Social Enterprise Factsheets

INFORMATION ABOUT SOCIAL ENTERPRISE - BUSINESS MODELS

FACT SHEET 8

TRADING CHARITIES
1. Definitions
Trading, when undertaken by charities, is often referred to as 'social enterprise' activity.

Some Voluntary and Community Organisations (VCOs), who have adopted a trading and social
enterprise approach, like to be known as social enterprises. It is a matter of organisational choice.
Some organisations see social enterprise as a new and exciting development, while others may
feel pressured by changing environments to make this shift in identity.

Trading and social enterprise activity in this sector isn't about turning organisations into
businesses, but about enabling the charity to become more sustainable by diversifying its income
base and avoiding reliance on grant income.

A charity cannot trade on a substantial or regular basis solely for the purpose of raising funds,
other than to meet its primary purpose. This is because trading implies a risk to funds that have
been given for charitable purposes. The fact that all profits may be applied to charitable purposes
is irrelevant when determining 'trade'. It is the activity not the outcome that is under scrutiny. The
organisation may be required to establish a trading subsidiary that donates all profits to the parent
charity.

This is a complex area. For key issues in deciding how to approach trading and charities, the
National Council for Voluntary Organisations (NCVO) has a dedicated section on their website:
http://www.ncvo-vol.org.uk/advice-support/funding-finance/income-sources/open-
market/introduction

2. Size and scale

According to NCVO, income from trading and contracting is responsible for over 50% of the
voluntary and community sectors income; in 2005/06 that was 15.6 billion. This outstrips income
from non-trading sources, including grants, gifts and donations.

3. Drivers
Reduced availability of grant funding from the public sector;
Income generated through trading goods or services on the open market can be a valuable
source of unrestricted, independent income;
Trading supporting organisational independence and growth.

4. Legal structures
There are a number of legal and organisational structures available to charities. It is an important
decision and wrong choices can restrict organisational development.

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A 'trading subsidiary' is a company, owned and controlled by one or more charities, set up in order
to trade. The purpose of a trading subsidiary is usually to generate income for its parent charity. In
general, non-primary purpose trade involving significant risk can only be done using a trading
subsidiary, which must be set up in such a way as to protect the parent charity and its assets from
the risks involved.

Even where trade is in support of the primary purpose (so there is no legal barrier to the charity
carrying on the trading itself) it may still be beneficial to establish a trading subsidiary. Where the
profits from trading would be liable to corporation tax, the use of a trading subsidiary may enable
the liability for this tax to be reduced or eliminated.

The Charity Commission expects the board of the trading company to be separate from the board
of trustees of the charity, so that the trading company can operate free from the influences that
affect the charity.

5. Examples
Earthworks in St. Albans is a small charity whose mission is to provide opportunities for training
and work experience to those of all abilities in horticultural and land-based skills. All of these learnt
skills are put towards gaining self-confidence, work experience and a better place to live.

Earthworks has taken a sustainable funding approach, combining statutory and non-statutory
grants with donations, contracts and the sale of services. Around 60% of its income comes from
environmental bodies, local businesses and Social Services Departments. The rest comes from
fundraising, donations, contracts and the sale of services.

Earthworks has been successful in their endeavours because they have a range of smaller grants
and contracts which pay for each project, so they are never reliant on one source of income. Start-
up business plans for each project aim to be as self-financing as possible.
www.earthworksstalbans.co.uk

Allergy UK is a national medical charity established in 1991 by a group of doctors to increase

understanding and awareness of allergies, to help people manage their allergies, to raise funds for
allergy research, and to provide training in allergies for healthcare professionals. The trading
activity includes a product endorsement seal of approval, translation cards, charity shops and a
magazine.

The charity is managed by a board of trustees who deal with the business aspects of the
organisation. All decisions on medical and scientific matters involving the charity are made by the
Health Advisory Panel members.

To manage the endorsement scheme, Allergy UK set up a separate trading company called Allergy
Research Ltd (ARL) with a separate board of directors containing representatives from the charity's
board. ARL is wholly owned by Allergy UK. Whatever profits it makes are given each year to
Allergy UK as an unrestricted donation. Since this is a donation, no corporation tax is payable. The
directors of the trading company have no say in the way that their donation is used.

In 1996, strings-attached grants from pharmaceuticals probably accounted for 90% of the charity's
turnover. By 2004, all restricted grants received totalled just 35% of Allergy UK's annual turnover.

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6. Support Organisations
The National Council for Voluntary Organisations (NCVO) is the national membership body for the
voluntary sector. It has a useful website and a free helpline. There is a network of Council for
Voluntary Service (CVS) organisations across the country providing a range of support services to
charities and community organisations.
www.ncvo-vol.org.uk

Association of Chief Executives of Voluntary Organisations - ACEVO provides mentoring and peer
support and legal advice services to its members.
www.acevo.org.uk

7. Further resources
Charity Commission
www.charity-commission.gov.uk

HM Revenue & Customs

www.hmrc.gov.uk

Futurebuilders
www.futurebuilders-england.org.uk

Community Development Finance Institutions (CDFIs)

www.cdfa.org.uk

Charity Bank
www.charitybank.org

Social Investment Group

www.efc.be

Foundation Centre
www.foundationcenter.org

Business Link East Midlands

Business Link is a free business advice and support service, available online and through local
advisers.
www.businesslink.gov.uk/eastmidlands
0845 058 6644
info@businesslinkem.co.uk

Produced by Social Enterprise East Midlands, working in partnership with Business Link