Key points for sports organisations on the use of charitable foundations

Published 30 November 2018 | Authored by: Benjamin Thomas

Establishing a charitable foundation can be an excellent way for a professional sports club to give back to the community. We are seeing an increasing number of foundations being established, not only by elite clubs but also by smaller clubs. However, foundations are not appropriate for every sports club. This article explores:

  • Why might a club wish to set up a charity?

  • What is a charitable foundation suitable for?

  • What isn’t a charitable foundation suitable for?

  • What are the practical steps associated with establishing a foundation?

  • What is the relationship between a club and its associated charity?

  • What are the risks involved?

For the purposes of this article, a charitable foundation is an entity which is recognised by the Charity Commission as being charitable and can take different legal forms.

Note that this article focuses on charitable foundations of clubs and does not go into any great detail on Community Amateur Sports Clubs, which have been discussed separately here,1 or other club structures for semi-professional and amateur sports clubs, as discussed here.2

Why might a club wish to set up a charity?

Many clubs choose to set up charities as a way of giving back to the community. Foundations are a recognition of the fact that many clubs operate in and involve the local community deeply. Decisions as to stadium expansion, for example, can have a profound impact upon the local community. Tottenham Hotspur’s new stadium has caused great controversy in the local area and disagreements between the club, Haringey BC and local residents are on-going.3 As such, work done by the club’s foundation can help to manage the club’s relationship with the local community.

Clubs also benefit from good press when they are seen to be helping the community. Given that many sports clubs are (or are perceived to be) very wealthy, this is an important part of their identity.

Importantly, setting up a charity is a tax-efficient way for the clubs to manifest these benefits and to ensure that their money goes as far as possible. The clubs and/or the charities benefit from the Gift Aid scheme and other tax reliefs, which are explored here.4

Additionally, establishing a charity helps to attract external support for the causes furthered by the charity in the form of grant monies from other charities.

What might a charitable foundation be suitable for?

Every charity must have charitable “objects” to be accepted for registration by the Charity Commission, which must further one or more of the charitable purposes listed in section 3 of the Charities Act 2011. By way of example, the list includes “the advancement of amateur sport”, “the relief of those in need because of youth, age, ill-health, disability, financial hardship or other disadvantage” and “the advancement of education”. It also includes, at section 3(1)(m), objects which can be said to be “analogous” to those which are specifically listed in that section, such as “the promotion of community participation in healthy recreation by providing facilities” for playing sport.

A club which wishes to carry out charitable activities through a charity must ensure that those activities fall within one of the objects listed in section 3. The purpose must also be beneficial (outweighing any detriment) (the “benefit aspect”) and a “sufficient section of the public” must benefit, without personal benefit which is more than “incidental” arising.5

As such, charitable foundations are appropriate for a number of activities. Using examples from different sports:

  • Liverpool FC Foundation:

    • Runs half term camps for children, for example educating them in conjunction with the Merseyside Fire and Rescue Service.

    • Organises a “real men don’t carry knives” football tournament.

    • Open Goals: a multi-sport and physical activity project encouraging families to be more active together.

    • Operates a military veterans football project helping to integrate military veterans back into civilian life.

  • Bath Rugby Community Foundation:

    • Hi5! Outreach, which gets disabled people involved in sport.

    • Urban Rugby Squad, which helps 14-16 year olds from disadvantaged backgrounds to participate in rugby.

  • Durham County Cricket Foundation:

    • Caught and Sewed, which involves the elderly in group sewing sessions, some of which are cricket-related and others of which are not.

    • Let’s Be Women, which uses cricket to help young women to tackle social issues.

    • Go Sketch, which allows young people to learn design skills and finishes by allowing them to design their own cricket bat.

What a charitable foundation is not suitable for

Charitable foundations are inappropriate for a number of activities. These include:

  • Running a club’s youth academy. Running a club’s youth academy provides the club itself with an unacceptable level of private benefit and such an organisation generally cannot be a charity.

  • Running programmes focussed on encouraging people to support the professional club. Again, this would create too much private benefit for the club.

  • Paying players. By the same token, paying players provides an unacceptable level of private benefit to the players.

  • Supporting the professional or elite game, either through a permanent club or through organisation of professional or elite events. Organisations which have a restricted membership, for example because only a limited number of people are sufficiently proficient at a sport to qualify for membership, cannot be charities since they do not have an open membership and thus are not for the public benefit. A club could not, therefore, set up a charity in which to house a “reserve” team.

  • Promoting participation in an exclusive or expensive sport. Sports which are unreasonably restricted to a certain membership because of social reasons (such as lack of wealth) also cannot be said to have an open membership or qualify under the object of “community participation”, since only a particular portion of the community can partake.

  • Supporting a sport which does not fit in with the Charities Act 2011 definition of “sport”, namely, “sports or games which promote health by involving physical or mental skill or exertion”. Sports which are not physically or mentally demanding, such as angling or motor sports, cannot establish charitable foundations under sporting objects, even if they are officially recognised as a sport (for example by Sport England). Where the sport is not considered to be “healthy” it might be possible to register a foundation as a charity under a different charitable object, depending on its purpose. For example, using angling as an example:

    • the Angling Collection has the charitable object of educating the public (in the history and practice of angling);

    • West Sussex Angling Academy has the charitable object of promoting social inclusion of people (because of ill-health, unemployment, financial hardship, etc.); and

    • Horizon Angling Club for the Disabled has the charitable object of, for the interests of social inclusion, improving the quality of life of disabled persons.

  • Promoting a sport which is very dangerous. All sports involve an element of danger, but those which are very dangerous will have to demonstrate that such danger is not so extreme as to undermine the promotion of “healthy recreation” (if that is the object of the charity) and they will have to demonstrate public benefit in their activities.

The practical steps to setting up a sports charity

Choosing legal form

If a club wishes to set up a sports charity, it must ask itself a number of questions, the first of which relates to legal form. A charity is not a legal form in and of itself, and neither is a “foundation”; rather, “charity” is a label attached to entities carrying out charitable work (which is recognised by the Charities Commission through registration of that entity) and “foundation” is used to denote charitable activity in the name of an organisation.

Some legal forms used by sports organisations are not appropriate for charities, such as companies limited by shares, community interest companies and an organisation registered as a community amateur sports club with HMRC (although that is not a legal form).

The majority of charities are set up as companies limited by guarantee (“CLG”). Indeed, all three of the examples used above are CLGs. That structure is popular with charities partly because it has always been the traditional model for charities, with which the Charity Commission is familiar. But such organisations are useful because they are simple to run, with limited liability for members. Profits cannot be distributed to members and must be used for the entity’s charitable purposes.

Many charities will choose instead to be a charitable incorporated organisation (“CIO”). A CIO is a relatively new legal form, dating from 2013, and has become popular because it is only subject to regulation by one regulator - the Charity Commission – whereas charitable CLGs are subject to regulation by both Companies House and the Charity Commission. CIOs are relatively easy to set up (but note that they do not legally exist until registered with the Charity Commission). CIOs are not appropriate for organisations that might wish to borrow on a secured basis, since they do not benefit from use of the Companies House charges register (although this is unlikely to be an issue for a club foundation). Additionally – and crucially for many club foundations – a member of a CIO must exercise its powers in a way which would be most likely to further the purposes of the CIO. This has been interpreted in other contexts (i.e. in relation to trustees) to mean that the member (or trustee) cannot vote where they have a conflict of interest (although the situation with regard to CIOs is not clear). Often, club foundations are set up with the club being the only member of the charity, and thus where there are likely to be conflicts a CIO may not be appropriate.

Charities can also be unincorporated associations, but such a structure is unlikely to be useful for a foundation since it does not have any legal personality (and therefore cannot enter into contracts by itself) and no limited liability.

Drafting articles of association / constitution

The next step will be to draft the articles of association (if a CLG) or constitution (if a CIO). This involves carefully drafting the objects of the charity so as to ensure that the objects are wide enough to allow some room for manoeuvre, while also making them narrow and focused enough to satisfy the Charity Commission.

Broadly speaking, everything that a charity does must further its objects and funding spent outside of a charity’s objects is a breach of trust. It is important to get the objects right at the first instance, since the objects can only be amended with the consent of the Charity Commission.

Identifying trustees

It is important that the club recognises the charity is not a subsidiary; it is an independent entity and this should be reflected in the make-up of the board of trustees of the foundation. It is good practice to ensure that at least a majority of the board of trustees are independent of the club (i.e. are not directors, employees or shareholders of the club). Trustees should be aware of their duties and should read the Charity Commission’s guidance on that matter.6

Trustees should be unpaid, although they can be paid in particular circumstances. Charity Commission guidance on that issue can be found here.7

Other steps

There is not sufficient space to discuss all of the other steps a club must take in setting up a foundation, but briefly these are:

  • Apply for consent from Companies House and/or the Charity Commission for use of any sensitive words in the name (e.g. “charitable” or “foundation”).8

  • Incorporate the company (if a CLG).

  • Open a bank account for the foundation.

  • Prepare and submit an application form to the Charity Commission for registration as a charity.

  • Register the charity with HMRC for charitable tax relief.

The relationship between a sports club and its charitable foundation

An important consideration for clubs in setting up a charity is the relationship between the club and the charity. As stated above, the club and the charity are separate entities and the trustees must keep this in mind at all times. This means that trustees must make decisions that are in the best interests of the charity, not the club, and must be free to (for example):

  • Negotiate and agree funding terms with the club and ultimately decline funding if conditions not in charity’s interests.

  • Take their own decisions (and not commit themselves simply to giving effect to policies and wishes of the club).

  • Take their own legal and financial advice.

  • Draw up their own policies and business plan.

  • Decide on beneficiaries and services.

  • Not agree to conditions that undermine the confidentiality of discussion.

Since the entities are independent of one another, care should be taken to document agreements such as use of premises, seconded employees, funding, etc. The club and the charity will likely enter into a service level agreement setting out the terms of the club’s support.

The Charity Commission’s guidance on corporate foundations is a very helpful guide, should a club have any questions.9

Note that a foundation may wish to set up a trading subsidiary to undertake trading which is not within its charitable objects (such as revenues from a bar) but this is unlikely given that the club to which it is related, as well as other grant making bodies, will be providing most of the funding.10

The risks in establishing a charitable foundation

You will by now have realised that it is not necessarily a simple thing for a club to set up a charitable foundation. While such foundations can be a great force for good, there are risks associated with them, such as:

  • Reputational risks. For example, when the Rangers Charity Foundation handed over control of the income from a charity match to the administrators of Rangers FC and saw its share of the proceeds of that match drop from 60% (plus a £25,000 management fee) to just 10%, the Scottish Charity Regulator criticised the charity and the story was widely told in the press.11

  • Charity Commission intervention, which can include removal of trustees or public criticism (as it did in the case of the Rangers Charity Foundation). This is particularly so in the current climate, where public trust in charities is very low.12 Charity trustees are permitted to make honest mistakes but this does not negate that their duties can be onerous.

  • Personal liability for trustees for breach of trust. See here, for example, where the Charity Commission made the trustees of an unnamed charity repay £650,000 to the charity.13

  • Safeguarding issues. Club foundations often work with vulnerable people – from children to military veterans – and this means that the foundation needs to be very careful regarding its volunteers and employees. This is particularly so after some of the sporting child abuse scandals, such as the Barry Bennell conviction.14 Charities must submit a “serious incident report” in the event of harm (or suspected harm) to beneficiaries and must confirm that there were no such incidents in previous year in annual return.15 It is an offence for trustees to provide false or misleading information in such a report or return.

Conclusion

Club foundations do excellent work in their communities and serve an essential function in the sporting world. This article has teased out some of the practical issues applying to clubs considering the establishment of a charitable foundation and has warned of some of the risks in so doing. What is clear is that a charitable foundation is not something which should be established on a whim, and requires significant care and attention to navigate the charity law landscape. Nevertheless, the increasing numbers of club foundations is something very encouraging to see.

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About the Author

Benjamin Thomas

Benjamin Thomas

Associate, Bates Wells Braithwaite

Ben is a solicitor in Bates Wells Braithwaite's Charity and Social Enterprise department. He advises a wide range of sporting clients, including governing bodies, grant-making institutions, clubs, Community Amateur Sports Clubs and social enterprises, covering issues such as governance, charity law / CASC registration and compliance, setting up charitable foundations, managing grants, general regulatory advice and contract drafting and review.

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