Many charities engage in trading activities of some kind, without ever giving much thought to either the structure of what they are doing, or the potential tax pitfalls involved.
In some cases trustees may not be aware that the activities they are engaging in are actually a form of trading at all. If trustees aren’t up to speed on the definitions of trade, and tax rules, they may be liable to an unwelcome tax bill for the charity.
There are several different types of trading that can be associated with charities. Primary purpose trading is any trade conducted while carrying out the charities primary activities, such as a theatre charity selling tickets to its shows, or a hospice or care home charging residents for accommodation.
Then there are ancillary trading activities linked to the primary purpose, such as provision of additional medicine to care residents or income from the bar at the theatre. In these cases, there can be complex areas that are hard to define as part of the charities primary purpose, and if the ancillary income is significant in relation to the total trade income, this would raise questions as to whether it is indeed ancillary.
With some notable exceptions such as lotteries, any other earned income is at risk of being taxable. If a charity is providing goods or services in exchange for income, then it must consider this risk.
There has also been some recent help from the Treasury, with charities whose income exceeds £320,000 given an exemption of up to £80,000 on other earned income. Previously the maximum small trading limit was £50,000.
A key start point for any trustee board would be to review charity operations and income earned to assess the level of each source of income and if they are close to breaching this threshold. It may be closer than you think!
Given that many charities work with low-profit margins and limited working capital, it is also essential to structure any trading correctly. Many charities will make use of a subsidiary company if they wish to ringfence any trading income, or also take advantage of potential VAT benefits. The subsidiary will carry out the trading activities, and gift aid any distributable profits raised to its parent charity. This then eliminates any potential tax charge.
Use of a subsidiary may seem like an easy fix but there are pitfalls in this approach too. Some expenses may not be allowable against the gift aid distribution, and there are the costs of set up and administration. In addition, trustees should be mindful that any trade they undertake is linked to the parent charity and that there are reputational and business risks attached should the subsidiary generate losses rather than profits.
In summary, trading in its many forms is a big part of modern charitable organisations. But awareness of what it involves, what the exemptions and risks are – and how to deal with them – is an essential part of any trustees role.
If you would like to know more about the above areas, Price Bailey will be running a series of detailed sessions at our offices on multiple dates.
This post was written by Michael Cooper-Davis, Charities Director at Price Bailey. If you need further information on any of the above, please feel free to get in touch with Michael using the contact form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.