Charity strategic planning – think about tax!
Friday, 26 May 2017
Charities are certainly adapting to changing funding environments. In seeking to reduce reliance on grant funding, many charities have looked to increase enterprise trading and charging for services. But the tax impacts of developing new opportunities and even delivering the same services under different arrangements have sometimes been overlooked – these need to be on a charity’s radar.
There needs to be joined up thinking on the tax impact of changes in activities, often including corporation tax, VAT and business rates.
For instance, just hiring out a room would not be trading. But if you start to supply refreshments to provide a better commercial proposition, this could fall into trading. This could affect the charity’s corporation tax status, its VAT expense and business rates exemption.
However, with a little forethought, some detailed discussion and sometimes a little professional advice, a new and creative plan for development can often be structured in a way that either minimises the impact of tax or at least factors in the impact of tax. There is no point looking at a new income generating idea to find that unforeseen tax implications render it a cost to the charity. For existing activities, a regular review of changes could help identify if adjustments are needed.
Questions to ask include:
….. did you last consider your activities and if they are trading? Do they fall within the exemptions?
……are you charging for? Is it directly related to your charitable purposes (or carried out by your beneficiaries)?
……are you doing it? If it’s not directly furthering your charitable purposes, is it closely related or is it fundraising? Fundraising activities would generally be expected to make surpluses.
…… income is expected to be generated from a trading activity? If it is unrelated to your charitable objective, is it sufficiently small scale (lower than £50,000 and either 25% of total income or £5,000, whichever is higher) to fall within the small trade exemption?
….should carry out the activity? Is it possible to carry out the activity within the charity using its tax exemptions, or should you be putting it into a trading subsidiary? Remember that a separate entity can bring with it additional administration costs (financial and time) – it may not be the only way to manage trading.
With MHA, we have created Keeping Your Charity on the Right Track, a 12 month programme to help you improve your organisational governance in a stepped and measured way. Each month’s article covers an area of charity governance for review. Month 5’s article considers tax and includes a high level checklist. You can read the checklist here.