C2. Trading and Tax

1          The PLATO entry draws attention to issues around `trading’. Local churches of the United Reformed Church enjoy charitable status and therefore may only conduct activities falling within the charitable purposes of the Church.

‘What constitutes Trading’ (SYN)

2          It is not easy to define precisely what in law constitutes `trading’.   However, subject to certain exceptions mentioned below, `trading’ is best defined as the regular provision or supply of goods and/or services for profit.   In the context of the church, this is so, even though such profit or gain is to be applied towards the objects of the church itself and not for personal benefit of the individual carrying on the `trading’.

3          Investment funds and letting properties do not amount to `trading’. In addition the Charity Commission and the HM Revenue & Customs would not consider a charity to be `trading’ in the following circumstances:

4          A charity may properly engage in what at face value may appear to be `trading’ to carry out its primary purposes and objects e.g. churches whose purpose is to advance religion can legitimately sell bibles and other religious literature as this would be in the furtherance of their primary purpose without incurring any adverse consequences.   The regular sale of any other type of books would be outside the scope of this exception and would constitute `trading’.

5          Generally the sale of donated goods is not regarded by either the Charity Commission or the HM Revenue & Customs as `trading’.   Further, if any charity engages in occasional ‘trading’ such as jumble sales, bazaars, sales of work etc, this will not count as `trading’ provided the four following conditions are satisfied:

• the organisation is not trading regularly;
• the trading is not in competition with other traders;
• the activities are supported substantially because the public are aware that the profits will be devoted to the purposes of the charity.

Consequences of trading

6          For a church to engage in any `trading’ activity which does not come within any of the above exceptions could give rise to all or any of the following:

• the church’s charitable status could be endangered;
• there could be serious adverse tax consequences;
• the trading income would become liable to income tax;
• if the turnover exceeds the VAT registration threshold, HM Revenue & Customs could raise an assessment for VAT on the amount charged to customers and users of the services provided;
• a liability to business rates could arise;
• depending on the extent of the use, planning permission might be required;
• those carrying on the `trading’ activity could incur personal liabilities in relation to `trading’;
• the Trustees would be in breach of Trust in permitting the `trading’ activity on church premises without a letting agreement at a proper rental;
• the building insurance might not cover any claims arising out of  the ‘trading’ activity.

Recommended practice

7          A separate non-charitable trading company should be formed to carry out the `trading’ activities.   This company can register for VAT if appropriate and act as an employer and also enter into any appropriate letting arrangement with the Trustees of the church premises as to the use of the same.   Although the company would be liable for tax on its profits, it can enter into a Deed of Covenant to pay those profits over to the local church, which can then reclaim the tax.   It is strongly recommended that if any local church wishes to conduct any trading activity it should take professional advice as to the setting up of the arrangements as outlined in this paragraph.   The Church should also inform the Area Pastoral Committee and its Trustees.

8          This summary  is only a brief outline on this subject. It is hoped however; it says enough to sound warning bells for any local church contemplating becoming involved in `trading’ or which is already doing so. In either case, the local church should take professional advice without delay.