Charity Trading to raise funds

Andrew EvansPartner, Geldards LLP

Outline • What is trading• When do you need a subsidiary• How to set up a subsidiary• Funding and Operational issues • Extraction of profits• Social Investment Relief• Workshop

What is trading?• Tax definition

“trade, profession or vocation conducted on a commercial basis and with a view to the realisation of profits”

What is trading?• In practice

- sale of goods or services - can include one off ventures - does not matter if profits are to be used for

charitable purposes

Can Charities trade?• Yes, but …• Exemption from tax for certain types of

trading by charities

Types of trading• Primary purpose trading• Ancillary trading• Non-primary purpose trading• Non-trading activities

Primary purpose trading• Carrying on the charity’s objects• Trade carried on by beneficiaries• Profits applied solely for the benefit of the

charity’s objects• Exemption from tax

Ancillary trading• Part of the primary purpose trade• Not a separate trade• Examples

- sale of refreshments at a theatre- crèche at a school/college

• Exemption from tax

Non-primary purpose trading• Trading intended to raise funds for charity• Not covered by any specific

exemption/concession• Shop selling bought in goods not related to the

charity’s objects• Tea/coffee shop• Sponsorship• Profits subject to tax (NB small trade exemption

limits)

Non-trading activities• Rent from land• Investment income• Donations (benefits to donor not amounting

to sponsorship)• Sale of donated goods

NB watch out for repairs to donated goods

Small Scale Trading Exemption• Lower of £50,000 p.a. or 25% of total income• Disregard limit of £5,000 p.a.• Applies to non-primary purpose trading

income• Disapplies charge to corporation tax

When is trading taxable?• Non-primary purpose trading• Above the small scale trading exemption• No other exemptions or concessions apply

What is a trading subsidiary?• A company limited by shares• Owned by the charity or charities• Used for non-primary purpose trades

Why use a subsidiary?• Risk mitigation

- protect charity assets from the risk of trading- create a separate administrative unit to

provide public services- tax reduction- staffing issues

Charity Commission view• No significant risk to the charity’s resources

Funding• Share capital• Loans from the charity• Loans from third parties• Retained profits

Share capital• Subscription for shares• Cannot be easily returned to shareholders• At risk if company goes into

liquidation/administration• Not recommended

Loans from charity• Commercial decision/charity’s powers• Best use of charity resources/investment

policy• Arm’s length terms• Written agreement• Repayment terms

Loans from third parties• Banks unwilling to lend • Charity guarantee• High interest rate• Loss of control• Spread investment risk

Retained profits• Subject to corporation tax

Conflicts of interest• Charities trustees• Directors of trading subsidiary• Duties of care• Legal responsibilities• Separate individuals

Other trading issues• Staff• Logo• Shared resources• Website• Which entity are customers and suppliers

dealing with?• VAT registration

Extraction of profits• Gift Aid payment from trading subsidiary• All profits not retained by trading subsidiary • Consider repayment of loans• Payment within 9 months after the end of the

accounting period

Other trading issues• Loss making subsidiary

- type of trade- trustee/director duties- conflict of interest

• Closure of trading company

Useful websites• www.hmrc.gov.uk/charities• www.charity-commission.gov.uk

Social Investment Tax Relief• Investment in shares or loans by individuals• Investment in a charity, a community interest

company or a community benefit society• Income tax relief at 30% on up to £1m p.a. but

lower limit for the charity• CGT deferral relief for the investor• Method of raising funds for charity trading

SITR Pitfalls• Very complicated • Restrictions on trading activities/charity size• Restrictions on investor links to the charity• Restrictions on benefits provided to the

investor• Detailed professional advice essential

Charity trading work shop• Why would you set up a trading subsidiary?

- what do you think about?• How would you fund the trading subsidiary?• Who would act as directors?• What operational issues would you consider?

Workshop continued• How would you extract money from the

subsidiary?• What do you do if the subsidiary makes a

loss?

Conclusions• If in doubt, take advice• Keep it under review• Do it properly

Thank You

Contact details

Andrew EvansDD: 029 2039 1761M: 07968 193331E: andrew.evans@geldards.com