How can a charity run a business?13th June 2018 | Posted in: Business Tax, Charity
One of the most widespread ways in which charities make money is by trading. At one end of the scale, a local community group might occasionally make a few pounds by holding a jumble sale. At the other extreme, it seems like there is at least one charity shop on every High Street. As an example of the funds which can be raised by a charity from carrying out business activities, in the year ended 31 March 2017 Oxfam made a profit of £859,000 from trading.
Actually, that last sentence is incorrect. It should read: “… Oxfam Activities Limited made a profit of £859,000 from trading.” In common with very many charities Oxfam carries out its trading activities by way of a separate, wholly owned trading company. The profits of that company are donated in full to the parent charity, so the overall effect is as if the charity itself made a profit from trading.
Why would a charity set up a separate company to carry out fundraising activities by running a business? There are a number of very good reasons, including the following:
- Having a separate company introduces an element of separation which makes it easier for the charity to be run by people who are good at running a charity and for the business to be run by people who are good at running a business;
- It means that the charity can, to some extent, be protected from the risks of running a business;
- Paradoxically, using a separate company also makes it easier to deal with the tax implications of the trading activity.
So, whilst it might on the face of things seem simpler for a charity to trade directly, all kinds of potential pitfalls can be averted by setting up a separate company.
For a long time there was a shortage of straightforward, practical guidance on this issue. The situation has recently improved by the publication by OSCR of its Charities and Trading Guide
The OSCR guide is very clearly written and easy to follow, but there is a lot of information to digest and even then the guidance cannot go into the matter in any great depth. If you would like to discuss this issue, please do not hesitate to call us on 0131 317 7377 to speak to a member of our charities team.