From the Wales Charity Law and Governance Conference 2014.

1. Charity Trading to raise funds
Andrew Evans
Partner, Geldards LLP

2. 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

3. What is trading?
• Tax definition
“trade, profession or vocation conducted on a
commercial basis and with a view to the
realisation of profits”

4. 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

5. Can Charities trade?
• Yes, but …
• Exemption from tax for certain types of
trading by charities

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

7. 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

8. 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

9. 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)

10. 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

11. 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

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

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

14. 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

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

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

17. Share capital
• Subscription for shares
• Cannot be easily returned to shareholders
• At risk if company goes into
liquidation/administration
• Not recommended

18. Loans from charity
• Commercial decision/charity’s powers
• Best use of charity resources/investment
policy
• Arm’s length terms
• Written agreement
• Repayment terms

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

20. Retained profits
• Subject to corporation tax

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

22. Other trading issues
• Staff
• Logo
• Shared resources
• Website
• Which entity are customers and suppliers
dealing with?
• VAT registration

23. 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

24. Other trading issues
• Loss making subsidiary
- type of trade
- trustee/director duties
- conflict of interest
• Closure of trading company

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

26. 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

27. 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

28. 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?

29. Workshop continued
• How would you extract money from the
subsidiary?
• What do you do if the subsidiary makes a
loss?

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

31. Thank You

32. Contact details
Andrew Evans
DD: 029 2039 1761
M: 07968 193331
E: andrew.evans@geldards.com