Against allowing charities to
trade within charity
343. We sought evidence from the Federation of Small
Businesses about whether the proposals in the draft Bill would
lead to unfair competition by charities against small businesses.
Mr Alambritis told us of:
"the impact on the smaller businesses next door,
especially where there was a common element as to what they sold.
[Charities running] coffee bars are the classic example, greetings
cards is another one, crockery another…. We have no objection
to the charitable status, to the fund raising; the only objection
we have is to the business rate tax break. That is the one element
that small businesses are concerned about. They would have no
objection to the charity shop being next door provided the tax
system was relevant to all because they do see them as fairly
aggressive commercial institutions."[366]
344. We also received a submission from the Charity
Advisory Trust, who were opposed to extending the power of charities
to trade. They said:
"…The Charities Advisory Trust's 'Charity
Trading: a statistical analysis' shows that trading income
rarely produces significant income for charities. There is evidence
that there have been quite substantial losses through trading.
Figures for 1995 - 2000
(incl.) show
trading income as a proportion of income for the top 200 charities,
by income, was on average less than one quarter of a%. 10% of
charities made losses…
"The device of the wholly owned trading company
has much merit. It isolates the trading activity so it is easier
to see if it is profitable or loss-making. Investment (subsidy)
in trading is easier to identify…
"It would be regressive to return to this situation.
Our experience in analysing charity trading accounts is that when
charities trade without using a separate trading company, costs
are not fully apportioned to the trading activity, so that the
profit levels are artificially enhanced …the arms-length
trading company ha[s] given charity funds greater protection".[367]
345. The Minister also told us that she did not support
the proposal to extend charitable trading:
"Because the recommendation was to allow charities
to not just trade to their charitable purpose but to create a
completely different kind of trading. I envisage the risk that
you could have within a charity someone who created some way of
fund-raising for the charity, the small bar in the village hall,
who then started running a chain of pubs, and that would be quite
possible, and that could raise money which went to charities.
They could benefit from tax relief in terms of non domestic rates,
they could benefit from all the other tax reliefs… we do
not think that you could be able to form an enormous company with
all the tax benefits that would have which could compete in the
high street, which had charitable character. If you want your
profits to give to charity you could covenant them to charity
and get the tax breaks in that way and that would be the right
way to do it".[368]
346. When we asked if she would be willing to look
at the question again, she replied:
"I am but I do think it would be very difficult
to create a mechanism because we allow trading to charitable purposes.
One could imagine that Fair Trade, for example, could become a
very big brand, that would be perfectly permitted under the Bill
as it stands and could be charitable but what we would not allow
is trading which is not to charitable purposes. I think that would
potentially not just compete unfairly but damage the brand".[369]
Rebuttal
347. In response to the Government's objection that
tax-exempt trade would lead to unfair competition with private
business, CFDG and others told us that allowing charities to trade
within the charity would give them no tax advantage that they
did not already enjoy.[370]
"…the reality is that charities that want
to trade already do so through a trading company and avoid tax
by transferring profits to the charity. It is unlikely that the
competition to small businesses would increase if charities were
allowed to trade through the charity".[371]
348. CFDG and ACEVO also sent us evidence addressing
a number of other objections commonly made to further powers of
trading by charities. These objections were:
a) That trading might lead to increased risk
to charity assets and exposure of trustees of unincorporated charities
to greater personal liability. CFDG argued that, if charities
followed the duty of care in the Strategy Unit recommendation,
then risky forms of trading would be carried out through a trading
company and charity assets would be protected.[372]
b) That boards of charities lack trustees with
the commercial acumen required for trading. CFDG pointed out that
this objection would apply to trade as currently carried on though
a trading company, since the same people would be running the
trading company.[373]
c) That some charities might develop trading
to such an extent that it became their dominant activity, thereby
bringing their charitable status into question and possibly damaging
public confidence in charities. ACEVO argued that there was nothing
to stop this happening currently as a result of trading through
a trading company.[374]
They told us:
"The concern that non-primary purpose trading
might render charitable activity a sideline could be met by retaining
a ceiling for trading, but making it more flexible. For example,
trading 'incidental' to the charity could be permitted within
the charitable structure. The threshold could be defined for all
charities as it currently is for those with a turnover of between
£20,000 and £200,000, as 'less than 25% of the charity's
total incoming resources'".[375]
(We assume that ACEVO meant to retain the current
rule that a small charity can receive income from trade of up
to £5,000 exempt from tax, even where this is more than 25%
of total turnover).
Conclusion
349. This issue is the only major point on which
the draft Bill does not follow the Strategy Unit's proposals.
Whatever recommendation this Committee makes, it is likely to
be a key matter for debate in both Houses when the real Bill is
brought forward. The Committee considered three options:
a) to retain the present arrangements - as the
draft Bill would do;
b) to adopt the Strategy Unit recommendation
- that is, to allow charities to carry out unlimited non-primary
purpose trading within the charity (subject to trustees exercising
such an appropriate duty of care and skill as is reasonable, a
duty to assess risk and suitability and a duty to take proper
advice[376] and to
provide that they should enjoy tax exemption on trading income;
and
c) to adopt the compromise proposal made by ACEVO
(paragraph 348 (c) above) - that is, that charities should be
allowed to trade within the charity and should enjoy tax exemption
on trading income up to the point where income from trading equals
25% (or £5,000, if the greater) of the charity's total turnover.
350. We accept the evidence which the Charity Advisory
Trust have presented that there are some advantages in the present
arrangements. A trading company can help ensure that profits and
losses are more easily identified and highlighted and can act
as a check on improvident trading by the charity. In addition,
we were influenced by the argument that, if charities were allowed
to conduct unlimited trading within the charity, charity assets
might be put at risk. Avoiding this risk depends on charities
complying with the duty of care and making astute use of the trading
company option.
351. At the same time, like the Minister, we are
conscious that changing the rules on trading within the charity
might encourage charities to increase their trading activity significantly.
This would carry a number of risks. Firstly there could be loss
of focus on the charitable activity as unrelated trading activities
increased. Secondly, where that trade proved unsuccessful or even
disastrous, with consequent loss of charitable funds donated by
the public (which would not be insulated against those losses),
there could be serious public disquiet. Another risk is that to
justify increased unrelated trade, the boards of charities could
become unbalanced. There would also be the risk that the more
trading charities carried out, the greater the number of trading
ventures that would fail or be subject to scandal, which would
also damage the charity brand. The Charity Commission might wish
to strengthen or issue guidance on procedures for charities engaged
on non-primary purpose commercial activity to disclose fully what
proportion of their income and expenditure relates to the costs
of the commercial activity.
352. We consider, however, that the other evidence
we have received suggests that there would be clear advantages
to allowing charities to trade more extensively within the charity
- in particular, the savings smaller charities will make through
avoiding the administrative costs of having to run a trading company.
We do not see that the Government's stated objection to further
powers of charitable trading - unfair tax advantages to charities
compared to private business - has been borne out.
353. On balance, we consider that further powers
to trade are desirable provided there remains some limit to them.
That limit should be higher than the existing limit of £50,000
a year.
354. The Committee recommends that the draft Bill
should be amended to allow charities to trade within the charity
and enjoy tax exemption on trading income up to the point where
income from trading equals 25% (or £5,000 if the greater)
of the charity's total turnover, but this should be subject to
an overall limit higher than the current £50,000 and the
Government should consult on the level at which that overall limit
should be set.
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