charity trading to raise funds
DESCRIPTION
From the Wales Charity Law and Governance Conference 2014.TRANSCRIPT
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Charity Trading to raise funds
Andrew EvansPartner, Geldards LLP
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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
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What is trading?• Tax definition
“trade, profession or vocation conducted on a commercial basis and with a view to the realisation of profits”
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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
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Can Charities trade?• Yes, but …• Exemption from tax for certain types of
trading by charities
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Types of trading• Primary purpose trading• Ancillary trading• Non-primary purpose trading• Non-trading activities
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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
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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
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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)
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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
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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
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When is trading taxable?• Non-primary purpose trading• Above the small scale trading exemption• No other exemptions or concessions apply
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What is a trading subsidiary?• A company limited by shares• Owned by the charity or charities• Used for non-primary purpose trades
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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
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Charity Commission view• No significant risk to the charity’s resources
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Funding• Share capital• Loans from the charity• Loans from third parties• Retained profits
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Share capital• Subscription for shares• Cannot be easily returned to shareholders• At risk if company goes into
liquidation/administration• Not recommended
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Loans from charity• Commercial decision/charity’s powers• Best use of charity resources/investment
policy• Arm’s length terms• Written agreement• Repayment terms
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Loans from third parties• Banks unwilling to lend • Charity guarantee• High interest rate• Loss of control• Spread investment risk
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Retained profits• Subject to corporation tax
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Conflicts of interest• Charities trustees• Directors of trading subsidiary• Duties of care• Legal responsibilities• Separate individuals
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Other trading issues• Staff• Logo• Shared resources• Website• Which entity are customers and suppliers
dealing with?• VAT registration
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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
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Other trading issues• Loss making subsidiary
- type of trade- trustee/director duties- conflict of interest
• Closure of trading company
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Useful websites• www.hmrc.gov.uk/charities• www.charity-commission.gov.uk
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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
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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
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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?
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Workshop continued• How would you extract money from the
subsidiary?• What do you do if the subsidiary makes a
loss?
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Conclusions• If in doubt, take advice• Keep it under review• Do it properly
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Thank You