by Tim Creighton, Director, Charities Law
In a word, yes! Charities can trade if they are authorised to do so in their governing documents. This will usually be found under the powers section in the governing document. In an unincorporated organisation this would be found in its constitution. In an incorporated organisation this would be found in its Articles of Association.
Even if a charity is authorised to trade under its governing documents, it should seriously consider the risks associated with trading.
These risks include reputational risk to the charity, financial risk and loss of focus on core charitable objectives.
If a charity has weighed up all the evidence and wish to trade as part of their fundraising endeavours, they will need to determine which type of trading they wish to pursue and which type of trading best serves their purposes.
A huge influencing factor on which type of trading to pursue is based on how the trading activities are taxed.
Trading profits, and some charity income from other sources, are liable to corporation tax (or income tax in the case of charitable trusts) unless specifically exempted.
To paraphrase the Charity Commission’s guidance, charity trading profits are exempt from corporation/income tax where the trading is:
“Primary Purpose Trading” contributes directly to one or more of the objects of a charity as set out in its governing document. For present purposes, it includes trading in which the work in connection with the trading is mainly carried out by beneficiaries of the charity, as that will normally be primary purpose trading holding of an art exhibition by a charitable art gallery or museum in return for admission fees; and sale of certain educational goods by a charitable museum;
“Ancillary Trading” contributes indirectly to the successful furtherance of the purposes of the charity. This is treated as part of “Primary Purpose Trading” for both. An example of Ancillary Trading is the sale of food and drink in a restaurant or bar by a theatre charity to members of an audience. The level of annual turnover in trading which is said to be ancillary may have a bearing on the question whether the trading really is ancillary, but there is no specific level of annual turnover beyond which trading will definitely not be regarded as ancillary.
“Small Scale Exemption” is available for small scale trading which is less than 25% of the Charity’s total income. A further exemption applies if trading is connected with certain fundraising events.
Do you need a review of your Charity’s governing documents to assist you in deciding if your charitable purposes would be advanced either directly or indirectly by trading? For more information about this article, or any other aspect of our third sector solutions, please contact Tim Creighton on +44 (0) 845 834 0840
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