A guide to third sector trading - WCVA

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It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support 7.5 Taxation Taxation is a technical issue whose implications can be financially significant and vary greatly from one organisation to another. This section is intended only as bare overview and a referral point for further information. Corporation tax The basic position: • The taxable profits of trading organisations are taxed at 20% from April 2011 (previously 21%). There is no dispensation for ‘social enterprise’ organisations of any kind. • Charities are exempt from corporation tax on most types of income which they use for charitable purposes. But not all trading income qualifies for these exemptions. Section 4.3 discusses the complexities, including the tax exemption which applies to charities with small scale trading income. • There is a legal obligation for new companies to notify HM Revenue and Customs of their existence for corporation tax purposes as soon as they are set up. • Significantly, some grant income for trading activities, including start up will contribute to taxable profits. You are strongly advised to seek professional advice on the use and treatment of start up grants as soon as you are awarded them. Information: • Information on the liability of charities for corporation tax is available from the Charity Commission www.charitycommission.gov.uk and from HM Revenue and Customers www.hmrc.gov.uk. • See Section 4.6 on charities and trading. • See Section 7.6 for details of the government’s Gift Aid Scheme which enables charities to retain the whole of financial donations from their trading subsidiaries without paying tax on them. VAT The basic position: • The turnover trigger: If the annual trading turnover exceeds or can be expected to exceed the statutory limit, the business must be registered for VAT. The same applies to a charity which carries out trading activities. 194
It’s an idea, but is it business? A guide to third sector trading 1: Getting started 2: First steps 3: Business planning 4: Legal and governance 5: Funding and resourcing 6: Financial controls 7: Managing growth 8: Management and governance 9: Social enterprise 10: Sources of support • Registration below the threshold: Registration is optional for businesses with lower levels of turnover. This is of benefit for small enterprises which are involved in zero-rated activities such as newspaper and book publication – since they can reclaim the VAT spent on raw materials. • VAT accounting: VAT registration demands that companies keep detailed records in their regular accounts. This includes VAT paid on all purchases and VAT charged on all sales. They must make periodic VAT returns detailing total payments and receipts. Since goods and services are charged at various rates, including zero, the accounts system needs to be robust enough to produce reports simply and quickly when they are needed. VAT and building projects: Many voluntary organisations which are grant-funded to carry out building work are understandably confused by the way VAT affects them, and they can lose tens of thousands of pounds if they do not take it into consideration. It is essential that you: • study the guidance from funders on VAT at the time when you apply for grants • check out the VAT implications of your funding and your future operations when your grant is awarded; there could be plenty of time to change your VAT registration status if that is needed, but don’t wait until you have spent the money in case there are more serious problems • get information from HM Revenue and Customs (live officers to speak to may be hard to reach nowadays, but there are comprehensive information packs and details on the HMRC web site) • talk to your accountant or a VAT specialist to see whether you might lose out when you spend the grant – one or two hundred pounds for a consultation is worth it just to put your mind at rest, and could literally save you a fortune. VAT and charities: • You may often encounter the misconception that charities do not pay VAT – this is incorrect – charities do pay VAT like most organisations, although they enjoy certain limited benefits. • These take the form of zero rated (i.e. chargeable to VAT but at 0%) or exempt, and include concessions on certain charity fundraising events, sale of donated goods, certain types of construction projects, disability aids, advertising etc. Check that you are not charged VAT at the standard rate on these items. 195
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A guide to third sector trading - WCVA

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