Faith charities often face a different reality in finance than other types of charity. This is because faith brings a culture or ethos in line with the priorities of the specific religion. It is therefore right to consider finance from this perspective.
As we experience the widely publicised financial challenges facing the sector, trustees and senior staff often look for innovative ways to diversify income in order to manage risk or increase revenue to meet these challenges. Most faith-based charities state that reputation is the number one risk – that a reputationally damaging incident could lead to a significant fall in loyal support or, worse, could affect the future viability of the charity. To this end, when opportunities arise, charity leaders should take a step back and consider whether the opportunity “fits” or whether there could be unexpected consequences. Consider the examples below:
Sponsorship
Many charities engage in corporate sponsorship deals with commercial enterprises – from the 1p for every tin of beans sold to x% of revenue from sales directed through the charity website. The royalty model is well trodden and most charities take legal advice before signing contracts. Most charities route this activity through a trading subsidiary, but there are other considerations too:
- Do your due diligence on the company and brand; consider the published values of the company and how they align to yours.
- Does the company strictly adhere to best practice in areas such as equality, diversity and inclusion (EDI), environmental responsibility and protection against modern slavery.
- Do you have sufficient visibility of the company’s reputation and any events or issues that are publicised through social media or news articles.
Sweating your assets
Many religious charities are, through their focus on worship, asset-rich. In some instances, these assets cease to be used operationally. Initiatives can include:
Leasing the asset to another charity
This can be either to generate income or for charitable purposes (on a peppercorn rent/full repairing lease). It is important for the planning for this to consider the strategy for the property; the length of any lease or license; and whether the purpose of the lease is to generate income or support the charitable strategy. Invariably, it will be a bit of both and so the details of the trustees’ strategy will need to be clear.
Property development
Many religious charities employ or commission property expertise that is tasked to consider the best use of any property that might be surplus to requirement. This could focus on letting, sale or development. Where development is being considered, the most profitable solution then care should be taken. A clean sale is often easier in terms of taxation, risk and governance; however, this may not extract the full potential of the property. This can create an impression that to not develop means missing out on potential income that could be beneficial to the charity. There are a number of factors that must be considered:
- Corporate structure and risk management – development gains are normally taxable and so in the absence of a trading subsidiary, there will be the need to consider whether one needs to be set up.
- VAT and stamp duty land tax (SDLT) – structuring development and sale of charitable property can be complex to obtain a tax-efficient sale.
- Risk management and governance – developments are complex and so establishing appropriate processes and governance will be necessary.
- Public relations – there is often a strong connection between the charity and local community and therefore there may be expectations regarding the property that will need to be managed. The nature of the development and likely future owner are matters that the community may be interested in.
- Finance – sometimes the market can change during the development process, leading to delays in the extraction of the anticipated income. This may have cash flow consequences that will need to be considered from the outset.
- Planning and other regulations – these can affect the timing and profitability of developments. Significant delays can have a significant impact on risk and cash flow.
These cautions should not deter a charity from looking at innovative ways to generate income.
Adam Halsey is partner and head of care, community and housing at HaysMac
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