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The voice of Scotland’s vibrant voluntary sector

Published by Scottish Council for Voluntary Organisations

TFN is published by the Scottish Council for Voluntary Organisations, Mansfield Traquair Centre, 15 Mansfield Place, Edinburgh, EH3 6BB. The Scottish Council for Voluntary Organisations (SCVO) is a Scottish Charitable Incorporated Organisation. Registration number SC003558.

Should charities rely on unconventional income sources?

This opinion piece is almost 7 years old
 

Most charity trustees have a responsibility to generate funds in order to deliver on the organisation’s charitable purpose.

Charities therefore undertake a wide range of activities to raise money.

Whether through fundraising, investment or commercial undertakings, each choice carries its own limitations, opportunities and risks.

Recent press stories surrounding the Buckfast Abbey Trustprovide a good example of the difficulties charities can face when trying to generate income through trading.

Lianne Lodge

Every charity is different and what might be an opportunity for one may be inappropriate for another

Lianne Lodge

The trust is registered with the Charity Commission in England, supporting and maintaining the order of Benedictine Monks of Buckfast Abbey which have produced the synonymous tonic wine since 1927. According to the Charity Commission, most of the trust’s income comes from its production.

As a charity, the trust does not pay tax on these funds, a fact which has been criticised by the National Secular Society.

It has now called for the trust’s charitable status to be removed by the Charity Commission. It also suggests that the controversial beverage causes “undeniable harm” and is at odds with the charity’s responsibility to provide a public benefit.

The specific row might be unusual, but it is remarkably easy for a charity to find that its need and means of generating income may not correlate directly with its charitable purposes.

Trustees in Scotland, England and Wales all have legal responsibilities to ensure that they act in line with the charity’s stated purposes.

However there is also a wider reputational risk where a charity is seen to be benefitting from financial sources which are questionable or raise ethical concerns.

For some charities it may be wise to consider establishing a subsidiary entity to run commercial activities, if they do not relate directly to the charitable purpose.

Revenues can then be passed up to the charity, ideally with the benefit of Gift Aid to reduce any tax liability.

This is, however, a very technical area and the numbers and risks must be looked at carefully to understand whether the benefits of this structure would outweigh the possible tax liability and increased administration. While trading subsidiaries have many benefits they may not suit every charity despite the increased legal flexibility.

In addition, a subsidiary company won’t necessarily protect against reputational damage, as the Buckfast Abbey Trust has found.

At the most basic level, but often the most effective, a charity’s constitution should be regularly reviewed in order to ensure that trustees are fully cognisant of the organisation’s primary purpose.

This document is a legal requirement, and regular review gives trustees an opportunity to consider whether their actions effectively reflect those goals.

The most important consideration for trustees should always be the long term ability to meet objectives and this means weighing up the consequences of all financial decisions.

Remember that every charity is different and what might be an opportunity for one may be inappropriate for another.

Take advice and keep the charitable purpose in mind at every step.

Lianne Lodge is an associate, charities & private client at Gillespie Macandrew LLP.