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Charity Shops Made Simple Charity shops made simple August 2018 1 Sayer Vincent LLP Chartered accountants and statutory auditors Invicta House 108–114 Golden Lane London EC1Y 0TL Offices in London and Birmingham 020 7841 6360 [email protected] www.sayervincent.co.uk @sayervincent Published by Sayer Vincent LLP Chartered accountants and statutory auditors Limited liability partnership registered in England and Wales OC390403 Copyright © Sayer Vincent All rights reserved No part of this publication may be reproduced by any means, or transmitted, or translated into a machine language without prior permission in writing from the publisher. Full acknowledgement of the author and source must be given. Sayer Vincent shall not be liable for loss or damage arising out of or in connection with the use of this publication. This is a comprehensive limitation of liability that applies to all damages of any kind, including, (without limitation), compensatory, direct, indirect or consequential damages, loss of data, income or profit, loss of or damage to property and claims of third parties. www.platform1design.com 2 Charity shops made simple Introduction 4 Legal and tax framework 5 Traditional charity shop operations 9 Gift Aid on donated goods 12 Using a trading subsidiary 18 Conclusions 21 Further reading 22 Charity shops made simple 3 Introduction Shops are an important source of income for many charities and are an excellent way to draw on the goodwill and support of local people. Many charities depend on volunteers to operate their shops and local supporters to donate goods for resale. Now, many charity shops are asking their supporters to help them increase the value of their gifts by using Gift Aid. This makes the administration associated with operating charity shops a little more complicated, but plenty of charities are already using Gift Aid as well as the normal sales of goods. This guide explains in detail how the scheme works so that finance teams in every charity can use it with confidence. It provides illustrations of appropriate accounting treatments, as well as background information on other tax and VAT issues and the legal framework of different types of shop activities. 4 Charity shops made simple Legal and tax framework All UK charities must be established for Charity tax reliefs charitable purposes only, those charitable The various charitable tax reliefs (income tax, purposes being defined in charity legislation. capital gains tax, corporation tax and VAT) are These purposes are the charity’s objects or only available to charitable bodies if all the primary purposes. A charity’s constitution following conditions are met: will normally set out the powers the charity ●● The body must be established for possesses. The powers describe what the charitable purposes only. Charitable charity may and may not do to further its purposes are the England and Wales primary purposes. For example, a charity may definitions in Section 2 Charities Act 2011. have the power: “To trade in the course of ●● The body must be subject to the control carrying out the objects and to carry on any of a relevant UK court (the High Court other trade provided such other trade is not or Court of Session) in the exercise of a substantial permanent trade”. its jurisdiction with respect to charities, Charities can enter into contracts for the or any other court in the exercise of a provision of goods or services if doing so corresponding jurisdiction under the law furthers the charity’s objects. Trading in the of a relevant territory. Relevant territories course of carrying out the charity’s primary are the member states of the EU, Iceland, purposes is referred to as primary purpose Norway and Liechtenstein. trading. However, the charity in the example ●● The body must have complied with any above could not carry out a substantial and requirement to be registered with a charity permanent non-primary purpose trading regulator such as the Charity Commission, activity, for example, the permanent and OSCR or the Charity Commission for substantial sale of bought-in goods that are Northern Ireland and any equivalents in a unrelated to the charity’s primary purposes. relevant territory It is important to check the charity’s objects The body’s managers must be fit and proper and powers to see what trading activities persons to be managers of the organisation. your charity can and cannot undertake. Managers are defined as ‘the persons having As explained below, a charity selling goods the general control and management of donated to it for sale is not normally the administration of the organisation’. This regarded as a trade. However, the sale of is the same as the definition of a charity bought-in goods on a permanent basis trustee used in s177 Charities Act 2011, though will normally be regarded as a trade. If the HMRC see the definition for tax purposes constitution prohibits a type of trading that as extending to include senior staff with the charity wishes to undertake, then it may financial authority such as the CEO and be possible to amend the constitution or it CFO. HMRC provide non-statutory guidance may be necessary to set up a separate entity on what they see as being the meanings of to carry out that trade. managers and fit and proper (available on gov.uk). This condition is treated as met if HMRC consider that the failure to meet this condition has not prejudiced the charitable Charity shops made simple 5 purposes of the organisation, or it is just and ●● Income from a trade that is mainly reasonable in all the circumstances for the undertaken by the charity’s beneficiaries. condition to be treated as met. This means that the work in connection Income tax or corporation tax for with the trade is mainly carried out by the charities charity’s beneficiaries. ●● Income from the sale of intellectual In principle, corporate charities are subject property rights. to corporation tax on all of their profits and gains and charitable trusts are subject ●● Gains from disposals of charity assets. to income tax on all of their profits and ●● Rental income from charity property. capital gains tax on all of their gains. There ●● Most forms of investment income such as are, however, a number of income and dividends, deposit interest and passively corporation tax exemptions for charities. In received royalties. practice, these usually cover all of a charity’s ●● Income from lotteries, raffles and prize income, trading activities being the most draws. common cause of difficulty. ●● Income from small scale fundraising events Non-taxable income (the event must meet the conditions for Certain sources of income are normally VAT exemption). regarded as being outside the scope of ●● Gift Aid, GASDS and Payroll Giving income tax or corporation tax. These include: donations. ●● Donations from individuals that are not ●● Grants and monetary donations from other ‘Gift Aided’ or provided under the Gift Aid charities and from companies. Small Donations Scheme (GASDS) and not provided under Payroll Giving. Ancillary trading The exemption for charitable trading extends ●● Legacies. to ancillary trading activities. For example: ●● Selling donated goods: the sale of ●● The sale in a charity shop of bought-in donated goods by a charity or its wholly- goods that are related to the primary owned trading subsidiary is not regarded purposes of the charity, e.g. the sale of as a trade for tax purposes but as the literature providing advice and support for realisation of the value of a gift. people with cancer by a welfare charity. Charity tax exemptions ●● The sale of confectionery, toiletries and Other sources of income are in principle flowers to patients and their visitors in a subject to income or corporation tax but are hospice or hospital. exempt when any associated profit or gain ●● Sales from a café to theatre attendees. is applied to the charitable purposes. These include: However, ancillary trading does not extend to: ●● ●● Income from primary-purpose trading. This Sales from a charity shop of bought-in is trading that is exercised in the course of goods that are unrelated to the charity’s carrying out the charity’s primary purposes. objects, e.g. sales of greeting cards and jewellery. 6 Charity shops made simple ●● The sale of confectionery, toiletries and HM Revenue & Customs (HMRC) will consider flowers to the general public. any evidence the charity may have to satisfy ●● Sales from a café to members of the the reasonable expectation test. The charity general public. will need to provide evidence to demonstrate the levels of turnover and incoming resources Such sales are non-charitable trading. that were expected, e.g. minutes of meetings Where there is a mix of ancillary trading at which such matters were discussed, copies and non-charitable trading, the two must be of cash flow forecasts, business plans and distinguished. previous years’ accounts. Small scale trades exemption The profit of non-charitable trading activities Investing in trading activities are exempt provided all non-charitable A charity using its own funds to invest in a trading activity is on a small scale. This trading activity must have the express power means: in its constitution to do so. The trustees must ●● If turnover from all non-charitable trading give careful consideration to the decision to activities is less than £5,000 in the year, or invest and the most appropriate way to fund the working capital. This should be properly ●● If the turnover from all non-charitable assessed and the trustees should receive trading activities is less than 25% of the appropriate documents, such as a business total incoming resources of the charity, or plan, to satisfy themselves that the trading is less than £50,000, whichever is the lower.
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