Charity A), whose main objective is to run residential and nursing homes, had developed a good reputation in the care sector for the provision of care and management of nursing homes. Another national charity (Charity B) which was also operating care homes had, on the other hand, come under significant pressure with the management of their nursing homes.
We advised Charity A on the possibilities of a joint working arrangement between the two charities. A joint venture was then established. This new entity was to be set up to manage the care homes transferred from Charity B; Charity A was to be responsible for the provision of care in these homes. The joint venture was to be owned jointly (50:50) but there were two major issues;
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Charity A wanted to benefit from the joint venture, but not account for the transaction as a joint venture
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What should the benefit for the transaction be based o
Charity A was keen for the most efficient and simple way that this activity was to be accounted for.
We advised that, it would be more appropriate to let Charity B take control of the joint venture (and therefore negotiation with Charity B should be such that Charity B would take most of the risks and rewards of the new entity). If this was to be the case, the accounting for the agreement as associate or joint venture would no long be appropriate for Charity A. Instead, Charity A could show the investment at cost. Furthermore, Charity A could then show the benefit accruing to them from this activity as “management fee”.
having considered any vat implications, we advised charity a to enter into the agreement. the joint venture become legally a subsidiary of charity b and was fully consolidated into the group accounts of that charity. however, the joint venture agreement confirmed the roles, risks and rewards for both a and b. a management fee was then agreed in respect of the number of service level agreements (based on staff salaries plus mark-up), and negotiated on an arm’s length basis with the joint venture.
if you would like any advice on joint ventures then please contact our charity group who will be more than happy to help.