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 • 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. 232
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 − It would be worth checking individual cases with the Commission before setting up unnecessarily cumbersome arrangements. Protecting the charity’s work: Sharing arrangements should not be allowed to do any damage to the charity’s ability to carry out its objects. The Charity Commission suggests that charities wanting to enter arrangements should get professional advice or speak to the Commission. This is a sign of just how seriously they take the issue, although it presumably doesn’t mean that the charity always has to be first in line to use the photocopier. Internal transactions: Very large charity groups might need to consider company pricing legislation, but this will not affect modest trading charities organisations. Mixed messages on shared facilities: • While requirements for the trustees of charities to monitor and take proper responsibility for their trading companies are soundly based in the need to protect the charity’s assets, the value of technical and legal restrictions on sharing buildings, staff and equipment seem to be of rather less practical value. They do not offer obvious benefits to either the charity or its subsidiaries, and could deter some groups from registering charities and some charities from taking a social enterprise route. • This provides an argument for studying closely whether charity law and tax considerations on primary purpose trading, ancillary trading and small scale trading really require a charity to set up a subsidiary in order to run its business activities. Maybe it should all be done by a single charitable company after all. This possibility is sometimes overlooked. • Yet, a separate trading subsidiary does provide a safeguard for the assets of the charitable company itself in the event of its own financial failure. So the legalistic disincentive to using this model could, ironically, expose charities to greater risks than necessary. Further information: Information on tax issues is available on the HM Revenue and Customs web site and on legislation from the Charity Commission. 233
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A guide to third sector trading - WCVA

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