Charitable Status and profit distribution
Some charities adopt the Industrial and Provident Society structure and it is common amongst housing associations. The Charity Commission recently clarified its position in relation to Industrial and Provident Societies and the payment of interest on share capital. Industrial and Provident Societies are registered with and regulated by the Financial Services Authority. Industrial and Provident Societies that are Community Benefit Societies can be regarded as charities provided they meet certain criteria. Community Benefit Societies that meet such criteria are currently exempt charities and do not have to register with the Charity Commission, although this may change in the future. Paragraphs 26 and 27 to Schedule 3 of the Charities Act 2011 provide for certain categories of Charitable Industrial and Provident Societies to register with the Charity Commission, however these provisions are subject to transitory modifications in Schedule 9 to the Act the effect of which is to preserve, for the time being, the status of all Charitable Industrial and Provident Societies as exempt charities. However, this may be subject to change in the future.
Charitable Industrial and Provident Societies receive the tax reliefs available to charities, but may have the power to pay interest on share capital in their rules. Whilst their rules may well make a distinction between interest and dividends, the rules may also indicate that the payment of interest is out of profits and therefore is a distribution of profits.
The Charity Commission regards a power to distribute profits as being incompatible with charitable status. The Charity Commission states this is because a power of a corporate body to apply its property and assets for the purpose of making profits and devoting the resulting profit to the distribution of dividends among the members is considered by the Courts to be incompatible with Charitable status.
The Charity Commission recently reviewed the legal framework and has discussed it with the FSA and H M Revenue & Customs. The Charity Commission recently confirmed that it is now satisfied that there are circumstances in which limited payments of interest may be made by Charitable Industrial and Provident Societies, which would not amount to a distribution of profit.
The Charity Commission's position as it has set out is that a power of a Charitable Industrial and Provident Society to pay interest on shares is not incompatible with charitable status, provided that the following provisions are set down by the Society's rules:
1. The interest rate is set at a level which is not in itself a motivation to buy shares and which the charity trustees can justify as being in the interests of the charity by reference to available commercial rates for borrowing;
2. The cost is part of the Society's revenue expenses and met before the surplus is determined;
3. The rates are declared in advance of the period for which they will become payable, just as for a bank or building society account, and never retrospectively;
4. There is a power to suspend interest payments in the interests of the Society;
5. There is a power of the Society to withhold repayment of the shares, either temporarily or indefinitely and to write the value down below the nominal £1;
6. The shareholding does not confer any rights to the underlying assets of the Society;
7. In the event of a solvent dissolution, shareholders cannot be paid more than the nominal value of their shares.
The Charity Commission has stated that it will continue to discuss these issues with the FSA, H M Revenue & Customs, the Department for Communities and Local Government and representatives of other government departments and organisations affected.
Some Charitable Industrial and Provident Societies may wish to review their rules in the light of the Charity Commission's position and anyone setting up a new Charitable Industrial and Provident Society should be advised to have regard to the Charity Commission's position.
For any further information please contact Gerry Morrison on 01904 688539 email firstname.lastname@example.org.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.