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Charities and trading

Jane Lee, PartnerPannone LLP18th April 2012

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Overview

• Types of Trading

• Risks of Non-Primary Purpose Trading

• Trading Subsidiaries

• Trustee Duties & Liabilities

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Types of Trading

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What is trading?

• Whether the sale of goods and services amounts to trading depends on a number of factors, including:

– the number and frequency of transactions;

– the nature of the goods or services being sold;

– the intention of the charity in acquiring the goods which are to be sold; and

– the presence or absence of a profit motive.

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What trading can a charity do?

• A charity can trade if the trading is within its objects and is:

– primary purpose trading;– ancillary trading; or– non-primary purpose trading that does not involve

significant risk to the charity’s resources.

• The sale or hiring out of donated goods is usually permitted

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Tax on trading profits?

• Trading profits of charities are liable to corporation tax (or income tax for charitable trusts) unless specifically exempted.

• When are the profits exempt?– primary purpose trading;– ancillary trading;– within the small scale exemption;– a lottery; or– connected with certain fund raising events.

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What is primary purpose trading?

• Trading which contributes directly to one or more of the objects of the charity

• This usually includes trading in which the work in connection with the trading is mainly carried out by the beneficiaries of the charity

• Examples:– provision of education services by a charitable school– sale of goods manufactured by disabled people who are

beneficiaries of a charity for the disabled

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What is ancillary trading?

• This is trading that contributes indirectly to the furtherance of the purposes of the charity

• This is treated as part of primary purpose trading for charity law and tax purposes

• Example– Sale of food and drink in a restaurant or bar by a

theatre charity to members of an audience

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Non-primary purpose trading

• Trading intended to raise funds for the charity, as distinct from the trading in furtherance of the charity’s objects

• Charities can only do this where there is no significant risk

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Losses from non-primary purpose trading• This will be treated as a “non-charitable expenditure”• Could lead to a restriction in the charity’s tax exemptions• Possible breach of trust BUT only if incurred irresponsibly

• The Charity Commission will look if:– there was a rational expectation that the trading would be

profitable;– if it was reasonable for the charity to have carried on the

trading itself rather than through a trading subsidiary; and– the expenditure which gave rise to the loss was within the

powers available to the trustees.

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Trading Subsidiaries

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Trading subsidiaries

• Owned and controlled by one or more charities

• Set up to trade

• Purpose usually to generate income for parent charity

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Trading subsidiaries

• Must be used when there would be a significant risk to the assets of the charity

• Must be set up to protect the parent charity and its assets from the risks involved

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Trading subsidiaries and tax

• profits do not qualify for charity tax exemption

• payments to parent charity can reduce or eliminate the level of profits (through gift aid) which are taxable to the subsidiary

• tax exemption is available to the recipient parent charity

• can result in overall tax savings

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Benefits of using a trading subsidiary

• To protect the charity’s assets from the risks of trading

• Create separate administrative unit for accounting/management purposes

• Reduce or eliminate tax liabilities from trading activities

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Disadvantages of trading subsidiaries

• Initial costs of set up and ongoing operation

• Some benefits that apply to charities may not apply to the subsidiary (e.g. charity rate relief and exemption from stamp duty land tax)

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Obligations on trustees investing in subsidiaries

• Must be able to justify financial support as an appropriate investment of the charity’s resources

• The interests of the charity is the most important factor

• Must be within the charity’s investment powers and taking into account the usual investment criteria

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Trustee Duties & Liabilities

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Trustee Duties

• Trustees have and must accept ultimate responsibility for directing affairs of a trust, investments, distributions etc.

• Trustees owe a fiduciary duty to the beneficiaries. They owe a duty of loyalty, honesty, integrity, good faith and transparency

• Conflicts of Interest Rule – Trustees must always put their beneficiaries’ interests above any personal interests

• Absolute rule against self dealing – transactions voidable by a beneficiary even if it is objectively fair. Exception where all beneficiaries concur after full disclosure of all relevant information

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Trustee Duties

• Compliance

– Ensure compliance with the terms of the trust

– Trustees must be familiar with the terms of the trust

– Act with integrity and avoid conflicts of interest or misuse of assets

– Comply with other legislation if necessary – company law, health and safety law

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Trustee Duties

• Duty of Prudence– Take control of trust property– Ensure the trust remains solvent– Ascertain extent of trust property and ensure it is

invested correctly– Pursue debts owed to the trust– Keep regular and accurate accounts– Avoid taking unnecessary risks with the assets– Care when investing and borrowing funds

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Liabilities of Trustees

• Liability for a breach of trust lies with the individual trustee – personal liability

• The extent of the liability of the trustee is judged by the personalised duty of care set out in s.1 Trustee Act 2000

• Measure of liability – loss of trust fund, with regard to the remoteness principle

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Liabilities of Trustees

• If trustees act imprudently or in breach of trust:

– They may be personally responsible for making good any loss

– Collective responsibility – indemnity/contribution from more “culpable” trustee

– Acting without prudence/acting capriciously

– Acting without prudence – different standard for different trustees depending on their skills and expertise

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Key Messages

• Trustee Duties and Liabilities must be considered when deciding whether the charity can trade and how it should do so

• It is important to analyse the proposed type of trading

• The possibility or need for a trading subsidiary should be considered

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• Any Questions?

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