While a fall in charitable donations during difficult economic times will certainly have posed a threat to a number of charities, reports suggest that many are adapting by becoming more self sustainable.
Figures released by the National Council for Voluntary Organisations show that in 2010/2011, more than half of the sector's income was earned rather than given (21.4 billion was taken from trading compared with voluntary income of 14.7 billion).
It is worth highlighting, however, that any charity thinking of following the trend by going down the trading route will need to proceed carefully to ensure that it acts within the boundaries set out by charity legislation.
As a general rule, charities are allowed to trade if permitted to do so under the terms of its constitution and if the trading activity itself directly furthers its charitable objects. This is known as “Primary Purpose Trading” and an example would be the provision of education services by a charitable school.
Charities can also engage in “Ancillary Trading”. This is trading that takes place during the course of the charity furthering its charitable objects. An example would be the sale of food or drink to the audience of a charitable theatre.
Some charities may wish to go beyond the above and trade purely to raise funds (as opposed to trading, which in itself furthers the charitable objects). This is known as “Non Primary Purpose Trading” and can only be carried out by a charity if it does not pose any significant risk to charity assets. There would be a significant risk if there was any possibility that the cost of carrying on the trade may exceed the turnover generated by the business, with the difference being financed out of charity assets. It would be a breach of charity law for this to take place as a charity’s funds must only be used to further its charitable objects (and cover expenses incidental to furthering those objects). In these cases, the trading activity should be channelled through a trading subsidiary (a separate business entity). If the subsidiary then gifts all or part of its profits to it parent charity, it will not have to pay any corporation tax on the profits that it donates.
The above is only a brief summary of the types of trade a charity can carry out, but hopefully is enough to illustrate the fact that engaging in a trade can throw up some complicated issues for charities. As a first step, detailed thought should be given as to the nature of the trade and, in view of that, whether a trading subsidiary will be needed. The potential rewards, however, in terms of providing a regular source of income and a degree of autonomy are likely to continue to attract more charities.