Mention the word charity trading, the first thing that comes to our mind is a café or souvenir shop. Charity commission surveys are always highlighting that more and more charities are turning to trading as another source of generating income. Brexit and the uncertainty this brings will certainly have some impact on the UK economy. If you haven’t set up a trading subsidiary, this may be a good time to start one.
Can charities trade? Yes, they can! Trading is a commercial activity however charities can trade and charities of all sizes do. Trading can be for charging fees for courses, entry fee for activities, sale of goods such as items Christmas cards and the operation of cafés. There are restrictions on charity trading though.
Setting up a trading subsidiary is not that simple and there are some traps charities must watch out for. Charity Law in the UK imposes restrictions on the nature and level of trading activity that charities can carry out. Charities need to decide on the purpose of the trade. Is it primary or non-primary purpose trading? The former is carried out to fulfil the charity’s main objectives and the latter is carried out simply to raise funds. For example, a charity that helps with special needs children’s care during school hours has a café which will be treated as primary purpose trading. This is because this activity is complementing the charity’s primary purpose.
The key points to consider when thinking about setting up a trading subsidy
- Governing document – Charity’s constitution allows to do so?
- Investment - Investment at the start and any ongoing.
- Structure – Who are the board members?
- Risk – Safeguarding existing assets of the charity.
- Reporting - How your trading subsidiary will be included in the parent charity.
HMRC will definitely show an interest in the trading subsidiary. A trading subsidiary needs to watch out when donating all its taxable profits. The trading subsidiary can donate the lower of its accounting profits and distributable profits. Fall foul of this rule and the parent charity may be liable to repay any unlawful distribution by its trading subsidiary. Should the trading subsidiary income exceed £85,000 (2017) then it will have to register for VAT. There are additional reporting reequipments should the trading subsidiary register for VAT, i.e. submitting quarterly VAT returns to HMRC.
We can help you and advise on all aspects of tax and trading. Please do not hesitate to contact Suda.Ratnam@Raffingers.co.uk