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 • Fundraising alone cannot be considered as ancillary trading. • There are no clear turnover limits, so watch out for grey areas. Large-scale trading – eg a community centre which is devoted mainly to a commercially successful café operation – might not be counted as ancillary trading for tax purposes. Small-scale trading: Trading which cannot be justified as primary purpose or ancillary, may be acceptable to the Charity Commission (if it poses no risk) and avoid corporation tax (if it qualifies for the ‘small-scale exemption’ described below). • Warning: HM Revenue and Customs add in an obscure income category called ‘incoming resources from miscellaneous activities’ when calculating the trading turnover. So check with them if you are in serious doubt about what qualifies. There is a charities helpline and their web site is www.hmrc.gov.uk/charities • The benefits: The fine detail of this tax concession is complicated, as ever. But the benefits are clear for many charities. The arrangement provides the best reason for small charitable organisations which start trading without substantial grant funding behind them to breathe easily in the early stages. • The small-scale exemption allows for trading turnover to be non taxable if it is below £5000, or if it exceeds that figure, it is limited to no more than 25% of the charity’s total income, up to trading maximum of £50,000 annually. (For example, a charity with a total income of £20,000 must simply have a trading turnover of £5,000 or less; a charity with a total turnover of more than £200,000 should have a trading turnover of no more than £50,000 if it is going to avoid being taxed on its profits.) 90
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 4.4 Choosing a structure: charities A charitable regeneration company running social projects had set up a trading subsidiary so that its expanding commercial leisure activities could be managed independently on a more businesslike basis. This also seemed like an ideal opportunity for the charity’s chair, a charismatic leader with business skills who had led its formation, to be offered a paid job as managing director of the leisure business. But in their enthusiasm the trustees had overlooked the fact that a charity can only employ trustees, whether in its parent company or its separately managed subsidiaries, if the memorandum and articles give it the power to do so. Even then, specific Charity Commission approval would be needed to legitimise the chair’s appointment. The discovery that a distracting bureaucratic process was necessary to put things right was a painful shock. The chair and his fellow trustees had to ask themselves: was it really in the interests of running a dynamic enterprise if it would always be subject to the constraints of charity law? Deciding whether to register a charity Pros and cons: Most third sector trading activities are associated with charities (they are either run by charities or by subsidiary companies owned by charities). But this does not mean that a charity is the best arrangement for you. Some senior managers say that it is a boon not to be inhibited by the restrictions of charitable status. The choice you make can sometimes be as much a matter of how you feel about your business activities as how you weigh up the benefits. Advantages for trading organisations: • Tax on profits: Registered charities in Wales and England do not normally pay corporation tax on profits (in Scotland where arrangements are different the tax system offers comparable advantages). This is undoubtedly the most significant benefit for many organisations. It means that: − a charity which trades can usually retain all its profits − a non-charitable trading company can donate some or all of its profits to charity under the Gift Aid scheme without corporation tax being deducted. (See Section 7.6) 91
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