Charity trading to raise funds
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Transcript of Charity trading to raise funds
Charity Trading to raise funds
Andrew EvansPartner, Geldards LLP
Outline • What is trading• When do you need a subsidiary• How to set up a subsidiary• Funding and Operational issues • Extraction of profits• Social Investment Relief• Workshop
What is trading?• Tax definition
“trade, profession or vocation conducted on a commercial basis and with a view to the realisation of profits”
What is trading?• In practice
- sale of goods or services - can include one off ventures - does not matter if profits are to be used for
charitable purposes
Can Charities trade?• Yes, but …• Exemption from tax for certain types of
trading by charities
Types of trading• Primary purpose trading• Ancillary trading• Non-primary purpose trading• Non-trading activities
Primary purpose trading• Carrying on the charity’s objects• Trade carried on by beneficiaries• Profits applied solely for the benefit of the
charity’s objects• Exemption from tax
Ancillary trading• Part of the primary purpose trade• Not a separate trade• Examples
- sale of refreshments at a theatre- crèche at a school/college
• Exemption from tax
Non-primary purpose trading• Trading intended to raise funds for charity• Not covered by any specific
exemption/concession• Shop selling bought in goods not related to the
charity’s objects• Tea/coffee shop• Sponsorship• Profits subject to tax (NB small trade exemption
limits)
Non-trading activities• Rent from land• Investment income• Donations (benefits to donor not amounting
to sponsorship)• Sale of donated goods
NB watch out for repairs to donated goods
Small Scale Trading Exemption• Lower of £50,000 p.a. or 25% of total income• Disregard limit of £5,000 p.a.• Applies to non-primary purpose trading
income• Disapplies charge to corporation tax
When is trading taxable?• Non-primary purpose trading• Above the small scale trading exemption• No other exemptions or concessions apply
What is a trading subsidiary?• A company limited by shares• Owned by the charity or charities• Used for non-primary purpose trades
Why use a subsidiary?• Risk mitigation
- protect charity assets from the risk of trading- create a separate administrative unit to
provide public services- tax reduction- staffing issues
Charity Commission view• No significant risk to the charity’s resources
Funding• Share capital• Loans from the charity• Loans from third parties• Retained profits
Share capital• Subscription for shares• Cannot be easily returned to shareholders• At risk if company goes into
liquidation/administration• Not recommended
Loans from charity• Commercial decision/charity’s powers• Best use of charity resources/investment
policy• Arm’s length terms• Written agreement• Repayment terms
Loans from third parties• Banks unwilling to lend • Charity guarantee• High interest rate• Loss of control• Spread investment risk
Retained profits• Subject to corporation tax
Conflicts of interest• Charities trustees• Directors of trading subsidiary• Duties of care• Legal responsibilities• Separate individuals
Other trading issues• Staff• Logo• Shared resources• Website• Which entity are customers and suppliers
dealing with?• VAT registration
Extraction of profits• Gift Aid payment from trading subsidiary• All profits not retained by trading subsidiary • Consider repayment of loans• Payment within 9 months after the end of the
accounting period
Other trading issues• Loss making subsidiary
- type of trade- trustee/director duties- conflict of interest
• Closure of trading company
Useful websites• www.hmrc.gov.uk/charities• www.charity-commission.gov.uk
Social Investment Tax Relief• Investment in shares or loans by individuals• Investment in a charity, a community interest
company or a community benefit society• Income tax relief at 30% on up to £1m p.a. but
lower limit for the charity• CGT deferral relief for the investor• Method of raising funds for charity trading
SITR Pitfalls• Very complicated • Restrictions on trading activities/charity size• Restrictions on investor links to the charity• Restrictions on benefits provided to the
investor• Detailed professional advice essential
Charity trading work shop• Why would you set up a trading subsidiary?
- what do you think about?• How would you fund the trading subsidiary?• Who would act as directors?• What operational issues would you consider?
Workshop continued• How would you extract money from the
subsidiary?• What do you do if the subsidiary makes a
loss?
Conclusions• If in doubt, take advice• Keep it under review• Do it properly
Thank You
Contact details
Andrew EvansDD: 029 2039 1761M: 07968 193331E: [email protected]