Given the challenging economic environment, it is good practice for charities to regularly question the status quo and discuss alternative structures.
One option increasingly on the boardroom agenda is collaborative working – how to do it well, what it might entail, and the key considerations, benefits and risks involved.
Given the fact The Charity Commission encourages charities to consider and imagine what more they can achieve for beneficiaries by working with others, we made this hot topic the subject of one of our latest webinars.
Some of the benefits of working more closely with others or through joint ventures include the ability to deliver greater impact and there are potential cost and resources savings and economies of scale that can be achieved through sharing management and support functions.
But charities need to think carefully before they embark on any collaboration. There are some key challenges including operational, reputational, and financial which must be addressed.
Our webinar provided a flavour of some of these, looking at some of the structural options commonly used and the issues charities need to think about from a VAT and trading perspective.
For many charities, collaboration helps to increase the reach of their services or improve the quality of their support services. In some cases, it will lower costs and overheads.
Collaboration can take place at many different levels, with a low level of engagement at one end of the spectrum (e.g., sharing information) to a lasting commitment to delivering services together.
To work well, the financial arrangements need to be clear, and charities need to decide what structure is the most appropriate, what the VAT consequences are and whether to treat the income as trading income.
Ways to collaborate
There are several ways to collaborate which vary in complexity and in terms of their pros and cons:
- Secondment of staff – this is one of the simplest ways to work with another organisation. Generally, the supply of staff is subject to VAT, but there are some situations where VAT may not be chargeable. These include the supply of staff between two charities where they are engaged only in non-business activities and the secondment is not carried out for financial gain or where the secondment meets HMRC’s requirements as set out in VAT Notice 700/34. In particular, to qualify as a secondment, the recipient must be responsible for playing the employee’s remuneration directly as well as the PAYE, NI, pension contributions and other similar payments directly.
- Consortium bids – this is one of the most common structures for collaborative working. A grant or contract is given to a lead organisation and sub-contracted or sub-granted down to other organisations. This is often done if a funder only wants to deal with one organisation, but it can be complex depending on the nature of the funding when it comes to VAT. It’s worth bearing in mind that whatever way the funding was given (grant or contract), it should ideally be the way it’s distributed to partner organisations to avoid additional complications and costs.
- Joint activities – Where activities are organised jointly but not through a separate entity they are commonly referred to as a JANE (Joint Activity Not an Entity). This is another popular way for charities to work together, and it can be organised in several ways, including contracts for goods and services, grant transfers and profit shares and joint supplies.
There is no legal basis behind a JANE as it’s not an entity and the VAT treatment can vary depending on the specific arrangement between the collaborating partners. As there can be uncertainty with this structure each the activities undertaken in each JANE should be looked at on its own basis and it may be necessary to agree with HMRC the VAT treatment proposed in order to ensure that this is acceptable.
- Joint Venture Company – this is a more formal, longer lasting relationship than a JANE where a formal company is created to carry out a service. As it is a separate legal entity it will need to register for VAT if it sells services that will attract VAT.
Sales and purchases between members and the joint venture will follow normal VAT rules. If it is not a charity, then any profits can be gift aided to member charities to avoid a corporation tax charge in the company.
- Partnerships – If a joint venture amounts to a partnership, then for VAT purposes the partnership is a separate entity and must register if it exceeds the VAT threshold. Sales and purchases between partnership and the partner organisation are subject to VAT as the two are separate entities. However, determining if a partnership exists is a very complex area of law, so it’s usually best to try and avoid partnerships. Often collaboration agreements will include a declaration that there is no intention to create a partnership to avoid any ambiguity on this subject.
- Sharing back-office functions – there is scope to share back-office functions, which can vary from executing tasks (payroll) to whole functions (finance/HR). This is common in local voluntary sector organisations where they often provide a range of services to small/micro charities.
The organisation sharing should consider whether it is within their charitable objects to provide services to other organisations as if not then this will qualify as trading income within the charity and have potential corporation tax consequences. One of the main issues with sharing back-office functions is that any charge is often subject to VAT which may be irrecoverable for the recipient. This irrecoverable VAT can mean a charity is paying more than if they carried out the function themselves.
Collaboration can bring many benefits in helping charities achieve their objects and reach more beneficiaries more effectively. However, for it to be successful it requires good planning and a willingness to put in the required effort to make it work.