As charities are part of the wider not for profit sector, there can be confusion about whether or not they can or should “trade”. By trading, we mean in the traditional sense of buying and selling goods or services for money.
The answer is that, yes, they can. Charities are generally interested in three types of trading:-
- “primary purpose trading” which directly furthers the charity’s purposes – for example an education charity charging for educational books/software; a care provider charging service-users or paying care providers or an activity charity charging for white water rafting courses;
- “ancillary trading” which indirectly contributes to the successful delivery of the charity’s purposes – for example a charitable theatre which sells sweets/drinks immediately prior to, during and immediately after a performance; an activity charity which sells buoyancy aids;
- other trading aimed at raising funds for the charity – for example high street charity shops.
When considering undertaking any trading, the charity needs to assess the risks involved versus the potential benefits, make sure its activities are conducted in accordance with any appropriate legislation (e.g. consumer rights) and structure its trading arrangements so as to best protect itself and its assets from tax and any claim resulting from such trading.
In addition to the tax considerations, there may be other advantages in establishing a separate organisation to undertake some of the charity’s activities. In particular, a charity may wish to ringfence a particular project or activity to attract funding or facilitate partner working. This can also enable the trustees to identify people with appropriate skills and commitment to manage the separate project. For example, it is not uncommon for churches to establish separate charities for some of their pre-school, community arts or night shelter projects.
Other not for profit organisations, such as motor car clubs who trade in motors and spare parts for their members, may wish to preserve their trading activities in a separate entity free from the constraints of the main club.
At Thursfields we are able to provide advice in relation to the best way to structure your charitable and commercial enterprises to reduce risk and preserve assets. HMRC provides general guidance on the tax issues at: https://www.gov.uk/guidance/charities-and-trading, which can help charities identify how to pay less tax and when to set up a subsidiary trading company.
We can also put you in touch with trusted accountants and tax advisors who can help the charity trustees establish and conduct the tax aspects of their trading activities with confidence.