Download Charity and Trading [pdf]
The current tax regime means that much of the normal fundraising activity of a charity is treated as trading and can lead to a tax liability. The tax rules are difficult to apply in practice and many charities default to putting such activity through a trading company.
Very few charity trading companies pay tax as they Gift Aid their profits to the charity so the present system does not lead to any increased tax revenue. What this does do is lead to increased costs and administrative burdens for the charity including professional fees paid to accountants and lawyers to understand the complexities, prepare agreements and carry out audits.
Defaulting to the use of a trading company can also lead to a charity accepting undue risk as there is sometimes a view that this risk is acceptable as it is not being carried out in the charity. In addition, Trustees may be abdicating their oversight responsibilities once an activity is not carried out by a charity as they believe that their responsibilities do not extend beyond the charity.
The last review of this structure was carried out by the Cabinet Office some years ago. The review recommended a change but it was not implemented. As charities work for increased efficiencies and strive to improve their effectiveness and governance I believe that it is time for a rethink.
This paper explains the background, considers the issues, discusses the concerns and highlights some of the complexities of the existing regime.
The recommendation for change is to allow charities to undertake all trading within the charity, without the need for a trading company. In effect, extending the exemption that allows charities to carry out primary purpose trades to all trades. A compromise would be to remove the fixed monetary caps and allow charities to trade if their trading income did not exceed 25% of all their income.
This proposal is for an option not to use a trading company, rather than preventing the use of one, so charities could and should continue to use a subsidiary trading company when the situation merited it.