Have you reviewed your management charges?

Many Academies have trading subsidiaries that rely on the Academy for the provision of staff, equipment and back office functions. In this scenario, a management services agreement should be in place between the Academy and subsidiary including an “at cost” charging principle.

Failure to charge at cost can result in the Academy incurring non-charitable expenditure which risks loss of charitable exemption on an equivalent amount of income. On the other hand, charging at above cost would result in non-primary purpose trading profits for the Academy which may be taxable. Therefore, it is important that any charges are at cost.

COVID-19 has impacted many businesses, including Academy groups, reducing the level at which they operate. 

Where a subsidiary of an Academy has been affected, the use of resources provided by the Academy may have reduced. If the management charge is not adjusted accordingly, this could create a taxable non-primary purpose trading profit for the Academy.

Whilst management charges should be monitored regularly by Academies, the current circumstances may have had a more significant impact compared to any changes in previous years, and so it would be prudent to review the current position to prevent any potential tax issue arising. 

Apart from management charges, other aspects of the operation of subsidiaries should also be reviewed including any financial support (e.g. loans) provided by the parent. 

A number of academy trusts have also sought to unwind existing subsidiary relationships as it becomes apparent that they are not needed or appropriate as circumstances change.

If you have any concerns about your management charges, or any other aspect of the operation of an existing trading subsidiary, please contact us.