Our charity is developing a range of trading activities that can’t be justified as furthering our primary purpose – we’re getting involved in room hire, conference organisation, catering, producing display materials etc for other organisations, not all of which are charities.

We’ve been advised to establish a trading subsidiary to take over these activities, to avoid any problems with the Charity Commission or the Tax Office.

Question: what is the best legal structure for a charity’s trading subsidiary? What sort of constitution should we use?

We are a small charity supporting bereaved children in Berkshire. We need to raise £165,000 each year to maintain the current service. We fundraise regularly through community giving and events. We have a ball coming up in May and will be seeking auction/raffle prizes. I'm aware there is a tax issue if an item is purchased over £250? We do not have a trading company - should we have one, what are the advantages or disadvantages?

sorry this is so long...

We are a well established community organisation, which operates a regular business planning cycle and has a strong trustee board who are engaged with our activities. Our aim, typically, is to reduce reliance on grants and we are clear that developing our existing social enterprise activity is the most viable way forward.

The existing businesses turnover £25k with scope to grow and we now have the opportunity to buy a 3rd business [we have done this before] that is turning over 60k p.a. This is a ‘primary purpose’ business and we are satisfied it fits well with objects and business plan, that we have very good data on the business and the market and that [suitably skilled] trustees are fully engaged in scrutiny/strategic engagement.

The issues I am less clear about relate to structures and governance.

• Trading entity and VAT: The new business takes us over the vat threshold; if we keep the trading activity within the existing charitable structure how will this affect the way we account for income/expenditure? I understand that the 2 small contracts we currently operate would attract VAT [as services rather than grant-funded activities], if we exceed the threshold.
• Would this be the ideal point at which we ‘spin off’ a trading entity?
• What are the pros and cons of various structures for such an entity? CIC? Company limited by guarantee/shares? (i’ve seen your ‘legal models’ document but no reference to CICs)
• Charity commission guidance seems clear on how a company would ‘gift’ its profits back to the ‘host’ charity thus off-setting corporation tax, but would there need to be a very tightly worded set of mem & articles to ensure there was a ‘lock’ on the new organisation? Is there a down-side to this? Is this what the CIC is for?
• Would we manage the new entity by making existing trustees of the charity into Directors of the new company?
• Are we coming at this from the wrong angle altogether? Should there be more fundamental ‘drivers’ shaping how we move forward?

Existing charitable structure: the charity is not currently a limited entity; it is an unincorporated association, which worked well when it was a small, membership-based entity handling small amounts of cash with few staff. If we go ahead with the trading ‘arm’ (on top of funding campaigns, grants and contracts), is this a point when we should be considering a change of structure for the main charity as well? If I were a trustee, should I not be concerned about personal liability in an unincorporated association? Should we wait for details of the new charitable incorporated organisation?

The issue concerns an arts charity who own the freehold to their building and their trading subsidiary who run the gallery shop and cafe within the building.

The rent for the gallery shop and cafe have been valued as required on an open market rent. The problem however is that this presumes that the gallery shop could be operated akin to gift shop, which would certainly maximise the commercial return. However if this were to happen the Arts Council and local authority funders have indicated that they would withdraw their funding over 'quality' issues. This funding is all for the charity.

The trading company is not sustainable if it had to pay a rent comparable with a gift shop or its commercial equivalent. The Charity Commission have not been impressed by the dilemma merely repeating that the trustees have a duty to maximise returns and they would be in breach of duty not to do so. The case to date has been that the operating restriction would apply whether the space was occupied by the trading subsidiary or any other arms length tenant.

What is the best way to proceed on this one? The added issue is that if the gallery shop and cafe were to close because of sustainability issues then the charity would receive no rental contribution whatsoever.

I am working with a Charity who want to set up a social enterprise trading arm, they have asked if they can charge interest to the social enterprise as they are basically supporting it 100% financially prior to the social enterprise making any money. I am unsure if they can, but think that they might be able to charge possible management costs or admin support?