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Charities and trading
Jane Lee, Partner
Pannone LLP
18th 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?
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–
–
–
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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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