There’s a lot of pressure on the third sector to become less dependent on grants and look at other ways of raising money. Any successful charity needs to have a diverse range of funding sources and income generation through trading can be an attractive prospect. But there are a lot of issues to consider before you start to trade. It’s easy to stray away from charitable objectives and fall foul of tax law, so you need to be aware of all the pros and cons of trading as a charity.

Charity law imposes restrictions on the nature and level of trading activity charities can carry out, and some types of trading are subject to tax, and have various legal and financial implications. To help explore this minefield, we’ve organised a free seminar on Charity Trading and Tax with two of our partners in the SCVO Pro Bono Service Legal and financial experts from Gillespie MacAndrew and Saffery Champness will offer guidance on when a charity can and cannot trade, and give practical help on tax, risk management and governance.

If trading is something you’re looking at, here’s four key issues to consider:

  1. CONSTITUTION
    Before starting any new activity you need to check your governing document to see if what you’re planning is in line with your charitable purposes, and if you have the necessary investment powers to finance your plans. If you don’t, then you’ll need to change your constitution.
  2. RISK
    A major consideration for trustees is to safeguard existing charity assets. Any trading activity, by its very nature, will have a certain amount of risk associated with it. So, even if the trading activity fulfils your primary charitable purposes, you may still want to set up a separate trading subsidiary to minimise risk.
  3. INVESTMENT
    As well as the money you need to invest at the start of any new business, you also need to consider any ongoing financial requirements. If the parent charity is going to loan the trading subsidiary any money, then there needs to be a formal loan agreement in place. It’s essential to get professional financial and investment advice
  4. GOVERNANCE
    If you set up a separate trading subsidiary, then you need to think about how it will be governed While a proportion of the trustees from the parent charity can also be on the trading subsidiary board, there needs to be a level of independence to avoid conflicts of interest and you may need to bring in trustees with specialist areas of expertise.

When it comes to charity trading you need to get it right from the start to avoid any reputational or financial mistakes. There’s guidance available in OSCR’s Charities and Trading Guide and HMRC’s Charities – Trading and business activities and come along to our free seminar on 22 May in Edinburgh to find out more