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 Is there a choice? Note that if your objects are exclusively charitable then, in law, you are automatically considered a charity, and if your income exceeds £5000 per annum you are generally required to register with the Charity Commission (subject to certain limited exemptions). In practice this requirement is widely flouted, leaving the ‘choice’ of charity registration rather less clear. Why does it matter whether your trading organisation is a charity? • Some types of trading are unacceptable for charities under charity law (see below). • Profits (surpluses) made by charities attract some valuable corporation tax concessions which are not enjoyed by other businesses. • Charities receive rate relief on commercial properties. • There are VAT concessions for charities under certain limited conditions (but don’t expect the regulations will be easy to follow if you are a newcomer). Types of trading What types of trading are acceptable for charities? There is more scope for charities to trade than some people think. But you need to be clear what type of trading it is – ie how it will be regarded by the Charity Commission and HM Revenue and Customs. The following distinct categories are explained further below: • non-trading – ie activities which are not technically regarded as trading by the Commission • ‘primary purpose trading’ – ie activities which directly meet some or all of your charitable objectives • ‘ancillary trading’ • small-scale trading which, although it is not primary purpose or ancillary trading, poses a low risk to the charity • other trading: some other activities including lotteries. When trading may not be acceptable for charities? A few rules of thumb: • the constitution or memorandum and articles of association of some charities specifically rule out the possibility of trading – you must check for this first 88
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 • fundraising itself can never be a charitable objective, so running a trading venture in order to raise money needs to fit under one of the above headings if it is going to be a legitimate activity • if the trading could pose a risk to the charity the answer is usually to set up a subsidiary trading company (see below and section 4.6) • the scale of the risk is all important, and trustees may need to weigh up factors such as the size of the charity, the cost of running the business and the market. Non-trading activities: The following are not regarded as trading and are therefore acceptable for charities: • letting surplus building and land where no services are provided to the user, so − it is not trading when a tenant simply rents a room from the charity at a proper market rent − but it is trading when a tenant rents a room in a managed workspace • selling or hiring out donated goods • selling investments and assets used for charitable purposes. ‘Primary purpose trading’: This means any trading which is carried out in the course of fulfilling the aims specified by a charity’s constitution, including trading carried out by the beneficiaries. • some examples: − admission fees and tickets for theatre shows, museums and art galleries run by charities set up for these purposes − the sale of goods made by people with learning disabilities in a charity which supports disabled people − fees charged by a public school • charitable benefits: The charity does not pay corporation tax on its trading profits, provided the surplus is used to support the charity’s aims. Ancillary trading: This is trading which is a bi-product of a charity’s main activities, and which contributes to its success: • Examples include a café run by a charity which provides a community or recreation centre, a theatre or museum, and books sold by a research or educational charity. • Ancillary trading enjoys the same tax benefits as primary purpose trading. 89
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