6.5 Interest and profit in charitable community benefit societies
In common with all charities, a charitable community benefit society must devote its resources to the pursuit of its charitable objects. Surplus income should either be re-invested in the society or used to support its charitable objects in some other way. In this context, the payment of interest on share capital is seen as an operating cost, and not a distribution of surplus.
The Charity Commission and The Scottish Charity Regulator have agreed the following policy in respect of the payment of interest on share capital by societies that are registered charities with the Scottish Charity Regulator or are recognised as exempt charities by HMRC.
“The regulator’s position is that a power of a community benefit society to pay interest on shares is not incompatible with charitable status, provided that the following features are required by the society’s rules:
1. The interest rate is set at a level which is not in itself a motivation to buy shares and which the charity trustees can justify as being in the interests of the charity by reference to available commercial rates for borrowing.
2. The cost is part of the society’s revenue expenses and met before the surplus is determined.
3. The rates are declared in advance of the period for which they will become payable, just as for a bank or building society account, and never retrospectively.
4. There is a power to suspend interest payments in the interests of the society.
5. There is a power of the society to withhold repayment of the shares, either temporarily or indefinitely and to write the value down below the nominal £1.
6. The shareholding does not confer any rights to the underlying assets of the society.
7. In the event of a solvent dissolution, shareholders cannot be paid more than the nominal value of their shares.”
This statement relates to the rules of the society, and determines the maximum rate of interest payable on share capital. The management committee usually has the discretionary powers to pay less than this maximum amount.
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