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 • The sale of second hand goods is a potentially complex area. But a basic rule of thumb is that the sale or letting of goods which have been donated to charities are zero rated. − The benefit is limited by the work which you might carry out on donated items – for instance, cleaning and basic repairs on old furniture and white goods is fine, but you would need to pay VAT on sales if you used the donations as raw materials for producing something different. − You should check for more information with HM Revenue and Customs if you are planning to generate income from second hand goods. • Whilst these limited VAT benefits alone should not be the reason for choosing charitable status, they can be valuable, in certain areas of charitable activity such as healthcare. • A trading subsidiary enjoys some, but not all, of the VAT privileges of its parent charity, provided there is a formal agreement for trading profits from relevant sales to be passed to the charity. But the wider privileges which apply to corporation tax are not available. Further information: Information on VAT, including the current turnover threshold figure can be found on the HM Revenue and Customs web site’s charity section at www.hmrc.gov.uk. Rate relief for charities The basic position: • Non-domestic premises occupied and used by a charity are entitled to 80% mandatory rate relief, known as ‘charity rate relief’. The remaining 20% may be waived at the discretion of the rating authority. In order to qualify for this relief, a property must be: − occupied by a charity, or the trustees of a charity, and − used wholly or mainly for ‘charitable purposes’. • Rate relief for charities − does not cover fundraising activities (because fundraising itself is not a charitable purpose in law) − does include the sale of some donated goods. 196
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 • Third sector trading organisations have no automatic right to receive rate relief. But local authorities have the power to give relief to non charities at their discretion. This may include the trading subsidiaries of charities. • Premises occupied partly by a charity and used for charitable purposes, and partly by a trading subsidiary, only qualify for the mandatory charity rate relief on the part of the building occupied by the charity. So it may be in the interests of charities to have a presence in all parts of their buildings and to argue that the building is used ‘mainly’ for charitable purpose. • The same approach might be used for buildings ‘mainly’ used for the sale of donated goods and partly for other trading activities. • The term ‘mainly’ could be interpreted as more than 50% of the value of sales, but in some cases 50% may apply to the floor area. • It may be necessary to discuss the situation with rating officers, or to get legal advice. If you can show the benefits of your activities it is well worth taking stand to win the maximum possible rate relief. Stamp Duty Charities enjoy an exemption from stamp duty land tax on their purchases of land and buildings. However the relief does not apply to purchases by trading subsidiaries. Taxation and non-charities Professional guidance: Taxation is a complex issue. While there is plenty of information on the HM Revenue and Customs web site (and other sites provided by commercial organisations with services to sell), there is absolutely no substitute for having an accountant who understands the special circumstances of charities, the third sector and their trading activities. Professional advice is usually a sound investment – costly mistakes are easy to make, and you will probably be paying an accountant to produce annual accounts anyway. A third sector beef about tax: Most people who have helped to run trading enterprises for community benefit which are not registered charities will at some time have asked themselves or others: Why should the state take tax from enterprises which have been set up to benefit society? 197
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A guide to third sector trading - WCVA

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