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Charity Trading - What Can We Learn From OSCR's New Guidance?

Charity Trading - What Can We Learn From OSCR's New Guidance?

Just in case you missed it, OSCR have now published (as of end March this year), a guide on Charities and Trading.  I have been asked to speak on this topic on a number of occasions and it is a personal favourite – I like the positive aspect to it, as the focus is on what charities can do directly to raise funds and become more self-sufficient, as opposed to the somewhat fraught focus on grant funding cuts etc.

My overall view of the OSCR guidance is that this is a very welcome addition to the resources available to Scottish charities. To date, it has been difficult for Scottish charities to know where to look for guidance on this topic. HMRC Charities (who are responsible for issues of charity tax throughout the whole of the UK) have a wealth of information on this topic but it can be somewhat tricky to navigate the pages of their website and some of the material is quite technical in nature. For many Scottish charities, the first place that they would typically look for guidance on charity issues is OSCR, so it is a much welcomed development that this guidance is now available direct from OSCR.

As for the guide itself, it is very user-friendly and pitched at a level that is not too technical – OSCR have managed to explain a complex set of principles in a very clear and succinct manner, making very effective use of diagrams. And I think that it is useful that OSCR is now definitively stating its position on activities which are not in furtherance of charitable purposes, but which HMRC Charities would be comfortable with (from a charity tax perspective) i.e. ancillary trading and non-charity trading up to the small trading exemption limit. 

Broadly-speaking, profits attributable to trading activities which are either:

(a) ancillary to the primary purposes (e.g. a museum selling refreshments to visitors); or

(b) which are not connected to its charitable purposes and are intended only to raise funds for the charity but up to a defined “small trading exemption limit”,

will not be subject to tax provided that the profits are applied in furtherance of the charity’s charitable purposes. This represents the position from a charity tax perspective, but from a Scots charity law perspective, the position was less clear cut i.e. a Scottish charity should only be carrying on activities which further its charitable purposes and which deliver public benefit. 

In the guidance, OSCR now confirm that they are comfortable with Scottish charities carrying out such activities, as follows:

  • Ancillary trading – trading activities which OSCR is satisfied are being carried out as a by-product of a charity’s main activities will not be regarded as activities which contribute to public benefit, but they are unlikely to be a problem in terms of the charity test;
  • Non-primary purpose trading (up to small trading exemption limit) – charities can undertake non-primary trading activities as long as there is no “significant” risk to the resources of the charity.

This, therefore, helps to clear up a grey area and to give greater comfort to Scottish charities looking to undertake income-generating activities of these kinds.

One limitation of the guidance, however, is that it does miss some subtleties - which is no doubt because of its primary focus (being aimed at non-lawyers and not intending to be fully comprehensive in nature).  Some examples (there are other minor points) include the following:

  • The guidance states, unequivocally, that a “trading subsidiary is not a charity” but this is not always the case.  There are instances where charities do set up charitable trading subsidiaries, for example, where the subsidiary is undertaking a new area of activity and the parent charity wishes a separate compartment from a risk and reputational perspective, and/or to form a separate focus for funding;
  • The section of the guidance on managing the relationship between the charity and the trading subsidiary arguably strays into shadow director territory as it suggests that the board of the parent charity should “decid[e ] on the role of the directors of the subsidiary”.  If that was interpreted as allowing the board of the parent to issue directions to the board of the subsidiary, this could potentially lead to the directors of the parent being deemed to be shadow directors of the subsidiary - thereby eroding the protections sought by establishing the subsidiary in the first place.  The board of the charitable parent should not, except in very rare circumstances, be dictating to the board of the subsidiary – setting an overall group strategy is one thing, but “deciding on the role of the directors” arguably sets the wrong tone.  Having said the above, it is unclear what OSCR had in mind when referencing “deciding on the role” of the board – they may have been thinking more of the parent board including certain “reserved matters” within the constitution of the subsidiary, rather than going as far as issuing directions;
  • Reference is made to the need for a formal lease to be in place where the subsidiary makes use of the charity’s premises, but this is not always required – guidance is needed on a case-by-case basis, but a more informal licence to occupy arrangement may suffice;
  • Reference is made to the tax efficiencies of establishing a trading subsidiary for non-primary purpose trading and making use of the gift aid regime to potentially “eliminate” paying corporation tax, but it is generally-speaking the case that some profits will need to be retained within the trading subsidiary for cash flow purposes, and certainly to allow for e.g. capital repayments on a loan.

So overall, an extremely welcome publication from OSCR, but (as recommended in the guidance itself) consider seeking guidance in relation to your particular set of circumstances before undertaking new trading activities.

By Gillian Harkness
Senior Associate, Public & Third Sector

Burness admin