Legal restrictions on income generation

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Legal restrictions on income generation Helen
Harvie
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Income in recession

• Statutory funding more competitive/tenders
• Less income from investments
• Less funding available from charitable trusts
• Reduced donations

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Additional income

• Fundraising activities
• Additional donations
• Hiring out premises/facilities
• Hiring out people
• Trading goods

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Fundraising appeals

• Wording of appeal if wish to use for general
  purposes
• Set end date
• Registered status in literature
• Consequences of initial failure or subsequent
  failure
• Telephone and Broadcast appeals

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Other forms of Fundraising

• Public Collections - licence
• Small Lotteries Gambling Commission, 20,000
  limit, max 250 non-cash prize
• Professional fundraisers and commercial
  participators prescribed wording in contracts
• Sponsorship associating charitys name with
  commercial product

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Fundraising events tax reliefs

• List of events specified by hmrc
• Organised exclusively to raise money for charity
  or its trading subsidiary
• Restriction on number of events 15 of the same
  kind at same location pa
• VAT exemption

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Fundraising - risk

• Risk CC guidance no more than 5k or 25 annual
  income
• Otherwise via trading subsidiary

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Donations tax reliefs

• No IHT on legacies
• Gift Aid on donations from individuals
• Donations from companies tax deducted as charge
  on income
• No CGT on gifts of assets that subsequently sold

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Donations - beware

• Benefits in exchange detailed limits max 500
  for 10k or Gift Aid invalidated
• Substantial donor legislation

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What is meant by trading?

• Primary purpose trading furthers objects
• Non-primary purpose trading intention to raise
  funds
• Ancillary trading
• Mixed primary and non-primary purpose

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What is not trading?

• Sale of donated goods by charity
• Sale of investments
• Sale of assets which charity is using or has used
  for charitable purposes
• Letting of land or buildings with no services

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Trading limits

• 25 of gross annual income (not profit)
• Maximum of 50k for charities with annual gross
  income over 200k
• De minimis of 5,000
• Above these levels must use trading subsidiary

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Trading subsidiaries when use?

• When trading exceeds limit
• When charity involved in non-charitable
  activities, eg political campaigning
• Ring-fence liabilities

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Trading subsidiaries - advantages

• Tax savings
• Risk management
• Protect assets of charity
• Clarity/separation

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Trading subsidiaries - disadvantages

• Some tax reliefs not available rating relief,
  SDLT
• Conflicts of interest
• Has to be financially independent
• Complexity and cost of running two organisations
• Relationship needs regular review and management

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Trading subsidiaries considerations on set up

• At what point set up company?
• Power of charity to set up trading subsidiary
• Selection of board
• Name of company
• Source of funding just charity or external
  funding?
• Form of trading company

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Considerations (contd)

• Charity investment share capital or loan
  capital?
• How does this fit in charitys investment policy?
• Tying up of funds
• Financial advice on investment

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Considerations (contd)

• Financially independent within 2 years CC
  guidance
• Use of charity name/brand/IP
• Shared staff/resources/facilities
• Record keeping of decisions, particularly on
  initial investment

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Funding of trading subsidiaries

• Initial investment shares or loan
• Ongoing qualifying loans for hmrc to obtain tax
  relief as investment
• Must be for benefit of charity and not avoidance
  of tax
• Market rate of interest, charge over assets

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Board selection

• Important think of future
• Overlap of boards CC guidance
• Act in best interests of both organisations
• Members of board conflicts of interest policy
  and register, procedure at meetings
• Chief exec role
• No payment of charity trustees

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Trading subsidiaries - staff

• Joint staff conflicts on interest eg share
  ownership bonus scheme
• Joint staff joint contract or one contract and
  recharge time
• Shared resources allocation of management
  charge charity not to make profit or trading
  written agreement

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Trading subsidiaries rating relief

• Rating relief of 80 (20 discretionary) not
  automatically available to trading subsidiary
• Charity shop charity can occupy, sell donated
  goods as long as 50, act as agent for
  non-donated, obtain relief

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Gift Aid payment to charity

• If charity sole shareholder payment to be made
  to charity within 9 months after year end
• If charity not sole shareholder have to make
  payment during year
• Payment in cash, actual transfer not notional
• Trading subsidiary retain some profit to make
  viable, but will be taxable

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Trading subsidiaries - insolvency

• Repercussions for charity if trading company
  becomes insolvent financial and reputation
• If charity continues to fund, trustees can be
  personally liable
• If charity trustees provided guarantees to bank,
  can be personally liable

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Insolvency (contd)

• Charity not preferred creditor if sole
  shareholder
• Charity will need to enforce contracts/loan
  agreements even if moral obligation
• Charity trustees must regularly review financial
  health of trading subsidiary

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Any Questions?