1. Helen Elliott September 2016
Trading made simple
Helen Elliott
September 2016

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

3. 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

4. 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

5. 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”

6. 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

7. 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.

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 5. Conclusion

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

16. 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

17. 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 onwards

18. 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

19. 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)

20. 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

21. 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

22. 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

23. 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

24. Sayer Vincent contact details
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