Things to Consider before starting How does your initiative fit with your social purpose? The first consideration for any charity considering trading or procuring contracts must be ‘how does this fit with our social purpose?’ Both Board and staff must consider seriously whether trading/contracts will help you to further the aims set out in your governing document or whether trading might conflict with your aims. Things to think about: Would a trading initiative or contract provide a new way of involving your users and volunteers, or would it take away valuable time that could be spent supporting them? Is your existing structure suitable for trading? All trading activity carries a degree of risk. Organisations that are incorporated bodies (e.g. Company Limited by Guarantee, Industrial and Provident Society) offer a degree of protection to their Board members, with the liability of individual members being limited. If you are not an incorporated body, individual committee members are liable, for example, for any debts accrued by the organisation. If you are not incorporated, and you wish to trade you should give serious consideration to whether your management committee is suitably protected. If you want to discuss the issues involved in becoming a company contact Margaret Nisbet at MVA on 0131 663 9471. The Charities Bill that is currently going through the Scottish Parliament is proposing to simplify the process of registering as a charity, and to grant limited liability to committee members automatically on registration. Many charities that wish to undertake large scale trading initiatives choose to divide their activities into a charitable arm, and a trading arm. This could take one of two forms, either: A charitable holding company, which holds all the shares in a trading subsidiary; or A profit-distributing company, who siphons off all their profits to a charitable company. One key advantage of separating out charitable and trading activities is that all the risk of trading is born by the trading company. If the trading company goes bust it will not affect the charitable arm. Organisations considering setting up a trading arm, or businesses setting up a charitable arm need to take proper legal advice on the subject. The information offered above is only a guide. SCVO provide some more food for thought at: http://www.scvo.org.uk/information/funding/type/trading_subsidiary.html Things to think about What would happen to your organisation if your trading initiative were unsuccessful? What could you do to minimise the risk to the organisation, and to individual management committee/Board members? Charities and Taxation Charities are not automatically exempt from tax on profits made from trading . However, The Taxes Acts provide for a limited exemption from tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the purposes of the charity. In addition the trade must satisfy one of these three conditions: The trade must be exercised in the course of the actual carrying out of a primary purpose of the charity or is ancillary to this primary purpose trade or The work in connection with the trade must be mainly carried out by beneficiaries of the charity or The turnover of a non-primary purpose trade falls below certain limits (currently £5,000, or if the turnover is greater than £5,000, 25 per cent of the charity's gross income, subject to an overall limit of £50,000) If a trade does not satisfy one of the above conditions, the profits of the trade will not be exempt from tax regardless of whether or not they are used for the purposes of the charity. The Inland Revenue produce detailed guidance on the issue of charity trading. Click here to go to the relevant Inland Revenue site. Things to think about Do the objectives outlined in your governing document really reflect your ‘primary purpose’? Skills and Experience Developing a trading initiative or contracting could require your organisations to develop new skills such as market identification, retail, direct selling etc. Although many of these skills will be transferable from the voluntary sector, you need to consider whether there is training that you require, or whether you need to employ staff with different skills sets. A range of training is available to Midlothian organisations: MVA run an annual training programme, which aims to provide Midlothian organisations with the skills and knowledge they need to function effectively. Many of these courses are relevant for aspiring social enterprises. Click here to access MVA’s training brochure [link]. Support is also available from Community Enterprise Limited: http://www.communityenterprise.co.uk Things to think about What skills do you currently lack that you would need to trade effectively? Can you develop these skills in your existing staff, Board and volunteers? Do you need to employ new members of staff to implement a trading initiative? If so, what should go into their job description and person specification? Your Trading Initiative You need to develop a business plan for your trading initiative. You can get support to do this from: MVA Midlothian Business Gateway Community Enterprise Limited Things to think about Is there a market for your goods or services? How do you know this? Is there any research that you could do to back this up? What are the costs of your initiative? Are these costs start-up only, or on- going? How do you know that these costs are comprehensive and realistic? Have you included any overheads? What is the likely income from your initiative? How do you know that this is realistic? How will you advertise your goods or services? Start Up Funding There may be initial start up costs to your initiative. Potential sources of funding for this are noted below: Futurebuilders Communities Scotland are distributing an investment fund called Futurebuilders, which is aimed at supporting social economy organisations to become more sustainable. Large investments are available through their Investment Fund, and sums of up to £50,000 are available through their Seedcorn Fund. Anyone wishing to discuss Futurebuilders applications with Communities Scotland should contact Anna Winters at the Edinburgh Area Office: email@example.com, or on 0131 313 3700. If you are considering applying to Futurebuilders for work that will be based in and/or benefit Midlothian , please also make contact with SEAM. We can provide support to help you strengthen your bid. We also provide feedback to Communities Scotland on whether Investment Fund bids meet local strategic priorities. More information is available on the Communities Scotland website: http://www.communitiesscotland.gov.uk/Web/Site/Whatwedo/FB_home.asp Loan Finance A loan is where money is borrowed for a particular purpose and then repaid over an agreed period of time. An additional payment called interest must normally be paid back with the original amount, known as the principal. Loans are generally prefereable where finance is needed for a specific purpose, for example to buy a building, and an organisation’s cash flow is predictable enough to plan repayments. Please note that you need a specific clause in your governing document that gives you the power to take out a loan on behalf of the organisation (usually in your ‘Powers’ clauses). There are many different organisations offering loans to social enterprises, and you may wish to speak to more than one potential lender. A starting point for small loans could be the SEED fund, managed by Community Enterprise Ltd. Click here to go to their website. A starting point for larger loans could be Social Investment Scotland. Click here to go to their website. Loans vs. Grants Organisations might be unsure whether loans are right for them. There are a number of advantages and disadvantages to both grant and loan funding: Loans Grants If an organisation already has a business Grants take time to be awarded; funders plan, a loan can be arranged very can sometimes take up to five months to quickly. make a decision. Grants often required a detailed Loans must be used for the purpose breakdown of specified costs, and require stated, but loans do not have to be used permission for these cost headings to be for specific costs. changed. With loans each case is assessed on its Grant applications are competitive, and merits and an application that meets a good projects may not be funded purely lender’s criteria is likely to be due to lack of available funds. successful. The overriding concern for the lender will The overriding concern for the lender be whether you meet their aims and will be your ability to pay back the loan. objectives. Loans have to be paid back and failure There is no repayment of grants required to do so can have consequences. (except in exceptional circumstances). Things to Think About Is grant funding likely to be available to kick-start our initiative? Are we in a position to take out a loan? Checklist Would a trading initiative provide a new way of involving your users and volunteers, or would trading take away valuable time that could be spent supporting them? What would happen to your organisation if your trading initiative were unsuccessful? What could you do to minimise the risk to the organisation, and to individual management committee/Board members? Do the objectives outlined in your governing document really reflect your ‘primary purpose’? What skills do you currently lack that you would need to trade effectively? Can you develop these skills in your existing staff, Board and volunteers? Do you need to employ new members of staff to implement a trading initiative? If so, what should go into their job description and person specification? Is there a market for your goods or services? How do you know this? Is there any research that you could do to back this up? What are the costs of your initiative? Are these costs start-up only, or on- going? How do you know that these costs are comprehensive and realistic? Have you included any overheads? What is the likely income from your initiative? How do you know that this is realistic? How will you advertise your goods or services? Is grant funding likely to be available to kick-start our initiative? Are we in a position to take out a loan?