A guide to third sector trading - WCVA

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
• If a charity purchases land for use by a trading subsidiary, this
must be justifiable as an investment of the charity’s resources in
terms of the commercial return received.
• 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.
• The stamp duty exemption will be lost if the purchase of the
land and buildings cannot be justified as an investment of
the charity’s resources; or is made in order to avoid tax by the
trading subsidiary.
• Further information see the Charity Commission guidance leaflet
CC28 Disposing of Charity Land.
Shared staff and equipment: The use of the charity’s staff and
equipment by the charity company is treated by the Charity
Commission and HM Customs and Excise as ‘indirect investment’.
This is also subject to restrictions:
• Sharing as a form of subsidy: Sharing arrangements must not
involve any element of subsidy of the trading company by the
charity. This is unacceptable under charity law, and it could also
have tax implications because subsidies cannot be treated as
charitable expenditure.
• The right level of charges: The parent charity should therefore
charge for any services and facilities which it provides to the
trading subsidiary.
− This should be a realistic reimbursement of the cost to the
charity, and a record of the transactions should be kept.
− These charges must be paid within a reasonable period of
time. Unpaid charges could also be regarded as a form of
subsidy.
− If the charity charges too much (more than its actual costs
them) this could be considered as trade by the charity, and it
could be taxed on the profits.
• Exclusive use: The Charity Commission advises that charities
should not provide staff and equipment to the subsidiary if the
trading company is not actually sharing these with the charity.
− This draconian restriction seems to limit rational arrangements
where economies of scale can be achieved in small
organisations by giving the charity the role of employing all
the staff and providing all the equipment.
− The alternative option is for the trading subsidiary to act as the
employer, though this may not be possible if the charity was
established before the trading arm.
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