Trading subsidiaries within Multi-Academy Trusts
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.
What is a trading subsidiary?
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.
Why might a MAT want to establish a trading subsidiary?
There are many reasons why a MAT may need to set up a trading subsidiary and we have outlined the key ones below:
- Additional Income Generation – Schools are constantly looking for ways to supplement government funding and, if operated well, a successful trading subsidiary is a good way of generating additional income for the benefit of the schools within a MAT.
- Filling Gaps in Services – There may be services which the local community is in dire need of but is not currently being met by the local authority or other organisations; this is likely to have a longer term impact on schools. For example, the MAT may open local children's centres or provide educational training to parents.
- To Fulfil Contractual Obligations – The MAT or individual schools within the MAT may have contractual obligations to provide, for example, leisure facilities outside of schools hours for the benefit of the local community. Whereas some Trusts have recreational and leisure charitable objects within their Articles, the DfE is increasingly reluctant to permit new Trusts to be incorporated with these objects.
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:
- Outsourcing MAT services – Human Resources, finance and accounting, cleaning, security and grounds maintenance services are increasingly outsourced amongst local MATs of varying size/resource availability
- Site Management and Leasing – A trading subsidiary enables MATs to lease out facilities to other schools, local community groups and general public. For example, some schools may have conferencing facilities, leisure centres and specialist playing sports halls/ pitches.
- Catering Services – Sometimes these are outsourced to other local schools, but a trading subsidiary also permits a MAT to trade with the general public. This could be combined with facilities being hired out (as above)
What benefits does a trading subsidiary provide to a MAT?
- Diversifying Income Streams – As is common wealth management practice, the more income streams an organisation has then the more financial resilience; compared to the vulnerability that overreliance on one income stream provides. Further, a trading subsidiary which is operated correctly offers an easy way to generate income from existing assets and resources which are currently underutilised.
- Ring-fencing Commercial Risks – The MAT can minimise the risk exposure, which is particularly important where there is significant financial or reputational risks from the trading activities. For example, the trading subsidiary may facilitate private events (such as weddings) or become subject to litigation (such as breach of contract claims).
- Reduced Tax Liability – Any profits which are chargeable to tax can be transferred to the MAT as a donation under the 'Gift Aid' scheme. This reduces the overall corporation tax liability.
- VAT Registration – Where a MAT already operates over the VAT threshold and sets up a trading subsidiary, then the MAT can benefit from joint registration. This offers an administrative advantage in that only one annual tax return needs to be submitted and, more importantly, it provides an ability to disregard intra-group supplies between the trading subsidiary and the MAT i.e. making these VAT free recharges.
What areas of risk are there for MATs?
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.