With effect from 6 April 2019 for unincorporated charities or 1 April 2019 for corporate charities, the limits for the level of turnover a charity can receive from non-charitable trading without tax implications will rise to £8,000 (up from £5,000), or 25% of the charity’s total incoming resources if greater, up to a maximum of £80,000 (up from £50,000).
Generally speaking, a charity can engage in unlimited trading where the trade is directly in fulfilment of its charitable purposes. So, for example, a charitable theatre that will have a charitable purpose of advancing the arts can sell tickets for its productions. This is known as ‘primary-purpose trading’. Similarly, a charity can also engage in trading that is directly ancillary to the fulfilment of its purposes without any tax implications. In our charitable theatre example above, this would mean that the theatre can sell refreshments to its audiences immediately before a performance and during the interval since this service is ancillary to its main activity. However, if the theatre opens its café or bar to the public at other times, then this is no longer ancillary and is viewed as non-primary-purpose trading.
Where a charity wishes to engage in a trading activity that is neither a primary nor ancillary purpose, but for raising funds, then, generally speaking, it will either need to rely on the small-scale trading exemption. Otherwise, it will need to establish a commercial company as a subsidiary of the charity to undertake the trading activity on its behalf. For smaller charities that engage in only a limited amount of trading, this extension of the exemption will be a welcome boost and will be of particular help to those charities whose income from trading activities was perilously close to the current £50,000 limit, such that they may have been forced to establish a trading subsidiary in order to avoid the potential tax liabilities that arise from exceeding the limit.
For charities with larger trading operations, the new limits will make no difference since the scale of the trading will continue to require that it be carried on through a trading subsidiary. It is also the case that in some circumstances, charities may choose to establish a trading subsidiary for smaller trading activities, for example, because they wish to separate out the trading activities to manage risk or avoid any distraction from the main purposes of the charity.
Where establishing a trading subsidiary, it is essential that it is operated at ‘arm’s length’ from the charity to demonstrate that the two entities are completely separate. This means, amongst other things, that the trading subsidiary will have its own board of directors, bank accounts, website, stationery/publicity, annual accounts and so on. It must be separately funded, so any funding it receives from the charity must be on a commercial basis. If the trading company uses any of the charity’s staff or premises, then an appropriate charge must be made. In other words, charitable assets cannot be diverted to support the work of a non-charitable company (even where it is raising money for the charity) unless proper arrangements are in place.
There are many other nuances in the area of charities and trading. For example, the sale of donated goods is not classed as a trading activity, and neither is the letting of surplus space in a charity’s property (provided that additional services are not also provided). Sponsorship of a charity event or project by a commercial entity may or may not be trading depending upon the circumstances and so on. If you are unsure whether or not certain activities are trading activities and whether or not a trading subsidiary is required, then you should take professional legal and financial advice.
If you require any legal advice around the issue of trading by charities, please call a member of our Charities team on 0121 214 3693.
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