Charities, Trading & Tax

These charities generally set up a subsidiary, which is non-charitable trading company. This protects the charity from the risks and liabilities associated with “business” trading. For example, a charity may set up a charity shop as a trading subsidiary. The charity shop, although linked to a charity, is not necessarily a “charity” in its own right.

View charity with separate trading company

Trading & Tax

If your group or organisation carries out any type of trading activity, find out about any tax requirements that may apply. Even one-off or occasional ventures may be treated as a trade for tax purposes if it involves the sale of goods or the provision of services for profit. For charities, the profits made from trading are generally exempt from tax provided that certain conditions are met.

As a general guide only, the following is an example of how income sources may affect a charity’s tax payments.

Your accountant will be able to advise you on the aspects of tax and trading. It is also advisable to seek guidance from the Inland Revenue.

Trading by Charities

Trading is normally defined as involving the sale of goods or services to customers or clients (for profit). There is a popular myth that ‘charities cannot trade’. This is not the case, though charities are restricted in regard to trading activities, that is, there are only certain circumstances when a charity can undertake a trading activity. Charities, which are permitted to trade, do so in a variety of ways such as:

• Organising a cake sale
• Organising a jumble sale
• Renting accommodation to people who need it (charitable housing association)
• Selling theatre tickets (charitable arts centre)
• Licensing a charity logo to a bank in an affinity credit card scheme
• Running a charity shop selling fair trade goods

Charity trading is a growing phenomenon, especially with so many services being sold by charities (often under contracts negotiated between charities and statutory bodies) in the field of health and social care, e.g. a charity-run residential home funded (under contract) by a Health and Social Services Trust.

(source: Good Governance Guide, NICVA 2001)

Taxation of Charity Trading (i.e. Inland Revenue & Customs & Excise)

All charities need a regular source of income. As there is little or no control over donations and legacies being received, inevitably trustees often decide to be proactive and increase revenues through trading activities. The development of trading activities is becoming increasingly essential for many charities.

However charity law does not permit charities to trade simply for the purpose of raising funds. This is because of the general expectation that contributions made to a charity will be used to meet its charitable purposes or invested prudently, rather than being risked in trading activities. Also if a charity trades simply for the purpose of raising funds, it may not only be in breach of charity law, but may also incur tax liabilities on trading profits.

It's therefore worth looking at what a voluntary organisation can and cannot do, and when charities may engage in trading activities for fundraising purposes, and also when a separate subsidiary trading company should be established to carry out those activities.

Charity law is very clear in that charities can trade in carrying out their charitable objectives or in connection with the primary purpose of the charity. For example, a charity set up for the promotion of religion can sell religious literature; an independent school charity which provides its educational services in return for fees; the provision of residential care services by an almshouse or similar charity in return for payment; art exhibitions at a gallery; or stage productions by a theatre can all be charged for.

Charities wanting to trade on a substantial or regular basis for the main purpose of raising funds, can separate out those trading activities to a subsidiary non-charitable trading company - a private limited company. This protects the charity and its assets from the risks and liabilities of the trade.

There may also be tax advantages for the charity in establishing a subsidiary trading company to carry out the primary purpose trading of the charity. Also, any profits of a non-primary purpose trade which is carried out directly by a charity will often be taxable, which is why many organisations choose for simplicity sake to separate the activities of the charity and a subsidiary trading company which covenants its net profits to the charity every year.

It is essential to bear in mind that if a subsidiary trading company is formed as a method of raising funds for the charity, funds should flow in one direction only: from the subsidiary trading company to the charity.

Also, where trustees are to be appointed as directors of the subsidiary trading company, the trustees need to bear in mind the potential for conflict of interest; and that the appointment of trustees as directors cannot be used as a method of paying trustees "by the back door".

What they don't tell you about working for a charity is that what constitutes a "trade" for tax purposes is primarily a matter for the Inland Revenue, but the fact that all profits or surpluses are to be used for charitable purposes is irrelevant.

However, income from the sale of donated goods is generally not regarded as trading income which is why charity shops relying on second-hand goods as such a welcome and established source of revenue for many organisations.

The Inland Revenue can advise trustees about the tax implications of primary purpose trading, but trustees may also decide to consult their own legal and accountancy advisers as well.

There is also what's known as an ancillary trade. Ancillary trades might include for example the sale of refreshments such as food and drink in a restaurant or bar run by a theatre charity to members of the audience.

Under section 505 (1)(e) of the Income and Corporation Taxes Act 1988, any profits arising from a charity trade will not normally be taxed if:

• The trade is undertaken in the course of carrying out a primary purpose of the charity; or
• The beneficiaries of a charity mainly carry out the trade.

The points above indicate the two main types of charity trades. In 1999 the Charity Commissioners for England and Wales broadened the interpretation of charity law to allow charities to promote urban or rural regeneration and to relieve unemployment.

This means that charities are able to undertake certain types of primary purpose trading which would have been forbidden in the past, for example, promoting tourism in a disadvantages area, or setting up small business units and renting them out at low cost to try and stimulate the growth of new businesses and employment in an area with high unemployment and poverty.

There are two other important restrictions to consider:

(1) Charities cannot have ‘trading’ per se as an object of the charity

(2) A Charity wishing to enter into any form of trading activity must have power to do so in its governing documents

Section 505 (1) of the Income and Corporation Taxes Act means in effect that the profits of a charity trade will be excused from the sort of tax that commercial businesses have to endure. It also means that a charity may undertake trading (in certain circumstances) without loss of charitable status.

Non-charitable Trading Subsidiary

Please note that when it is not possible for a charity to carry out a particular type of trading activity, it may be quite simply set up a separate non-charitable trading subsidiary to carry out the trade. The Charity can receive the full benefit of any profits arising from the trading subsidiary, if such profits are donated to the charity through tax efficient schemes.

There is information and advice available about what a particular charity can and cannot do in the way of trading. A charity, which is considering entering into trading activities, can seek advice on what is appropriate from:

Charity Advice Section

NICVA
61 Duncairn Gardens
Belfast
BT15 2GB

028 90877777

Inland Revenue
FICO (Charities)
St John’s House
Merton Road
Bootle
Merseyside
L69 9BB

0151 472 6042