What Are Restricted And Unrestricted Funds?
Charities are mainly funded via grants, contracts and sponsorships, which are earmarked the purposes of the funding. This restricts ways a charity may spend such funds and requires reporting to the funders. This type of funding is called restricted funds.
But what can a charity do if it faces other types of spending that fall outside the restricted funding criteria? It may want to raise funds via other means, for example – via donations or opening a charity shop. These sorts of funds are called unrestricted.
Should a Charity Pay VAT And Taxes?
Now, if a person or a company opens a business, they should pay taxes and incur VAT cost etc. A charity would have to do the same, wouldn’t it? Well, not necessarily.
You see, charities are exempt from paying taxes and VAT on most income and capital gains up to a certain limit as long as they spend it on recognised charitable purposes, of course. It is called Small Trading Exemption.
What Is a Small Trading Exemption?
The Small Trading Exemption is a type of tax relief on any trading a charity may have that fall outside it’s primary charitable purpose.
This is where a charity can operate a trade with a turnover of up to 25% of it’s normal income. For example, if a charity has income of £50,000, then it will have a small trading exemption of £12,500 (turnover, not profit), if a charity has total income of £200,000, then their small trading exemption will be £50,000. There is an upper limit to the small trading exemption, which is £80,000. If the trading turnover goes above the £80,000 cap, then all of the trading activity is subject to corporation tax.
What Types of Trade a Charity Can Carry On?
There are two main types of trade that a charity can carry on: primary purpose trading and non-primary purpose trading. An example of primary purpose trading would be a religious charity selling bibles, as this furthers the charity’s primary purpose. This type of trading is fine to carry on and it does not affect the tax status of a charity and the exemptions don’t need to apply.
An example of non-primary purpose trading would be operating a retail shop selling donated or bought in goods. This is where the small trading exemption levels will come into play. If a charity believes that they will go over the exemption levels, then it may want to open a subsidiary trading company.
What Is a Trading Subsidiary?
A Trading Subsidiary may be used to conduct trading outside of charity’s primary purpose. Additionally, a charity may benefit from a trading subsidiary protecting it’s assets from trading losses.
Furthermore, if a trading subsidiary makes profits from trading donated goods or runs fundraising events on behalf of the Charity, it’s exempt from paying VAT.
Otherwise, a trading subsidiary must pay tax and VAT as any other business.