Helen Elliott September 2016 Trading made simple Helen Elliott September 2016

Agenda Non-trading receipts What is trading? Can charities trade? Trading exemptions for charities Using a trading company Recent developments

1. Non-trading receipts Grants, donations, gifts Sale of donated goods (seen as realisation of a gift) Letting out property (not seen as trading) Investment income Passive IP rights (e.g. licence to use logo) Can all be received by a charity without incurring a direct tax liability – provided income applied for charitable purposes only

2. What is trading? Profit seeking motive Repeated transactions – though one off transactions can be trading Nature of the asset – do the assets have any other purpose? Similarity to recognised trades Method of sale and interval between purchase and sale Method of acquisition of assets sold – sale of assets acquired by gift less likely to be trade

3. When can a charity trade? Charities can carry out: Trading which contributes directly to the furtherance of the charitable objects Fundraising trading provided it does not involve significant risk to the charity But the governing documents may impose stricter limitations E.g. “no substantial permanent trading activities”

4. Exempt trading Some types of trading are exempt from income / corporation tax when undertaken by a charity: Primary purpose trading – exercised in the course of carrying out the charity’s objects Beneficiary trading – work mainly carried out by the charity’s beneficiaries Ancillary trading – e.g. café in theatre for theatre-goers Lotteries – the lottery must comply with gaming legislation Fundraising events – all trading in connection with a qualifying fundraising event is exempt

4. Small trades limit If the level of other trading activity is below the small trades limit then can carry out in charity without incurring a tax liability Small trades limit = 25% of charity’s total incoming resources, subject to overall limit of £50,000 Useful for small scale trades – e.g. selling Christmas cards, photocopies, magazine & website ads etc.

5. When do you need a trading co? If carry out non-exempt trading above small trades limit in a charity then charity will pay income / corporation tax on any profits But can avoid by transferring the non-exempt trade to a subsidiary company Subsidiary company then gift aids any profit to the charity – reduces taxable profit to nil Accepted and approved by HMRC and the Charity Commission

5. Setting up a subsidiary Care with lending to the subsidiary Providing working capital is an investment by charity Small separate board Transfer profits by gift aid donation to charity Up to 9 months after the end of year if subsidiary 100% owned

5. Management charges Charge on a cost reimbursement basis for staff time and use of other charity resources This is VATable – charity may need to register Consider a VAT group Better to keep fixed assets in charity – charge for use

5. Do you need a trading subsidiary? Advantages Protects charity from tax liability Clarifies objectives Limited liability Can undertake more activities VAT planning

5. Do you need a trading subsidiary? Disadvantages Added costs Tax knowledge needed Corporation tax needed, audit may be Must operate at ‘an arm’s length’ Management charges and VAT Rate relief lost 12

5. Trading scenarios Sponsorship - Need to consider what is provided to the sponsor Minimal benefit – donation Substantial benefit – trading Cause related marketing Exempt or non primary purpose trading

5. Conclusion

6. Recent developments How much can be gift aided? Theatrical productions tax relief Orchestra tax relief

6. How much can be gift aided? For Company Law purposes, gift aid payments from a subsidiary to its parent are distributions As such Companies Act s830 limits distributions to accumulated realised profits Any distribution in excess of this is illegal Hence cannot gift aid more than this

6. How much can be gift aided? Previously Charity Commission guidance stated that could gift aid more than distributable reserves In Feb 2016 HMRC announced that it will not permit a subsidiary tax deduction for illegal distributions made in periods from 1 April 2015 onwards

6. Theatrical productions tax relief From 1 September 2014 Corporation Tax only – if charitable trust must set up corporate subsidiary for productions Administered by special HMRC entertainment industry unit

6. Theatrical productions tax relief A qualifying production is treated as a separate trade Qualifying costs of that production attract an 80% additional deduction Qualifying costs = production creation, setup and close down but not running, marketing, financing Can use the additional deduction to reduce a profit, and hence reduce tax liability (if taxable)

6. Theatrical productions tax relief If there is a loss (after including the additional deduction) – can surrender all or a part of the loss for a payable tax credit: 25% for a touring production 20% for a non-touring production Max surrender amount is lower of the enhanced loss and the additional deduction Any un-surrendered loss is carried forward

6. Theatrical productions tax relief Government example (non-touring production): Profit / Loss calculation £m Production income 3.5 (A) Qualifying costs (4.0) Non-qualifying costs (0.5) Profit / (Loss) on normal CT principles (1.0) (B) Additional deduction B = 80% x A (3.2) (C) Enhanced loss (4.2) (D) Surrenderable loss (lesser of B and C) 3.2 Loss c/fwd Payable tax credit: 20% x D 0.64

6. Orchestra tax relief From April 2016 Similar to theatrical productions relief: 80% additional deduction and 25% surrender rate But no distinction between touring and non- touring productions Most performances in a claim must include at least 12 players Minority of instruments can be electronically or directly amplified

6. Orchestra tax relief The players in the orchestra must be primary focus of each performance Relief focussed on traditional classical music orchestras Excludes: Choirs and most choral music (focus must be players) Chamber music (min 12 performers) Music competitions Performances to be recorded Amplified music

Sayer Vincent contact details Helen.Elliott@sayervincent.co.uk Publications www.sayervincent.co.uk