The Essential Trustee - Cafés in charity shops: key considerations


01 July 2019

The Birketts Charities and Social Enterprise Team specialises in advising on charity retail and attends the Charity Retail Association conference every year. We have just returned from this year’s conference, where we were asked by a number of delegates about the legal issues associated with installing café areas in charity shops.

This article provides a helpful summary of the key legal issues to be considered when thinking about installing café areas in charity shops.

Your lease

You should check your lease to see what the permitted use is and whether this needs to be expanded to include a café area. Some leases will allow a change of use with landlord’s consent.

Planning

The planning position will vary depending on the premises and planning authority involved. It will also depend on your proposals for the set-up of the café. For example, an area including some chairs and a vending machine is going to be a very different proposition to a full café with a kitchenette serving hot food.

It might be possible to have permitted development rights where café use is a part of a building because there are rights to convert from A1 (retail) to A3 (food and drink on premises) use (and this also applies where the proposal only involves part of premises). However, there are some points on which you could be caught out. For example, if your premises also includes an element of D1 use - for a drop-in centre, for example - the change to A3 might not be available.

It might also be that whilst permitted development rights are available, the new use might only be temporary or it might be permitted, but subject to a ‘green light’ from the planning authority. In some cases the mixed use could fall into the ‘sui generis’ (or individual case) planning class and will need consideration on its own facts by the planning authority.

The safest course of action is for you to contact the local planning department and ask what their requirements are. If a planning application is needed then you will know and can deal with it.

Charities and trading

The operation of a café within a charity shop is a trading activity (N.B it will also be a ‘business activity’ for VAT purposes). So, it is important to understand the rules that apply to charities and trading, as getting this wrong could have unintended adverse tax consequences for your charity.

This is a complex topic, and the following provides a high-level overview of the key legal points. If you are at all unsure as to whether this affects your charity, you should seek professional advice. There is also guidance available on the HMRC website.

If an activity falls within the definition of ‘trading’, it is important to consider whether or not this may be carried out within the charity or whether a trading subsidiary is required.

There are two main types of trading for tax purposes for charities:

  • charitable trading (i.e. primary purpose, ancillary purpose, or trading mainly carried out by beneficiaries); and 
  • non-charitable trading (otherwise known as ‘non-primary purpose trading’ and is any trading that does not fall within a ‘charitable trading’ category and is carried out merely to raise funds for the charity).

Charities may carry out an unlimited amount of charitable trading without any liability to pay tax on the profits, provided that the profits of the activity are applied for charitable purposes. (N.B. the VAT position will be different, so it should not be assumed that an activity will be exempt from VAT just because it is exempt from tax: it depends on the nature of the activity, and VAT is notoriously complex!)

The operation of a café within a charity shop will be non-charitable trading. Provided that the trading activity does not present a risk to the charity’s assets, it is possible for a limited amount of non-charitable trading to be carried out within the charity without any tax being payable on the profits (provided that the profits are applied for charitable purposes). This is known as the ‘small-scale exemption’. The current limits are as follows:

Total income of charity  Maximum amount of income from non-charitable trading 
Under £32,000 £8,000
£32,000 to £320,000 25% of charity's total income
Over £320,000 £380,000

Importantly, the above limits apply to all of the non-charitable trading activities taken together; the limits do not apply per trading activity. This means that in order to assess whether or not a charity falls within the small-scale exemption, the total income from all of its non-charitable trading activities need to be considered. Other common charity shop activities that constitute non-charitable trading include the sale of bought-in goods and the commission charged under the Retail Gift Aid scheme. However, there might be other types of non-charitable trading activity within the charity, which also needs to be considered.

If a charity has income from non-charitable trading in excess of the applicable limit set above, then tax will be payable and this can affect the charity’s overall tax position. It is also likely to be outside the powers of the charity (many charity constitutions expressly prohibit taxable trading). In those circumstances, the charity should set up a trading subsidiary through which the trading may be carried out.

The trading subsidiary will be able to covenant its distributable profits to the charity each year, which reduces the tax liability of the trading subsidiary (often to nil), so the use of a trading subsidiary is both tax efficient and prudent, as it also ring-fences any risk associated with the trading activity.

Business rates

Charities qualify for 80% relief from business rates. The remaining 20% relief is at the discretion of the local rating authority.

To qualify for business rates relief, a charity shop must fulfil the following conditions:

  • it must be wholly or mainly used for the sale of goods donated to a charity
  • the proceeds of sale of the goods (after any deduction of expenses) must be applied for the purpose of a charity.

Any charity wishing to install a café in its charity shop should therefore bear in mind that if the premises are not wholly or mainly used for the sale of donated goods, then it could jeopardise business rates relief.

Trading subsidiaries are not charities and are therefore not automatically entitled to 80% relief on business rates. This is at the discretion of the relevant rates authority; some take the attitude that as the undertaking is run for charity then relief should apply, but some do not take that view.

Some charities deal with this by ensuring that the parent charity owns or has the lease of the shop and is therefore the ratepayer entitled to relief. The charity then accounts for income and related expenditure on the sale of donated goods and the charity’s trading subsidiary accounts for income and costs on bought-in goods. The trading subsidiary is granted a licence of the shop for these purposes.

Hospice UK outlines this process in more detail in its interesting report Charity shops - interaction with rates relief.

Other issues to consider

Depending on what type of food and drink you are serving, you may need to comply with food safety legislation and have the necessary hygiene certificates.

You will need to look at who is going to run the café and whether this will be employees or volunteers, and the employment law issues involved in this.

In addition, there are obvious health and safety considerations.

Conclusion

The issues involved are complex and charities should seek suitable professional advice to ensure they structure their affairs as efficiently as possible.

The content of this article is for information only and is not intended to constitute legal advice. Specific legal advice should be sought on a case by case basis. If you require advice on the legal issues involved in installing a café area in a charity shop or any general advice on commercial property, please contact Louisa Saunders and for advice on charities and trading please contact Liz Brownsell.

The content of this article is from the August 2019 edition of The Essential Trustee and is for general information only. For further information please contact Liz Brownsell or a member of our Charities and Social Enterprise Team. Law covered as at August 2019.