First: check your governing document. Some, particularly those based on the Charity Commission’s older models, contain a clause that prevents charities from undertaking “any taxable permanent trading activity” or “substantial trading activity”. If you want to trade, then amending your governing document will be necessary.
If your governing document doesn’t specifically prevent you from trading, charity law allows charities to trade provided that the trading falls into one of the following categories:
- primary purpose trading: trading which contributes directly to one or more of the objects of a charity as set out in its governing document. In order to make a decision about which category of trading your social enterprise activity will fall into, you will need to look at you charitable objects as stated in your governing document and assess the trading activity against these.
- ancillary trading: trading which contributes indirectly to the successful furtherance of the purposes of the charity. This is treated as part of primary purpose trading for both charity law and tax purposes. 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.
And
- non-primary purpose trading: trading that is intended to raise funds for the charity, as distinct from trading which in itself furthers the charity's objects. Charity law permits charities to carry on non-primary purpose trading in order to raise funds, provided that the trading involves no significant risk to the assets of the charity. The significant risk to be avoided here is that the turnover is insufficient to meet the costs of carrying on the trade, and the difference has to be financed out of the assets of the charity. Examples of non-primary purpose trading are the conduct of lotteries (subject to conditions) and trading within the terms of the “small scale exemption”.
Trading is not precisely defined but an essential feature is selling goods or services, or letting premises. It is possible for a charity to be engaged in any combination of these three types of trading.
Charities must pay tax on trading profits (income or corporation applies, depending on the charity’s legal structure), VAT applies in the same way as it does to commercial organisations but with some specific exemptions for charities, and all other relevant laws must be complied with too (sale of goods, consumer law, product safety, etc).
Trading companies
A trading subsidiary is a company, owned and controlled by one or more charities, set up in order to trade. The purpose of a trading subsidiary is usually to generate income for its parent charity. Trading subsidiaries must be used for non-primary purpose trades involving significant risk. Even where there is no legal barrier to the charity carrying on the trading itself, there may be a benefit to using a trading subsidiary, for example in reducing tax liabilities.
For full information, read Trustees trading and tax: how charities may lawfully trade