a patent? How should a patent be applied for? An employer Independent consultants International aspects Charities and patents Registered designs and design rights Design right and copyright Registered design Databases Storage and use of data Databases and copyright The database right Ownership of rights in a database Checklist for those using a database Complete copies Public domain Extracts Damages Data protection Lists Electronic direct marketing Conclusion Confidential information Chapter 10 Insurance An introduction to the world of insurance Jargon Utmost good faith Average Indemnity calculation Excesses Compulsory insurance Employers' liability compulsory insurance Motor insurance

12 Contents xvii Recommended insurance cover 274 Damage to buildings insurance 274 Insurance against loss and damage to contents 275 Business interruption insurance 276 Public liability insurance 276 Risks arising from the ownership, occupation or management of premises 276 Employees' activities 277 Exclusions 277 Product liability insurance 278 Professional indemnity insurance 278 Other insurance 279 Legal expenses insurance 279 Libel insurance 279 Fidelity insurance 279 Trustee indemnity (or directors' and officers' liability) insurance 280 Internet and cyberliability insurance 280 Goods in transit 280 Insurance policies and others 281 Practical considerations 281 When is it worthwhile taking out insurance? 281 Negotiating cover 282 Package cover 282 How to buy effectively 282 Renewal 283 Ongoing obligations 283 Risk management 283 Chapter 11 Insolvency What is insolvency? 285 The going concern test 286 The balance sheet test 286 Interrelationship of the cash flow and balance sheet tests 287 The insolvency of trusts and unincorporated associations 288 Charitable trust 288 Unincorporated association 290 Process 290 Incorporation 291 The insolvency of incorporated organisations 291 Administration 292 Company voluntary arrangement 294 Administrative receivership 295 Scheme of arrangement 296 Liquidation 296 Compulsory liquidation 296 Creditors' voluntary liquidation 297

13 xviii Charities, Trading and the Law The liquidator 297 Members' voluntary liquidation 298 Disputed debts 298 Companies limited by guarantee 299 Loss of limited liability protection 299 Fraudulent trading 299 Wrongful trading 300 Looming insolvency - the practical implications 302 The implications for unincorporated organisations 302 The implications for companies 302 The concerns of the Charity Commission 303 Personal guarantees 304 Personal liabilities of charity trustees - what can be done? 304 Limiting liability by insurance 304 Limiting liability by contract 305 Limiting liability by incorporation 306 The consequences of insolvency 306 Uncompleted contracts 306 Employment rights of employees 307 The interrelationship between an insolvent trading company and its parent charity 308 Conclusion 310 Appendix 1 Useful Addresses 311 Index 315