New Charity Commission guidance on trading
DTA and our partners in the Community Alliance, have been pushing for clearer guidance from the Charity Commission on trading.
New guidance was published in April 2007, and applies to charities in England and Wales. A key message is that charities can trade in pursuit of charitable objectives. But where the trading is not in pursuit of charitable objectives but rather to raise money for the charity, and there is a risk to the charity’s assets if things go wrong, it must set up a trading subsidiary.
The Charity Commission guidance points out that charities enjoy advantages in the tax treatment they receive in relation to trading and trading profits. For example, in terms of VAT, certain sales and purchases are exempt or zero-rated. A charity’s trading profits are, in certain circumstances, exempt from tax.
While charities may trade more or less freely in pursuit of their charitable objectives, there are restrictions on engaging in trades the objective of which is to generate funds for the charity. In particular, charities may not engage in such commercially-oriented trades where significant risk to their assets would be involved.
Trading subsidiaries
Where trading (other than trading in pursuit of its charitable objects) involves significant risk to a charity’s assets, it must be undertaken by a trading subsidiary.But even where it is not essential for the trading to be undertaken by a trading subsidiary, the use of trading subsidiaries may produce benefits, for example in reducing tax liabilities: trading subsidiaries may make donations to their parent charity as ’Gift Aid‘, so reducing or eliminating the profits of the subsidiary liable to tax.
But the use of trading subsidiaries where it is not essential to do so is not always beneficial, since it may involve additional management and other costs, and there may be fiscal drawbacks. On the other hand trading operations may benefit from using a trading subsidiary due to the organisational and financial clarity conferred by distinguishing a trading operation from the charity’s main work.
Trustee responsibilities
Trustees of charities with one or more trading subsidiaries need to be aware of their responsibilities. They need to remember, in all decisions made in regard to a trading subsidiary, that the interests of the charity are paramount. The interests of a trading subsidiary, its directors, creditors or employees, must all be secondary to those of the charity.
This is because the purpose of using a trading subsidiary is to benefit the charity in some way, for example to protect the charity’s assets from the risks of trading, or to increase the level of financial return to the charity by saving tax. If the charity’s assets are employed or put at risk for the benefit of the subsidiary, or its directors, creditors or employees, then that purpose is frustrated. In such cases, the trustees of the charity may be personally liable for any loss of, or decline in value of, the charity’s assets.
Due to the complexity of the law in this area, and the potential scale of adverse consequences if mistakes are made, charities and the trustees of charities engaging in substantial trading operations should take independent advice from appropriately qualified professional persons.
Full details are available on the Charity Commission website http://www.charity-commission.gov.uk/publications/cc35.asp
