Today sees the start of a 6-part series which considers the trading activities of charities and the role of non-charitable subsidiaries. This is a pertinent issue in today's climate as charities move towards sustainable funding models. In Northern Ireland where the various Grant monies have begun begin to dry up there will be an increased onus on local community and charity groups to utilise trading opportunities as a means of funding, as failure to do so could result in their very survival coming into doubt.
PART 1
TYPES OF TRADING CARRIED OUT WITHIN A CHARITY
Charities are allowed to trade by law provided that the trading falls within one of the following categories:
Primary Purpose Trading- covers trading which contributes directly to one or more of the objects of a charity as set out in its governing document. Also includes trading where the work is mainly carried out by beneficiaries of the charity (beneficial trading).
This form of trading is not subject to tax and is therefore an effective way of funding the charity.
Examples include: provision of education services by an educational charity or the charging by a hospital for health care services.
Work carried out be beneficiaries (beneficial trading) might include sale of furniture produced by those with learning difficulties.
Ancillary Trading- is not on its own primary purpose trading but is carried out as part (ancillary) of a primary purpose trade.
Examples include: a theatre charity established for the promotion of arts running a cafe bar which sells refreshments to those attending the performance or the provision of accommodation to the students by a University.
Again this form of trading is not subject to tax liabilities.
Non-Primary Purpose Trading- is a form of trading which does not contribute directly to one or more of the objects of a charity as set out in its governing document. A charity will be allowed to raise funds through the carrying on of a trade which is not primary purpose, but only if the trading involves 'no significant risk' to the resources of the charity.
There is however no tax exemption for non-primary purpose trading, subject to a small trading exemption.
Exemption for Small Trades
The exemption to tax is applied where total turnover from all non-primary purpose trading does not exceed the annual limit.
The annual limit is as follows: £5,000 or if turnover is greater than £5,000, 25% of charity's gross income, subject to an overall limit of £50,000
In Part 2 I will condsider the use of trading subsidiaries and their respective advantages and disadvantages.
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