Although Academy Trusts are publicly funded organisations, they are still subject to almost the same tax requirements as any incorporated charity. With the current Government funding for schools operating in deficit, an increasingly more commercial strategy and innovation within Multi-Academy Trusts (“MATs“) is starting to flourish. Whilst these new opportunities create new revenue streams for schools, they also bring with them new risks and potential tax liabilities. It is for these reasons that the use of trading subsidiaries within MATs has increased in recent years and a new area of professional advice is being sought by our clients.
This note has been produced to provide a simple overview of what trading subsidiaries are and the reasons why MATs may want to establish them within their current corporate structures.
Academy Trusts can only carry out trading activity which furthers its charitable objects, or those activities with are ancillary to furthering those objects. For Trusts with DfE model Articles of Association, this means that they can only carry out trading which has an educational purpose, or which is incidental to an educational purpose. For example, Trusts can charge for music lessons, school trips, school meals or uniforms. This is known as ‘primary purpose trading’.
Where a Trust generates income from trading activities which are outside of ‘primary purpose trading’, then this income is potentially subject to corporation tax. In this instance, a Trust may choose to set up a company which will carry out these non-educational activities in order to protect its commercial interests and minimise any tax liability. This is particularly beneficial where the additional income exceeds £50,000.
Academy Trusts who are thinking about expanding their trading activities beyond primary purpose trading should undertake a review of their Articles and Funding Agreements in order to understand what trading is permitted and what restrictions apply.
There are many reasons why a MAT may need to set up a trading subsidiary and we have outlined the key ones below:
Further to the above, in some instances it has been observed that the DfE has required a MAT to set up a trading subsidiary as a condition of an academy conversion.
We think it would be helpful to provide some common examples of trading subsidiaries that MATs are already operating:
In order to be successful, the MAT will need robust and appropriate mechanisms to ensure that the trading subsidiary has sufficient working capital.
In addition, Directors will need to have sufficient control over the company and this is likely to be best secured through adopting a Service Agreement which sets out the terms of the provision of services between the MAT and its trading subsidiary.
Lastly, it is important to highlight that a trading subsidiary is not always the best option for a MAT and it is very much dependent whether the MAT has the resources available. This means generally in effectively governing the company, but also requires an assessment of whether the MAT has appropriate leases and management charges (depending on the proposed trading activities).
In any event, before deciding to incorporate a trading subsidiary a MAT should carefully consider whether all of the income generated could be charitable.