Legal and regulatory issues

Both charity and tax law are extremely complex so no action should be taken without first seeking independent legal advice. The following provides a brief overview of the various legal and regulatory issues that must be considered before developing trading.

Organisations can seek to contact WCVA’s helpdesk or the Charity Commission for further advice and support.

Getting started

For any registered charity, considering trading activity guidance must first be sought from the Charity Commission website. In particular the Charity Commission publication CC35 Charities and Trading . This looks at how much a charity can earn before it should consider setting up a trading arm, outlines the issues associated with setting up a trading subsidiary, including Value Added Tax and governance, and many other legal and structural issues associated with trading. Even if your organisation is not registered as a charity, the publication is useful reading.

When charity trading is permissible

According to the Inland Revenue – ‘Normally, a trade involves the sale of goods of services to customers as part of a commercial enterprise’. However, if your organisation is a registered charity there is no reason why charity and tax law should stop you from trading. Nevertheless, please seek independent legal advice before doing so and check that your governing document allows you to do so. Careful attention must be paid to:

When can a charity trade?

Charities cannot trade on a substantial or regular basis solely to raise funds. This is because trading implies a risk to funds that have been given for charitable purposes not speculation. The fact that all profits may be applied to charitable purposes is irrelevant when determining 'trade'. It is the activity not the outcome that is under scrutiny.

However, charity trading is permissible in law if it:

  • Carries out the charity's primary mission or purpose
  • Sells donated assets
  • Is occasional
  • Falls within the Extra-statutory Concession

If your organisation intends to trade in a way that does not fit any of the above then you will be required to ‘hive-off’ trading activity into an arms length trading subsidiary, which donates all surpluses, and profits back to the parent charity.

Legal structures

In its simplest terms, a legal structure is a formal method of organising a project so that it is acceptable in law. There are six main types of legal structure:

  • Associations, Societies or Clubs
  • Trusts
  • Friendly Societies
  • Royal Charters
  • Limited Companies
  • Industrial and Provident Societies

The first three are unincorporated - this means that the organisation has no separate legal identity distinct from individual members. This means that members of its management committee have ultimate personal legal and financial liability. Unincorporated organisations are subject to income tax.

Whichever model is used (electoral or trustee) the board exists to provide strategic direction and ensure compliance with the law. They are not responsible for day-to-day management decisions and do not generally include executives or managers.

Governance issues

Voluntary and community organisations can seek to adopt an electoral or trustee model for governance where:

  • Members elect the Directors or;
  • A trustee model is used – membership is restricted to the Directors so that members and directors are the same.

The trustee model is used most commonly for charity trading and community businesses (or ‘social enterprises’) will most probably choose the elected model.

VAT

In general, a charity trading subsidiary or social enterprise will have no special treatment in relation to VAT. Concerning trading by a charity, income or corporation tax relief for particular trading activities, does not automatically imply a relief from VAT. Further information on VAT is available from HM Revenue & Customs website.