A SENIOR lawyer has highlighted a raft of tax and legal risks in a warning issued to Scottish charities.
Helen Kidd, a charities lawyer for Lindsays, has urged that charities embarking on increasingly expansive ways to raise money ensure that trading does not trigger unexpected tax bills – or stray on to the wrong side of the law.
Amid rising costs, including National Insurance contributions, tightening public sector funding and a downturn in fundraising income, organisations across Scotland are having to be more innovative than ever to secure financial survival.
For many, that has included launching – or expanding – trading operations, whether through shops or by providing other chargeable services and initiatives.
But, unless those directly further the organisation’s charitable purposes, Helen has warned that there are consequences to consider, which many trustees do not often realise.
She said: “In so many ways, the finance and fundraising world for charities since the first coronavirus lockdown five years ago is almost beyond recognition.
“The barrage of events and circumstances which have hit the sector has been relentless.
“Yet, through innovation, evolution and entrepreneurship, charities continue to adapt, overcome and succeed.
“But, when trading to raise revenue, there are critical financial and legal sense-checks which need to be carried out in order to ensure that charities do not risk unintended tax or regulatory consequences.
“Not every charity realises this.”
The warning has been shared as many charitable organisations consider key issues ahead of the new financial year.
Helen, a partner and head of charities and the third sector at independent Scottish legal firm Lindsays, added: “Generally speaking, if a charity’s trading activities directly further its charitable purposes, those profits should be exempt from tax.
“This is known as primary purpose trading (PPT).
“If the trading is non-PPT – and above the small tax trading exemption set by HMRC – the charity must route such trading via a wholly-owned trading subsidiary to stay on the right side of charity law and tax rules.
“In this scenario, the subsidiary then donates its profits back to the parent charity under the gift aid scheme (with time limits applying), ensuring compliance with charity and tax law.”
To remain within the parameters of charity law, charity trustees must be satisfied that trading activity directly advances the charity’s purposes and provides public benefit.
Scottish charity regulator, OSCR, notes examples of PPT may include a residential care charity providing accommodation in return for fees, a further education college running a restaurant operated by students as part of their catering course or a theatre charity selling tickets for productions.
Charities should only undertake non-PPT activities if there is no “significant risk” to the organisation’s resources.
If a charity carries out non-PPT, it will have to pay income or corporation tax on the profits of this, unless it falls within specific exemptions in tax law.
Helen said: “This is a complex picture.
“We generally work with a charity’s accountant or auditor to support any necessary changes to its legal structure ensuring tax efficiencies in trading.
“Good advice can make a real difference.
“When you’re trading to make your charity more financially stable, the last thing you want is an unexpected tax bill or facing reputational damage from an OSCR inquiry.”
The latest SCVO third sector tracker, published in the autumn, highlighted that while confidence in charity survival remains high, uncertainty is also near record levels.
