Power to pay

Charities are often characterised as non-profit making. More accurately, charities cannot distribute their profits to members. They can generate a surplus as long as it is applied in furtherance of the purposes of the charity and not distributed to shareholders (see Scottish Burial Reform and Cremation Society Ltd v Glasgow City Corporation [1968] AC 138, and Incorporated Council of Law Reporting for England and Wales v A-G [1972] Ch 73 CA).

Clearly the generation of a surplus to pay shareholders or members is not a charitable purpose and an organisation that operates in this way will therefore have purposes that are not exclusively charitable.

Can a charity pay interest on share capital? This question arose with regard to industrial and provident societies because those societies established for the benefit of the community which are charitable are due to lose their exempt charity status when the relevant provision of the Charities Act 2006 is implemented. Some of these societies have a power to pay interest on share capital '“ which in some sets of rules was stated to be payable out of profits. Such payments therefore appeared to be a distribution of profits. In Girls Public Day Schools Trust Ltd v Minister of Town and Country Planning [1951] Ch 400 Roxburgh J decided that the existence of preference shares, and the possibility of the distribution of the profits of the company which was implicit in such existence, was incompatible with the conclusion that the land in question was held for exclusively charitable purposes.

The Charity Commission agrees that distribution of profits to shareholders is an arrangement that is generally incompatible with charitable status. However, we have looked at the legal framework and have had discussions with the FSA and HM Revenue & Customs. As a result, we are satisfied that there are circumstances in which limited payments of interest may be made, in a way that does not amount to distributing profits. In other words: the power of a society to pay interest in shares is not necessarily incompatible with charity status.

Meeting the requirements

There are certain conditions that have to be met for this to be the case. They include that the interest rate must be set at a level that is not in itself a motivation to buy shares and which the trustees can justify as in the interests of the charity. Also, rates must never be set retrospectively, and the shareholding must not confer rights to a share of the charity's assets. The trustees must also have the power to suspend interest payments in the interest of the charity. For the full list of conditions, which must be required by the rules of the IPS, see the commission's policy statement.

It is considered that the cost of such payments is part of a society's revenue expenses and is met before the surplus is determined rather than being a distribution of profits.

We continue to be in discussions with other government departments and will be reviewing the situation as it develops. In the meantime, so long as they meet the conditions set out, IPSs, which would otherwise be charitable, will not fail to be so due to a suitably qualified power to pay interest.