Trading places

Most independent schools undertake commercial activities to supplement their traditional income streams; now more than ever before are doing so. Doug Locke outlines the legalities of schools running trading companies

As financial pressures on parents increase, many schools are placing more emphasis on trading as a way of continuing to provide educational excellence, outstanding facilities and demonstrable public benefit while keeping fees affordable. However, charitable schools need to consider carefully how they structure non-primary purpose trading to avoid breaching charity law, paying unnecessary tax and putting governors at risk of personal liability. Central to these issues is the correct use of trading companies. This article covers those points, as well as giving advice on provisions to include in contracts with trading partners.

Types of trading
Substantial income can be gained from the hire of sports pitches, swimming pools and gyms at times when they would otherwise lie idle. Similarly, it is common for schools to hire out facilities to summer schools and sports camps during school holidays, and to make use of buildings for weddings at weekends.

Schools are being increasingly imaginative in the types of trading they undertake and are seeking to combine
income generation with marketing. For example, hosting book launches, car launches and concerts can raise
money, while also attracting potential parents onto a school’s premises. Often, the type of trading will depend on the nature of a school’s premises and location. Large rural schools may be in a better position to offer sports pitches, wedding facilities and even perhaps a golf course. But an urban school with a smaller site might nevertheless be able to provide facilities for children’s parties, language courses or revision courses, with the advantage of greater accessibility.

More schools are now offering parents the opportunity to buy online from the school shop. This option makes the buying process easier for parents (who might in consequence buy more), and gives them more control over what is bought. It also ensures that payment is received before products are collected, which has obvious cashflow and credit control benefits. One of the most troublesome elements of most types of online selling is the delivery of goods, but this problem does not affect online school shops, from which goods can be collected in person.

Why use a trading company?
Charity law and tax law do not allow a charitable school to generate more than £50,000 turnover from trading
activities beyond those permitted by the school’s charitable objects. A school that breaches that threshold will be exposed to unnecessary tax liabilities, which will in turn expose the school’s governors to potential personal liability.
Importantly, revenue from summer schools run by third parties will often count towards the £50,000 threshold because in most cases summer schools, despite being of an educational nature, are operated commercially.
Many schools now generate turnover in excess of £50,000, and many more plan to do so. For most of those
schools, the use of a trading company is the preferred solution.

Provided that it is set up correctly, a school’s trading company can:
• ringfence the school (up to a point) and its governors, from the risks of trading;
• transfer profits without incurring corporation tax;
• protect the school’s charitable status; and
• simplify VAT arrangements and might even produce a VAT saving.

Ringfencing liability
Most trading involves a risk that something will go wrong, and the law does not allow all risks to be excluded by
contract. If liability arises from a trading company’s activities, the school itself may avoid liability even if the scale of the problem causes the trading company to become insolvent. For a trading company to become insolvent is clearly undesirable, but is far preferable to the insolvency of the school.

It is also worth considering that where trading would involve significant risk to a school’s assets, charity law provides that this must be undertaken by a trading company. However, while the use of a trading company is a good way of managing risk, the school cannot be insulated from all risks. The school will remain subject to occupier’s liability even if that liability arises from the trading company’s activities. Consequently, it is important that the school is covered by appropriate insurance. For most schools, this is achieved simply by way of a single policy that covers both the school and its trading company.

Typical trading company structure
Typically, a school will enter into a licence agreement with its trading company, which will establish the relationship
between the two entities. Importantly, that licence must be on arm’s length commercial terms to comply with
charity and tax law. So, for instance, it must require the trading company to pay a licence fee, and also to pay a
service charge for cleaning, utilities etc.

The licence will give the trading company the right to use the school’s premises and branding, and it should also
cover issues such as child protection, data protection, and the restriction of the school’s liability. This is particularly
important given that the trading company’s activities are likely to involve large numbers of visitors to the school’s
premises and extensive processing of children’s data.

A school should, if possible, avoid granting a lease (as opposed to a licence) to its trading company, as that would require the consent of the Charity Commission. For the trading company to trade, it may be appropriate for it to receive a loan from the school. As with the licence, the loan must be made on arm’s length commercial terms.
The trading company’s surplus will typically be transferred to the school in a tax-efficient manner under the licence, under the loan agreement (if any) and by gift aid.

It is important that the trading company has appropriate constitutional documents, and that the school’s constitutional documents allow for the use of a trading company. It is also important that the members of the trading company’s board of directors are selected with a view to avoiding conflicts of interest.

Dealings with third parties
In the course of its operations, a school’s trading company will enter into many contracts, both with consumers
and other businesses. Carefully worded contracts are vital to the smooth running of the trading company. For
example, they should impose obligations relating to child protection and the proper conduct of third parties
on school premises. They should also limit the trading company’s liability, provide for prompt payment and allow
the trading company to terminate an arrangement if the other side misbehaves or becomes insolvent.

However, the terms on which a trading company (or the school itself) deals with third parties must comply with legislation, especially where the third party is an individual consumer. In particular, if a school operates an online shop, the buying process must comply with distance-selling legislation.

Key points to recap
• imaginative trading makes the most of a school’s assets to provide income and raise the school’s profile;
• if a school generates more than £50,000 turnover through non-primary purpose trading (or is likely to
in the future) it would probably benefit from using a trading company;
• using a trading company reduces the risk of liability to a school and its governors, helps avoid unnecessary tax
payments and helps ensure compliance with charity law; and
• it is vital that a trading company is properly constituted, and that there is a full, arm’s length licence between
it and the school.

It is also important that the trading company contracts with third parties on terms that protect it and the school, and that comply with relevant legislation.

Doug Locke is a partner in the education team of Veale Wasbrough. Doug can be contacted on dlocke@vwl.co.uk
or on 0117 314 5602.

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