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1 Introduction

This guidance paper updates previous RFU advice relating to Industrial & Provident Societies (I&Ps) and Community Amateur Sports Clubs (CASCs).  This paper is comprehensive and supersedes all previously issued RFU circulars on the subject matter

2 Background

The Finance Act 2002 introduced legislation to allow amateur sports clubs to register as CASCs with HM Revenue & Customs (“HMRC” - previously the Inland Revenue) and so access a package of tax benefits.  Furthermore, the Local Government Act 2003 introduced legislation granting CASCs 80% mandatory rate relief on premises they occupy.

In October 2003 the RFU issued guidance to clubs and Constituent Bodies on the issues involved in registering as a CASC.  This guidance concluded by strongly advising clubs to consider CASC registration, as the benefits involved can be advantageous to many clubs. 

Further RFU guidance was issued in February 2004 detailing the requirements for changes to the RFU Model Rules for clubs who are registered, or considering registration, as Industrial & Provident Societies.  This guidance is now not appropriate due to changed practices of HMRC.

Within the last few months it has become apparent that a number of clubs applying to register as CASCs have had applications refused by HMRC due to non compliance of their rules with CASC requirements.  Such conclusions are subjective and appear to indicate that HMRC have begun to apply general principles more stringently.

HMRC did not inform the RFU of any change in policy and it was left to the RFU to infer this from the feedback from member clubs.  It is for this reason that this paper may appear belated.

Following meetings with the HMRC we are now in a position to issue this updated guidance relating to I&P Model Rules and CASC registration.

3 I&P Model Rules

I&Ps are registered with and regulated by the Financial Services Authority (FSA).  To aid member clubs’ registration as an I&P the RFU in the past lodged a set of model rules (“Existing Model Rules”) with the FSA.  Any club that is currently an I&P is likely to have these as their club rules.

The RFU has now lodged a second set of CASC compliant model rules (“CASC Model Rules”) with the FSA to sit alongside the first set and these are now available for use by clubs.  This second set has been drafted to ensure that they comply with the requirements of Schedule 18 of the Finance Act 2002 with regard to the constitution of clubs that wish to qualify as CASCs.  The rules have also been approved by HMRC as meeting the criteria for CASC compliance.

Any club registering as an I&P henceforth has a choice whether to adopt the Existing Model Rules or the new CASC Model Rules.

We strongly advise any clubs registering as an I&P that intends to register as a CASC or believes there is any likelihood of so registering in the future to adopt the CASC Model Rules.

Any I&P clubs wishing to register as a CASC which have the Existing Model Rules are strongly advised to change to the CASC Model Rules in their entirety prior to CASC registration.

Appendix 1 of this circular sets out the changes between the two model rules.  In general we believe that the best interests of a typical club will not be compromised in any way by adopting, or changing to, the new CASC Model Rules.  Indeed, the revised clause on dissolution better secures the club’s assets for the future interests of the game.

4 I&P Incorporation

Guidance on the process of incorporating as an I&P can be obtained from our solicitors:

David Kinch
Edwin Coe Solicitors
2 Stone Buildings
Lincoln’s Inn
London    Tel: 020 7691 4000
WC2A 3TH    Fax: 020 7691 4174

The document “Incorporating Your Club: Your Questions Answered” which forms part of the pack to be obtained from Edwin Coe upon request, has been attached to this paper as Appendix 2.

Edwin Coe’s legal fees for dealing with registration as an I&P are £200 plus VAT; additionally there will be a registration fee of £120 (for clubs registering with a standard set of model rules).  After the first year of registration an annual fee is payable to the FSA; this is dependent upon the club’s level of net assets, but will be between £60 and £370.

Edwin Coe will also provide guidance to clubs already registered as an I&P on the process of amending Model Rules and, should the club wish to, changing completely between the two registered sets of Model Rules.

5 Other ways to incorporate

Incorporating as an I&P is not the only way to incorporate.  Clubs can also incorporate as companies, in which case it is usually preferable to use the company limited by guarantee structure for members’ clubs rather than using a company limited by shares.  The RFU is in the process of preparing a model memorandum and articles of association for a company limited by guarantee together with a guide to incorporating as such.  We will distribute these as soon as they are available.  As with I&P registered clubs, it is possible for companies limited by guarantee to be registered as CASCs.

6 CASC criteria

For a rugby club to register as a CASC it must meet certain criteria as detailed on the Revenue’s website on www.hmrc.gov.uk/casc/ , these are as follows: 

i) membership of the club must be open to the whole community;
ii) the club’s facilities must be available to members without discrimination;
iii) the club’s constitution must specifically prevent profits of the club being distributed amongst its members;
iv) the club must provide facilities for and encourage participation in an eligible sport (rugby union football is classified as eligible); and
v) the club’s constitution must specifically provide that, on dissolution of the club, any net assets are to be applied for approved sporting or charitable purposes.

The RFU believes that the majority of the above criteria will not pose a problem for community rugby clubs.  However, items (iii) & (v) above may require changes to the club’s constitution (see section  3 on Model Rules) but will not change the practice of the majority of clubs.  Indeed, such provisions may be beneficial to a club to avoid the risk of it being “asset-stripped” by outsiders.

Payments to players

There are strict limitations regarding payments to players.  Members who play the sport may be paid in some other capacity, eg as a groundsman or a bar steward; there are also provisions to pay members small amounts to carry out activities such as coaching other members of the club or promoting the sport in schools or the wider community.  What is not acceptable is to pay members simply to play. The scheme is about supporting clubs which provide facilities for, and encourage, sport in their communities, not clubs which are simply looking for success in competition.

In summary, we believe that clubs who do not pay players should be able to register as CASCs relatively easily.

7 CASC benefits

Registration as a CASC brings with it a package of benefits as set out below (together with our comments in italics):

i) Mandatory rate relief

The Local Government Act 2003 introduced legislation granting CASCs 80% mandatory rate relief on premises which are wholly or mainly used for the purposes of the club or other clubs registered as CASCs.
This entitles the club to a significant relief to their rates bill.  Some clubs already receive discretionary rate relief of varying amounts from their local authority; however, there is no obligation for Local Authorities to continue to provide discretionary relief from one year to the next.  The relief afforded to CASCs is mandatory at 80%.

ii) Tax benefits available to clubs:

a) Exemption from Corporation Tax on trading income where such income is less than £30,000 pa.

b) Exemption from Corporation Tax on income from property (rental income, etc) where such income is less than £20,000 pa.

c) Exemption from Corporation Tax on interest received and gift-aid income.
This can be of significant value to clubs which receive funding from member donations.  Under the provisions of Gift Aid, a cash donation to a CASC of £100 gives a benefit of £128 to the club.

d) Exemption from Corporation Tax on chargeable capital gains.
This means that clubs planning to relocate and reinvest in new facilities who would face a potential Capital Gains Tax liability can do so free of Capital Gains Tax.

iii) Tax benefits available to those making donations to CASCs:

a) Individuals can make cash donations to CASCs under Gift Aid.
A donor may be more inclined to make donations, knowing that the club will benefit further.  Also, if the donor is a higher rate tax payer then they may claim additional tax relief on the donation in their self assessment tax return.
b) Individuals can get relief from Inheritance Tax on gifts to CASCs.
This can also be of similar value to clubs since donations from a deceased member’s estate to a CASC will be treated in the same way as gifts to a charity and will attract relief from inheritance tax.

c) Companies can get relief on gifts of goods and equipment.

d) Individuals and companies can avoid a taxable capital gain on gifts of chargeable assets.

For the tax benefits to apply, the income gains and donations must be used by the club for its main purpose.  Please note that there are rules to prevent the exemptions for CASC donors being used for tax avoidance purposes.

8 The decision making process and CASC registration

Based on the above and taking into account a ‘typical’ rugby club we believe that the decision to register as a CASC can be distilled down to the following simple three-step process:

Step 1 - Will the club materially benefit from converting to a CASC?

We believe that the answer to this should be yes if:
• the club pays a significant sum of money in rates or would do if any discretionary rate relief was withdrawn.
• the club is planning to relocate or otherwise dispose of its current property and reinvest in new facilities at a significant capital gain; and/or
• the club receives or can potentially receive significant donations from members or other individuals, either whilst living or as part of their will.

Step 2 - Does the club accept the consequences of registration?

We believe that the answer to this should be yes if the club intends to permanently remain a CASC.

Step 3 - Can the club qualify?

We believe that the answer to this should be yes if:
• the club does not pay its players; and
• the club makes certain changes to its Constitution/Model Rules as noted in earlier sections of this paper, specifically to restrict the distribution of assets to its members and to ensure that assets on dissolution are applied for approved purposes.

If the answers to these questions are yes then we believe that the club should seriously consider registering as a CASC. 
Registration

The registration process is detailed on the HMRC website http://www.hmrc.gov.uk/casc/.  It is extremely simple requiring completion of a brief form and the provision of certain club documents.

De-registration

There is no provision in the legislation for a club to de-register i.e. ‘once a CASC always a CASC’. Before applying to be a CASC, members need to be agreed that what they want is to maintain the club for the continuing use of the community.

If a club ceases to comply with CASC criteria or ceases to hold any of its property for qualifying purposes then the club is deemed to have disposed of its property and then immediately re-acquired it at the then market value, thus triggering a tax liability on any Capital Gain.  This is an anti-avoidance measure introduced by the Inland Revenue and could have a potentially adverse impact. 

This provision could affect clubs which are currently totally amateur but which have ambitions to access higher league levels since, if this resulted in a club starting to pay players, it would mean that the club would no longer qualify as a CASC.  We believe that solutions exist which involve splitting the 1st XV into a separate entity: however, such measures are not guaranteed to be successful.

9 CASC statistics

As noted above, the RFU believes that there are substantial benefits delivered to clubs which register as CASCs.  These are detailed on the HMRC website under: http://www.hmrc.gov.uk/casc/.

As at July 2005, according to Deloitte & Touche CASC statistics, a total of 3,058 sports clubs have registered as CASCs in the UK, 1,360 of these being registered within the last twelve months. 

It is estimated that, to date, the total cash benefit to these clubs as a result of CASC registration is around £7.0m (being £4.3m from rate relief, £1.5m from corporation tax savings and £1.2m from gift aid repayments).

Of the sports clubs which have registered as CASCs, around 190 are rugby clubs in England which are members of, or affiliated to, the RFU.

The issues of the lack of government funding of sport in the UK and the tax regime to which sports clubs and national governing bodies are subjected are well publicized.  The legislation relating to CASCs has been one welcome change to this and the RFU is keen to ensure that the benefits are utilized as widely as possible.  Furthermore, the perceived success of the CASC scheme is inevitably a factor in the government’s incentive to offer further benefits to grass roots sport.

We therefore reiterate that there are potentially substantial benefits to clubs registering as CASCs and we would strongly urge all clubs to give this matter serious consideration.

 
Appendix 1: Differences between the Existing Model Rules and the CASC Model Rules

The CASC Model Rules (currently registered with the FSA as “Model A (CASC Version –Clubs)”) were based on the Existing Model Rules (currently registered with the FSA as “Model 4 (Clubs)”), incorporating the changes listed below.

Note that the current Existing Model Rules have themselves been amended over time; recent changes relate to meeting dates, Committee Members’ interests, the Licensing Act 2003 and sundry terms, eg FSA, IRB. 

The list below excludes minor changes in grammar, punctuation or relevant updates to cross references.

Appendix 2: Guidance on incorporation

Incorporate Your Club

Your Questions Answered

1 Why incorporate?
Principally to obtain for the Members of the Club the benefit of limited liability.

2 Why do you need limited liability?
Without incorporation, Members would be personally liable for any borrowings or other liabilities that the club may have. Depending on the nature and extent of the liabilities this may involve a degree of risk that Members would find unacceptable.

3 Are there other advantages?
Yes. They include the following:
(a) All the property of the club would become directly owned by the club rather than through the trustees as at present which removes the need to appoint or change trustees.
(b) Incorporation will enable the club to give a floating charge over its assets or to create debentures so as to secure any borrowings it may wish to make. This will make it easier to raise finance when it is needed by the club.
(c) In an increasingly litigious age legal actions will involve the club itself rather than its Trustees, Officers or Committee Members.

4 How can the club incorporate?
Incorporating as an Industrial and Provident Society is one way a club can incorporate.  Another way is as a company, usually limited by guarantee rather than by shares.  This Guidance and the Model Rules only relate to incorporating as an Industrial and Provident Society but the RFU will be issuing similar guidance on how to incorporate as a company limited by guarantee in due course.

It will be for each club to decide for itself which is the most appropriate structure.  Incorporating as a company limited by guarantee is procedurally a little more complicated than as an Industrial and Provident Society but may be simpler to run once it is established as advisers and other third parties are generally more familiar with a company structure than an Industrial and Provident Society structure.  It is the belief of the RFU that many clubs, and perhaps also some of the Constituent Bodies, would wish to enjoy the benefits of incorporation, either as an Industrial and Provident Society or as a company limited by guarantee.  Packs of the relevant paperwork for incorporation as an Industrial and Provident Society are available from Edwin Coe Solicitors; similar guidance relating to companies limited by guarantee will be available in due course.
The remainder of these guidance notes deal with incorporation as an Industrial and Provident Society.

5 Will the club need to adopt new Rules?
In order to take advantage of the incorporation service, at a cheaper rate through the RFU, a club is required to adopt a set of the Model Rules. These will in varying degrees differ from the club’s existing rules and each club should seek advice and comments from its solicitors and auditors as to the effect of any particular change.  Two sets of Model Rules have been produced, the first of which has been in use for some years and the second version introduced in 2005 for clubs that wish to qualify as Community Amateur Sports Clubs.

6 Will the new Rules place a limit on the Committee’s power to borrow money in the name of the club?
Yes. The Model Rules provide a limit on the amount it may borrow, however, it is up to each club to decide what the appropriate borrowing limit is for it. This will depend on commercial requirements and the ability to repay. The borrowing limit may be changed with the consent of the Members at a general meeting.

7 Will Members have shares in the club once it has been incorporated?
An Industrial and Provident Society has to have a share capital and each Member will therefore have one share.

8 Will Members have to pay for their shares?
Not in the sense of having to pay anything extra. Each share will have a nominal value of 5 pence and 5 pence of each existing Member’s subscription for the next season will be applied in paying for its share. In the case of new Members, the 5 pence will come from their first subscription.

9 Will different categories of Members be permitted?
Yes.  But the FSA will not accept the description “member” for any person who is not a full voting member.  Therefore only membership categories which carry full voting rights should be described as “members”.  There must be one vote for each member:
(a) Anyone who is a full member must have one vote, there can be no differential voting rights.
(b) Anyone other than a full voting member should be described as an associate, supporter, or some similar word.
The Description “Honorary Member” is acceptable to describe a full voting member who is not required to pay a subscription.

10 Will it be possible for anyone to build up a large shareholding in the club?
No. Each Member will have one share and no more and shares will not be transferable.

11 What will happen to a Member’s share when he ceases to be a Member?
It will be cancelled and the 5 pence paid for it will fall into the club’s funds.

12 Will a share in the club have any value?
Not in a commercial sense. It will not be transferable and can therefore not be bought and sold. It will be cancelled when its owner ceases to be a Member, and for example, cannot therefore be left to anyone else by will.

13 Will members be issued with share certificates?
No. Since the share will not be transferable, this would serve no useful purpose and would therefore be an unnecessary expense.

14 Will Members notice any difference between the Club in its unincorporated state and when it has been incorporated?
This is thought to be unlikely. However, this will depend on the extent to which the Model Rules differ from the club’s existing rules.

15 Will there be a Board of Directors?
 No. The club will be run, as now, by a Committee elected by the Members.

16 Does incorporation have any effect on the club’s alcohol licence?
No.  The regime is the same however the club is constituted.  Under the Licensing Act 2003 “Qualifying Clubs” are permitted to sell alcohol to members and their guests and “associated members” (which would include members of another club and their guests).  In order to be a Qualifying Club, a club must:
(a) have a minimum of 25 members;
(b) require a two day interval between a member’s nomination or application for membership and being admitted to membership;
(c) be established and conducted in good faith;
(d) not permit alcohol to be supplied on the premises otherwise than by it or on its behalf.
It is therefore expected that clubs will satisfy the criteria.

17 Will the registration authority accept small amendments to the Model Rules?
The registration authority is prepared to register clubs with minor amendments to the Model Rules at an increased fee (Edwin Coe’s Guidance Notes, available on request, give details) but the amendments must not breach any statutory requirement, for example must not restrict the votes of members, or dispense with the holding of meetings. The amendments that have been accepted include the appointment of honorary and life members, provisions for junior members, the number of members to constitute a quorum for the purpose of holding a meeting and the method of advertising general meetings. Should a club have a specific provision that it would like to include details should be provided to Edwin Coe when the registration pack is returned.

18 Can closed membership clubs register with Model Rules?
There is no provision in the Industrial and Provident Society Legislation which prevents a club imposing a qualification for membership. Should a club wish to impose criteria for its membership, details should be provided to Edwin Coe.  However clubs that wish to qualify as CASC’s must comply with the requirement that membership of the Club be open to the Community at large and therefore any membership criteria that detract from the principle are unlikely to be acceptable for such clubs.

19 Can a rugby club which forms part of a larger sports club incorporate using the Model Rules?
In theory there is nothing to stop a rugby club which forms part of a larger sports club from incorporating. However, it is likely that the sports club as a whole will have Rules and therefore to incorporate the rugby club separately will require the co-operation of the sports club. Separate legal advice should be sought to ascertain the practicality of incorporation in these circumstances.

20 Must the club include the word “Limited”?
The club’s full name, including the word Limited, must be displayed in a conspicuous position at its registered office and appear on all notices, advertisements and other official publications of the club and all business letters, cheques, bills, receipts and invoices.
Should a club so wish, it is possible to apply for permission to dispense with the word “Limited”. However, it must be able to show that the objects of the club are wholly charitable or benevolent which would be unusual for a rugby club. Certain documents and information will be required from the club to support this.

21 What is the annual cost of registering as an Industrial & Provident Society?
The Financial Services Authority (FSA) charges only two fees:
(a) registration fee (see paragraph 4 of Edwin Coe’s Guidance Notes); and
(b) an annual fee on a sliding scale based on total assets as disclosed in the last Annual Return subject to a discount of £20 if paid by direct debit and £10 if paid by credit transfer.  The annual fees for the financial year ended 31 March 2006 are set out below:

The annual fee covers all transactions enabling a club to implement amendment of its rules or change of name without having to pay a further fee.
There is a concession that a club is not required to pay the annual fee for the financial year ended 31 March in which it is first registered.  The amount of the annual fee is subject to review each year by the FSA in order that it reflects the actual cost of providing the registration service.

The FSA will charge an administrative fee in addition to the annual fee as follows:
(a) if the annual fee is not paid within 30 days from issue of invoice an administrative fee of £250 will be payable plus interest on the outstanding fee.
(b) if the Annual Return is filed late i.e. more than 7 months after the club’s accounting date, an administration fee equal to the annual fee will be payable capped at £250.

22 What is the position concerning liability for the club’s existing borrowing?
Following registration as an Industrial and Provident Society all the assets and liabilities of the club automatically vest in the incorporated body. Where the club has existing borrowing either secured by mortgages, personal guarantees, or merely by a form of loan agreement, there will be a continuing liability on the individuals i.e. trustees, club officials or personal guarantors who signed the relevant document except in cases where that document limited the liability of trustees or club officials to the assets of the club in their hands. Any new borrowings entered into or liabilities incurred after registration will be in the name of the incorporated club and personal liability will only arise if the lender requires it.

23 If the club has a lease of its premises, is the landlord’s consent required to register as an Industrial and Provident Society?
There is no requirement in these circumstances to obtain the landlord’s consent, although clubs should check the terms of any lease they have with their legal advisers to ascertain whether the registration certificate of the club as an Industrial and Provident Society should be registered with the landlord. The position of club trustees or individual guarantors who entered into the lease originally is similar to that in relation to borrowings mentioned in the reply to 22 above. In other words, the individuals remain liable themselves to the landlord unless in the lease they have limited their liability to the assets of the club in their hands.

24 Can a club registering or already registered with Model Rules also qualify as a Community Amateur Sports Club (CASC)?
Clubs wishing to incorporate as a CASC should use the CASC Model rules as these have been approved by HMRC.  All the differences between these and the other Model Rules are noted in Appendix 1, the key differences are:
(a) the requirement that on dissolution, all assets of the Society be distributed for the benefit of the Game or another CASC or charity;
(b) the limits on powers contained in rule 5 of the CASC rules;
(c) the requirement that membership of the club should be open to all without discrimination of any kind.
Clubs that adopt the rules should not therefore encounter objections from the Revenue on the basis that the rules do not meet their criteria for CASC compliance.
Clubs should, however, be mindful of making any amendments to the rules which could have a bearing on the club’s compliance with CASC requirements.  In particular, any changes that relate to the powers of the club to use its funds for any purpose which may not be regarded by the Revenue as qualifying expenditure or any change which would raise any barrier to entry to the club by the community at large is likely to be viewed as being in breach of the requirements.  This would be a relevant consideration for any club contemplating having a professional team as payments to players would result in the club ceasing to qualify as a CASC.  It may be possible for the professional element to be operated by a separate entity with a view to the club retaining CASC status but this cannot be guaranteed and clubs in this position should obtain their own advice on how best to proceed.
Clubs should also be aware that the fact that the rules are CASC compliant does not guarantee that the club will retain CASC status in the future.  The legislation requires not only that the constitution of the club comply with the legislative requirements but also that the club’s operation should remain within the limits set down by the rules and the legislation.  This is particularly relevant in the context of the rules that focus on issues of qualifying expenditure and the provision of benefits for the community as a whole. 

25 Does the adoption of the CASC Model Rules guarantee the club will always have CASC status?
No.  It is in the nature of model rules, which adopt a ‘one size fits all’ approach, that they give clubs a wide range of powers so as to avoid debates arising as to whether a particular course of action was or was not within its powers.  This raises the possibility of a conflict between matters which might still be authorised under the rules but could still fall foul of the requirements of the CASC legislation. 
Examples of where such issues could arise include the following (rule references are to rule numbers in the CASC compliant Model Rules):
(a) Rule 4.3 (which gives clubs power to use its assets as security for loans) is drafted to enable a club’s assets to be used as security for loans for other persons or corporations in which the club has an interest.  Whilst giving such third party security is not specifically precluded by the CASC legislation, HMRC would need to be satisfied that such security was provided in furtherance of the main object of the club, namely the provision of facilities for and promotion of participation of the whole community in the game;
(b) the Revenue regard the requirement that the club be open to the community as a whole as being of the utmost importance and it is one of the specific requirements of the CASC legislation.  Rule 18 provides for the payment of annual subscriptions by members.  If these were set at too high a level it could be seen as a form of indirect discrimination against sections of the community that are unable or would find it difficult to afford such a payment.  Subscriptions should therefore always satisfy the test that they be set at a level which can be afforded by people on average earnings;
(c) Rule 4.7 regarding the support of other charities or events.  Whilst as a matter of construction, this would entitle a club to put on events such as quiz nights and charity auctions, it could also entitle it to run or support a fully commercial operation which may not be within the scope of a CASC;
(d) in relation to Rule 19.1, regarding the sale of tickets for games, again any distribution of match tickets as a means of enabling members or players to achieve a mark up by selling on the tickets would be a breach of CASC legislation as it would be perceived as a disguised payment to players or members; and
(e) clubs must have a majority of members participating in the sport.  This is not restricted to playing members as it can include coaches, managers or any other non-paid work undertaken on behalf of the club.
Many of the changes that were made to enable the rules to become CASC compliant were designed to ensure that all expenditure by a club must be qualifying expenditure, which in the context of a rugby club, means that all expenditure must be incurred for the purpose of providing facilities for, and promoting participation in rugby.  As a result, all payments to members for playing the game are prohibited (Rule 5.1.3) and clubs must keep in mind the need to ensure that the CASC rules governing expenditure are complied with at all times. 

26 What happens if a club fails to comply with CASC rules?
Whilst the legislation does not provide a mechanism to allow clubs to de-register as a CASC, the Revenue do have the power to de-register a club if it considers the club has committed a serious transgression of the CASC rules.  The club would then cease to benefit from the CASC tax exemptions from that date which could result in substantial tax becoming due.
Further information about CASC’s and more detailed guidance on Revenue interpretation can be found on the HMRC website at www.hmrc.gov.uk/casc/ which also contains illustrations of how the rules operate in practice.

Download the Existing model Rules and the CASC Model Rules now.