Internet Watch Foundation

1.1 At their meeting on 19 July 2005, Board agreed that:

1.2 Executive Committee considered the position with regard to IW Ltd at their meeting on 20 September 2005 and have set out some trading principles in section 6 of this paper. 

2.1 Since 1997, IWF has consisted of two companies as follows:

2.2 Currently IW Ltd employs all the staff and has carried out all the “trading” (leasing the building, paying rates etc.).  It is IWF Ltd which has been re-registered with the new objects and will become a registered charity.  At the outset IWF had and still has ISPA and LINX as its main funders but they were joined by another six members in 1999. Since then our funders to grown to just under sixty. The main purpose of our funders also known as members is to provide the financial backing required to operate the hotline and its management.  We understand that the above company structure was designed to protect the Directors of IWF Ltd., the Board, from the effect of any trading losses.

 

2.3 IW Ltd is registered at Companies House with the following company objects:

To carry on a business as a general commercial company.  It is not necessary to make changes to the IW Ltd objects as part of the registration of IWF Ltd as a charity.

3.1 On approval and completion of the charity registration, the employment of staff, the leasing of East View, the payment of rates and the purchase of goods and services are all likely to be transferred to the registered charity which will carry out these current “trading activities” which enables IWF to fulfil its remit.  We will continue to take advice from our consultants and accountants on the most cost effective way of securing goods and services and some may be secured through IW Ltd.

 

3.2 The registered charity will continue to own the trading company IW Ltd.

 

4.1 Charity law allows charities to exercise a trade and there are various categories of trading which a charity can carry out without channeling that trade through a separate company. Examples are outlined below:

 

Charity law allows charities to exercise a trade in the course of actually carrying out the primary purpose of the charity and this is called "primary purpose trading".  The profits of a primary purpose trade are exempt from tax (but not necessarily exempt from VAT), provided that the profits are applied solely to the purposes of the charity. If necessary, the Inland Revenue will advise trustees whether a particular activity is primary purpose trading.

 

Trustees may also wish to use trading activities as a way of raising money. If fund-raising is the main or sole aim of such trading activities (rather than primary purpose trading which also happens to produce an income) this is called "non-primary purpose trading".  If the charity has an income in excess of £200,000 per annum then such trading can be up to a maximum of £50,000 trading turnover.

 

A charity may also exercise a trade which is ancillary to the carrying out of a primary purpose of the charity. This is treated as primary purpose trading for both charity law and tax purposes.  An ancillary trade is one that does not directly further a primary purpose but is exercised in the course of the actual carrying out of a primary purpose of the charity.

 

A charity may also exercise a mixed trade, i.e. a single trade which has both primary purpose and non-primary purpose elements.  In practice the Inland Revenue will accept that all of the profits of a mixed trade will be within the primary purpose exemption from tax if:

·         the turnover of the part of the trade which is not for a primary purpose is no more than £50,000 in a particular tax year, and

·         the turnover of that part of the trade is less than 10% of the turnover of the whole trade in that year.

4.5 The position with regard to a charity carrying out trading is complex.  For example, the licensing of the CAI database may be regarded as falling within IWF charitable objects or regarded as "primary purpose or ancillary trading".  Further advice will need to be taken on these matters.

 

4.6 Based upon current activities, it is not clear at this stage what trading IW Ltd might carry out.  We are advised that there may be some tax advantages in IW Ltd procuring some goods and services on behalf of IWF and this will be investigated further.  Our solicitors have recommended that IWF retain the trading company and if IWF is advised that an approved activity does not fall within our charitable objects or within the permissible trading for a charity then this activity, subject to approval, could be carried out by IW Ltd.  Any profits from the trade may be passed to the charity in a tax-efficient way under the Gift Aid scheme.

 

5.1 Many charities own a trading company and the Charity Commission recommend that the Board of Trustees for the charity are not the same as the Board of Directors for the trading company.  There should be at least one person who is a trustee of the charity (IWF) and not a director of the trading company (IW Ltd.), and at least one person who is a director of the trading company and not a trustee of the charity. The people without dual interests are expected to give suitable advice to their colleagues as to the proper course of action in any conflict of interest and this reduces the risk that any transaction between the charity and the company may be challenged or questioned.

 

5.2 Under the present arrangements, see paragraph 2.1 above, nine of the Trustees will not be Directors of IW Ltd, the trading company and two of the three Directors of IW Ltd, will not be Trustees of the Charity.  These arrangements at Director and Trustee level satisfy the requirements of the Commission.

 

5.3 Funding Council interests are represented on the Board of Directors of IW Ltd by the Chair of Funding Council and on the Board of Trustees by their three elected members. 

 

6.1 On the basis of our current and anticipated activities and the legal advice we have received on such activities, we do not anticipate IW Ltd engaging in activities of any significant scale or scope, but we need the flexibility provided by the option to use IW Ltd in a cost-effective way, providing of course that there is proper circumspection, accountability and transparency of any such operations. The following recommendations are designed to achieve this.

 

·         That IW Ltd only engages in trading activities that cannot be carried out by IWF, the registered charity, or are more cost effective when carried out by IW Ltd.

·         That those activities must not conflict with the objects of the charity or likely to adversely affect its reputation.

·         That any new major stream of work for IW Ltd would be subject to approval by the IWF Board of Trustees.

·         That Funding Council and the Board of Trustees have a standing agenda item reporting on IW Ltd and which includes a trading report and appropriate financial data.

·         That in the event of any perceived conflict with regard to trading by IW Ltd, the Board of Trustees of IWF will make the final decision.