Legal and regulatory issues

Both charity and tax law are extremely complex so no action should be taken without first seeking independent legal advice. The following provides a brief overview of some legal and regulatory issues that must be considered beforeembarking ontrading. 

  • Getting started
  • Legal status
  • The options for trading organisations
  • VAT 

Organisations can seek to contactWCVA's helpdesk, theCharity Commission, orHer Majesty's Revenue and Customs (HMRC)forfurther advice and support.  


Getting started

For any registered charity considering trading activity guidance must first be sought from the Charity Commission and in particular the publication CC35 Trustees, trading and tax. This explains when and how charities may engage in trading and contains some basic information on the application of income and corporation tax on trading profits. Even if your organisation is not registered as a charity, the publication is useful reading. 


Legal status

It is recommended that, in almost all cases, enterprise activities are operated by incorporated organisations. The important choices should be about what type of legal structure, not whether to register. 

Unincorporated associations are groups which have not yet registered to become limited companies. They are regarded in a legal sense as a number of separate individuals who are each personally responsible for the activities of the organisation. 

Incorporated organisations are limited companies of any type and Industrial and Provident Societies. They are seen by the law as single entities, which are separate from the people who are running them. In the unlikely event of legal action being taken against a charitable or community-owned company, it is the company which will usually find itself in court, rather than the directors or staff in their personal capacity.  


The options for trading organisations

Companies limited by guarantee are the most widespread format for trading. The financial liability of the directors and members is usually limited if the business fails. They can be adapted to operate as:

  • Stand-alone trading companies - with or without charitable status
  • Charitable (or non-charitable) holding companies with subsidiary trading companies
  • Subsidiary trading companies
  • Community-owned regeneration organisations with multiple activities
  • Worker-controlled co-operatives (although these commonly use structures under the Industrial and Provident Society legislation). 

Companies limited by shares have two main uses in third sector trading organisations, as:

  • Stand-alone trading ventures (often community-based) in which groups of individuals or organisations can buy shares to invest in, and own, trading activities which are run for social benefit
  • Trading subsidiaries: Companies limited by shares are used much more widely as wholly-owned subsidiary trading organisations by charities, development trusts and other community ventures. 

Community Interest Companies (CICs) have been introduced to help organisations which operate for public benefit to register easily and cheaply and toprovide protection for their assets and profitswhen they attract outside investments. The memorandum and articles of association specifies that their assets are 'locked in' so they cannot be distributed to members or transferred to other companies, except to another asset-locked organisation such as a CIC or charity (as is also the case for charities).  

Charitable Incorporated Organisations (CIOs) are a new type of company with limited liability which come with charitable status. They remove the need for the two stage process of registering a charitable company - first with Companies House and then with the Charity Commission. If you are starting a charitable company from scratch this is the route to use. If you are already a registered charity there is no need to change, but you can if you want to.


VAT

Taxation is a technical issue whose implications can be financially significant and vary greatly from one organisation toanother, guidance must be sought from HMRC at all times. 

In general, third sector organisations will have no special treatment in relation to VAT. If your annual trading turnover exceeds or can be expected to exceed the statutory limit, you must be registered for VAT. The same applies to any charity which carries out trading activities. 

Registration is optional for organisations with lower levels of turnover. This is of benefit for small enterprises which are involved in zero-rated activities such as newspaper and book publication - since they can reclaim the VAT spent on raw materials.