Running A Charity As A Business
Charities are facing increasing competition for grants and donations so they often establish trading operations to generate essential additional funds. At the same time the public and other funding bodies are demanding that charities adopt a more efficient and businesslike approach, whilst still retaining their philanthropic values.
So what are the rules governing charities’ trading activities?
Provided the governing document of a charity permits, it can trade if the trading activity:
- Directly furthers one of the organisation’s charitable purposes (‘primary purpose trading’), or
- Does not involve a substantial risk to the resources of the charity (and is to raise funds)
An example of “primary purpose” trading is a child protection charity charging local authorities or other organisations to provide a temporary specialist refuge service for traumatised children.
Activities that are supplementary to primary purpose trading are known as ‘ancillary trading’ which could be a charity theatre selling drinks to attendees at an interval in the performance. Ancillary trading is treated as ‘primary purpose trading’ for legal and tax purposes.
If the trading is not “primary purpose” then the law ensures charities don’t lose charitable funds when they are engaging in activities that don’t directly achieve their charitable purposes. “Non-primary purpose” trading helps charities to raise funds by being enterprising rather than relying on the public for donations. Examples might include: a school or college providing conference facilities for businesses out of term-time.
Tax is payable on the profits of trading unless:
- The trading directly furthers one of the organisation’s charitable purposes (or is ancillary)
- It falls within an exception for small-scale trading
- It is a lottery or a certain type of fundraising event
If a charity’s trading involves a substantial risk to the resources of the charity, or exceeds certain financial limits, it needs to do it through a trading subsidiary. This is normally a company set up by the charity to carry out its trading activities. The subsidiary will provide limited liability and protect the assets of the parent charity if it is set up in the right way.
The use of trading subsidiaries may also be advantageous in other circumstances:
- Tax efficiency – if profits are sent by Gift Aid to the parent charity they are likely to be tax exempt
- Primary purpose trading where there are significant risks to resources of charity
- Large trading operations
- Where administrative separation is convenient.
Charities need to be just as enterprising and resourceful as commercial operations – but they also have to operate within a legal regime which ensures the effective use of charitable funds.
If you are involved in running a charity then hopefully the law will now be a bit clearer.
Contact William Hopkin for further information or advice.
Published 14/08/2008. The author of this article is William Hopkin
