Schools pay less tax if they set up companies and pass profits back as a covenant. Neil Merrick on the growing merchandise culture
When pupils buy lunch at one of the three canteens in John Port School, or purchase sweets from the tuck shop, the money does not go directly to the school but to a private trading company. John Port Enterprises was set up more than three years ago to co-ordinate merchandising at the grant-maintained school, about five miles from the centre of Derby, as well as to reduce its tax burden.
The company is in charge of school catering, vending machines and the sale of sweets and stationery in tuck shops. School uniform sales have been franchised to a local clothing supplier and part of the profits channelled back through John Port Enterprises.
As a charity, John Port School is eligible to pay corporation tax on its profits. By setting up the company, it reduced its tax bill in the same way as other charities. Although John Port Enterprises pays tax in the same way as other private companies, the school reclaims the tax once the profits are passed to the school in the form of a covenant.
John Port is a large 11-18 mixed comprehensive in the small village of Etwall. With 10 teaching blocks and a site stretching to 133,000 square metres, including substantial playing fields, it is anxious to maximise its merchandising activities wherever it can.
When Michael Crane arrived as headteacher in September 1994, the school had been grant-maintained for nearly 18 months and John Port Enterprises had been in operation for exactly a year. As former head of a local authority school, he saw the trading company as a means by which the school could make further use of its autonomy. "It was an exciting development which I inherited. It means the school can use its own initiative," he said.
The company has four directors: Mr Crane, Sheila Aston, the deputy headteacher, the chairman of governors, Barry Whyman, and Graham Cole, a chartered accountant who was appointed director of finance and support services in September 1993 and is in charge of the day-to-day running of thecompany.
The first hurdle to overcome was drawing up the memorandum and articles of association. These had to be broad enough to cover all existing activities as well as new ventures, such as adult education and the running of educational trips, which John Port Enterprises may wish to embark upon in the future. "It's better to have them built in at the outset to avoid the time and cost of going back to Companies House," said Mr Cole.
The school has three catering outlets, including a fast-service bistro canteen. Each day about half of the 1,700 pupils eat meals at school but, in spite of large sales, profits on catering are minimal.
"We try to be as efficient as possible but also provide value for money along with a healthy,balanced choice," explained Mr Cole. "If you are offering a meal at Pounds 1 to Pounds 1.25 which, commercially, would cost double that, then there is a strong element of service tostudents. I don't see it as a loss but a cost within education."
The school runs one tuck shop, which takes up to Pounds 300 per day, along with a trolley service for sixth-formers. Vending machines raise even more money. A Cadburys machine is refilled three times a day and the school keeps all the profits. A series of Coke machines are refilled by Coca Cola staff and the school receives acommission on all sales.
Prior to Mr Crane's arrival in 1994, students could buy their uniform in the school's clothing shop or through outside retailers. After uniform rules were tightened, reducing the opportunity for outside sales, John Port Enterprises was potentially in a monopoly situation. With administrative costs rising, it franchised sales to Cheatles, which has shops in Burton, Nottingham and Uttoxeter. The school's company receives 5 per cent commission on all sales.
In 1993-94, John Port Enterprises made a pre-tax profit of Pounds 4,000 on a turnover of Pounds 21,000. The following year profits rose to Pounds 6, 000 but last year, even though turnover rose significantly to Pounds 75,000, including a substantial increase in school uniform sales, profits were down again to Pounds 4,000.
Graham Cole said setting up the tuck shop accounted for the fall in profits and, next year, profits are forecast to increase to Pounds 16,000. One disadvantage of the rising turnover is that the company must pay VAT, which cannot be reclaimed in the same way as corporation tax.
Mr Cole recommended any school which finds itself facing VAT to contact Customs and Excise, which had been extremely helpful. "You should not be frightened of them or the InlandRevenue. They are a freeconsultancy."
Christopher Reynolds, head of St Benedicts School in Derby, has less fond memories of Customs and Excise. Twice during the past five years the school has fought and won cases against Customs and Excise over VAT.
St Benedicts, a voluntary-aided local authority school with about 1,500 pupils has run a trading company for five years. This pays an annual dividend to the school's charitable trust, which reclaims corporation tax in the same way as grant-maintained schools and other charities.
The company is in charge of catering, school uniform and tuck shop sales and also runs conferences at the school. According to Mr Reynolds, the Pounds 16,000 profits made last year is "survival money". He added: "It's sad that, as well as being headteacher, I've got to be managing director of a company with a turnover approaching Pounds 100,000. But sometimes the only way to survive is to pump money in from other sources."
When St Benedicts first took on Customs and Excise, Mr Reynolds had real difficulty finding out information about tax. "We only went to them to ask if we were liable for VAT. That was the first mistake, as they said we had exceeded the limit," he explained.
Five years later, as schools become more familiar with tax issues, the situation is still complex. "Every area is different, particularly with Customs and Excise," he continued. "It's important that people go to see an expert. "
Schools are bombarded almost daily with offers from private firms to help them with fund-raising. John Sutton, general secretary of the Secondary Heads Association, said merchandising was an increasingly important activity for schools, although the association had not yet been asked to provide specific advice. "People find out through trial and error," he said. "It's not a professional matter for our members. It's a matter for the governors of the school."
Back at John Port School, Michael Crane confirms the money raised through merchandising is a significant way of enhancing its annual maintenance grant. At times, however, the school hires out its premises for a peppercorn rent to community groups which are unable to afford the full market prices. "Although there is great emphasis on how we can sell ourselves and our products, I also see it as a way in which the school can raise its profile in the community, " said Mr Crane.
School buildings and grounds are hired out for everything from wedding receptions to committee meetings. Lettings bring in about Pounds 15,000 per year and, because such transactions are exempt from tax, they do not have to be put through John Port Enterprises.
During the past three years, the school has introduced a new caretaker's contract so that cover is provided from 6am-10pm each weekday and site managers only receive overtime at weekends. "All extra business during the weekday hours means extra marginal income," said Graham Cole.
He concedes it will be difficult to expand merchandising further, but the school is to review staffing in its three canteens to reduce costs. Future projects may include self-service "food courts", allowing pupils a wider choice of food, and possibly a second tuck shop. "Merchandising can mean any number of a range of activities. It's not just selling Kit Kats," he said.