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Analysis: Why the CFDG has taken up the case for relaxing the trading rules

By Mathew Little, Third Sector, 20 February 2008

The Charity Finance Directors' Group budget submission to the Treasury, published last week, reignites an old controversy about charity trading rules.

The existing regulations compel charities to set up separate trading companies if the volume of trading they carry out unrelated to their cause exceeds £50,000, or 25 per cent of turnover. But the CFDG says they are "complex, inconsistent, difficult for charities to get right and resource-intensive", and wants them changed.

We've been here before. The 2002 report on charity law reform, Private Action, Public Benefit, recommended that charities be free to trade entirely in-house without the need for trading subsidiaries. But the Government rejected the recommendation on the grounds that it would mean unfair competition for small businesses.

Now the CFDG wants ministers to look again. Chief executive Keith Hickey says charity trading happens anyway, with profits Gift-Aided back to the parent charity and no extra tax incurred. "Whether we do it in-house or as a subsidiary will make no difference to small businesses," he says. "The only people who benefit are auditors, lawyers and administrators."

The CFDG says that, if the Government is loath to make a radical change, it could implement small reforms that would make life easier for trading charities. One would be to raise the threshold under which charities can trade in-house from £50,000 to £250,000. "Only the large charities would have an issue," says Hickey. "Any charity with income of £1m and under would get out of the net."

Another incremental reform would be to reclassify sponsorship as 'primary purpose trading' that can be undertaken internally. Many charities would benefit, says Hickey, because sponsorship is the main reason they need a trading company.

But there is opposition to liberalisation. Stephen Lloyd, a partner at law firm Bates Wells & Braithwaite, says the current regulations are good for charities. "People who say it's an unnecessary fetter aren't thinking seriously about the impact on public opinion," he says. "If a charity starts trading and loses a lot of money, most of its charitable money has gone down the pan."