What could be the risk if you don`t? The problem is the balance between two possible issues. On the one hand, HMRC may argue that these costs are not related to the transaction and should not be authorized if the charity allocates costs to the commercial subsidiary, which has no connection to commercial activities. This could result in a higher taxable profit in the subsidiary. A Service Level Contract (SLA) is a two-way written agreement that defines the services and quality your MS Society group expects from a service provider. An ALS is designed to clarify the situation and protect against future investigations. It also requires trustees and management to think clearly about the distribution of costs in the development of the agreement. In many cases, you may be surprised at how the current process works or whether it fairly reflects the cost allocations between the two entities. The use of ALS is reviewed in Section 6 of the guidelines. In addition, the new guide includes an appendix and checklist (checklist 1) for all charitable subsidiaries. Trustees and management should read and complete this checklist to ensure that they have taken into account the commercial subsidiary`s operations, risks and independence. See: www.gov.uk/guidance/guidance-for-charities-with-a-connection-to-a-non-charity We have developed a series of SLA models that cover everything your group and service provider should include in a written agreement. We expect your coordination team to use our ALS model to establish this agreement.
Having ALS is not a miracle weapon, and any costs that seem artificially distributed will always attract attention. But it will always be a risk minimisation factor associated with these relationships and a useful management tool to understand both the charity`s activities and the actual costs in its commercial subsidiary. It`s always better to be prepared. It`s not a problem, I hear you say we`ll only be Gift Aid, anyway! The danger is that if your subsidiary does not have sufficient reserves to give the help of that much, it ends with a tax bill. The subsidiary cannot pay more than it can pay and a large amount of undue costs could easily lead to a difficult situation. On the other hand, the charity could bear the costs of its own business activities. Not only does this conceal the conduct of business activities by creating false profits, but it also creates the ability for HMRC to argue that charitable costs are not used for charitable purposes – with a potential tax debt as a result (within the charity itself). The public perception of these objects would also be very poor. In many cases, the distribution of costs or the burden between the two is, at best, poorly defined and, in the worst case, totally artificial.