HMRC and the Charity Commission recently updated and reissued their guidance on charities and trading. Finding ways to pay less tax is important for everyone but especially charities with limited budgets. Setting up subsidiary trading companies is becoming increasingly popular, particularly for the larger charities. If you would like advice on this our expert in that area is Jade Tinney, Head of the Clapham & Collinge Company and Commercial Department.
The starting point is that a charity must pay tax on profits with a number of exceptions. It will not pay tax on profits made from trade if:
- Money is being made to help the charities aims and objectives known as "primary purpose trading".
- The level of trade that is not primary purpose falls below the charities small trading tax exemption limit.
- The trading is done through a subsidiary trading company.
One major disadvantage for charities which very often is not fully understood is that a charity is not exempt from paying VAT when trading although it is eligible for some VAT reliefs. If a charities trading income is above the VAT registration threshold then it must register for VAT.
The national charities in particular trade through subsidiary trading companies and this is done for a range of reasons. One of them is to keep the trading separate from the main charity and its assets, particularly to protect those assets from any losses that are sustained whilst trading as that can be a risk and a concern to charities. Very often it is a cultural decision to have a separate organisation to carry out all of its trading activities so that when a trading company donates its profits to its parent charities main purpose there is no corporation tax due on the payments. There can be issues about conflicts of interests in the trading company and the members of its board so it is vital that advice is taken on not just whether a separate trading company is in the best interests of the charity (or is indeed necessary) but also how that is to be implemented - Legal and accountancy advice on this is essential.
Article by Neale Grearson, Head of Clapham & Collinge Charities Department.
For more information on the legal services we offer to charities, visit our dedicated charity services webpage, call 01603 693500 or email us using the 'Make an enquiry' form. Appointments available at our Norwich, North Walsham, and Sheringham offices.
*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.
Norfolk's Big Charity Conference 2019
Join us on Wednesday 12th June to explore what the future has in store for the VCSE sector as we address many of the key issues that are likely to affect your charity over the coming years.
This event has been developed to inspire and offer practical solutions to charities needs from a range of local businesses within the professional services industry. During the conference workshops will be delivered by charity specialists from Clapham & Collinge Solicitors, Alan Boswell Group (Insurance Broker and Independent Financial Planners), Larking Gowen (Chartered Accountants and Business Advisors) and Spalding & Co (Chartered Surveyors). Click here to find out more or to book your place.
