The Regulator for Charities in England and Wales

CC35 - Trustees, trading and tax

How charities may lawfully trade

Contents

C. Trading by charities

C1 What is trading?

The short answer

There is, unfortunately, no short answer. The sale of goods (including property) or services is an essential feature of any trade. However, there are cases in which charities may sell goods or services, without the activity being regarded as a ’trade‘, and without the income so arising being treated as trading profits. This distinction matters, for example, because trading profits may be taxable (see C4, below).

In more detail

Whether the sale of goods and services by a charity is ’trading‘ depends on a number of factors, including:

  • the number and frequency of transactions;
  • the nature of the goods or services being sold;
  • the intention of the charity in acquiring the goods which are to be sold;
  • whether the goods are capable of being used and enjoyed by the charity selling them;
  • the nature and mechanics of the sales; and
  • the presence or absence of a profit motive.

But the fact that the sale of goods, services and property furthers the objects of the charity, or that the trading profits are to be used for the furtherance of those objects, does not prevent an activity from being regarded as ’trading‘.

The following activities are not generally regarded as ’trading‘, and the income derived from them is not regarded as trading profits:

  • the sale or letting of goods donated to a charity for the purpose of sale or letting (see C3);
  • the sale of investments;
  • the sale of assets which the charity uses, or has used, for its charitable purposes; and
  • the letting of land and buildings where no services are provided to the user.

Where a charity is trading , the trading profits are, in principle, subject to corporation tax (or income tax in the case of charitable trusts), other than as specifically exempted. See C4 for further information.

Further information

Please refer to the HMRC website guidance Trading and business activities for more information on trading by charities.

When a charity lets property, the trustees will normally need to obtain the advice of a qualified surveyor regarding a proper rent for the property: see the Commission guidance Disposing of Charity Land (CC28). If services are provided to the user, such letting may amount to a property business, which would be ’trading’.

C2 What kind of trading may charities carry on?

The short answer

Charities may carry on trading activities which contribute directly to the furtherance of their charitable objects, or (where the purpose is to raise funds for the charity) which do not involve significant risk.

In more detail

Charity law allows charities to trade provided that the trading falls into one of the following categories:

  • ’primary purpose trading‘ (see C6);
  • ’ancillary trading‘ (see C7); and
  • ’non-primary purpose trading‘ that does not involve significant risk to the resources of the charity (see C8).

Note that the third category of trading listed above, ’non-primary purpose trading‘ that does not involve significant risk to the resources of the charity, is normally understood to include:

  • the conduct of lotteries, subject to conditions (see C11); and
  • trading within the terms of the ’small scale exemption‘ (see C12).

But it may also include other types of trading: it depends on the circumstances.

Further information

The Commission guidance Providing Alcohol on Charity Premises (CC27) gives further information on the sale of alcohol from charity premises.

C3 Is the sale or hiring out of donated goods ’trading’?

The short answer

No. The sale, or letting on hire, by a charity of goods donated to it with the intention that they should be sold (or let) is not normally ’trading‘. The income so derived is not considered as trading profits and is not liable to corporation tax (or income tax in the case of charitable trusts). Such sales are zero-rated for VAT purposes.

In more detail

The selling or letting of donated goods is not considered as ’trading‘. It is a business activity for VAT purposes, and such sale or letting is within the scope of VAT. However, the sales are zero-rated if the goods are sold or let through charity shops, or through charity auctions or similar events, to the general public, disabled people, or people receiving certain specified benefits, or are exported. The sale or letting of donated goods by a trading subsidiary may also be zero-rated (see Part D, in particular D13).

If goods donated to a charity with a view to sale are substantially altered or improved prior to sale, for example by turning donated raw materials into finished, saleable goods, then the profits from such sales may be treated as trading profits, and the VAT treatment may be affected. However, sorting and cleaning items, or giving them minor repairs, does not make the profits obtained from their sale trading profits.

See also C10.

C4 Do charities have to pay tax on trading profits?

The short answer L symbol

Yes. Trading profits, and some charity income from other sources, are liable to corporation tax (or income tax in the case of charitable trusts) unless specifically exempted.

In more detail

Charity trading profits are exempt from corporation tax (or income tax in the case of charitable trusts) where the trading is:

  • ’primary purpose trading‘ (see C6);
  • ’ancillary trading‘ (see C7);
  • within the terms of the ’small scale exemption‘ (see C12);
  • a lottery (see C11); or
  • connected with certain fund-raising events (see C13).

In all these cases the exemption is subject to the condition that the profits are applied solely to the purposes of the charity.

Also note that the sale or hiring out of goods donated for that purpose is not normally ‘trading’ and that income from this activity is not liable to income or corporation tax (see C3).

Most types of charity income - other than trading profits - are either not liable to income or corporation tax at all, or qualify for generally applicable exemptions, so long as the income is only applied for charitable purposes. But certain types of non-trading income (technically described as ’incoming resources from miscellaneous activities‘) are taxable. In some cases the ’small scale exemption‘ may be available, in others there is no exemption at all. Examples of such ’incoming resources from miscellaneous activities‘ include:

  • income from the underwriting of shares (except where this is done on a regular basis, when this is likely to be treated as trading); and
  • gains arising on the sale of land, which are treated for tax purposes as income rather than capital, because the land was acquired specifically with a view to obtaining a gain on disposal, or because the consideration for the sale is structured wholly or partly by reference to the profits of the subsequent development of the land by the purchaser.

It may be beneficial to a charity for it to carry on in a trading subsidiary such forms of business as are expected to produce incoming resources of this nature, since the subsidiary's liability to corporation tax may be reduced or eliminated as indicated in D4.

However this guidance is primarily about charities and trading, not about how charities can reduce their tax liabilities. Professional advice should be taken before a charity hives off non-trading activities of this nature to a trading subsidiary.

Further information

More information about the tax liabilities of charities can be obtained from the HMRC website.

C5 Do charities have to charge VAT on sales?

The short answer L symbol

Yes. Charities which are registered for VAT must charge VAT on standard/reduced rated sales in the same way as other organisations, but there are some specific provisions for zero-rating or exemptions, which apply to charities, or to some charities, but not to other organisations, or not to all other organisations.

In more detail

The sale of goods by charities is subject to VAT on the same basis as would apply to commercial organisations, unless specific provisions for zero-rating or exemption apply. There are a number of such provisions applying to some charities, to charities generally, or to a class of supplier which includes some charities or charities generally. The following are examples of the special treatments:

  • the sale or hiring out of goods donated to charities for that purpose is zero-rated for VAT (see C3); and
  • the sale of goods or services at certain charity fund raising events is exempt from VAT (see C13).

Further information

More information about the tax liabilities of charities can be obtained from the HMRC website. The area of VAT is a notoriously complex one, and any charity making sales should seek the advice of a taxation specialist.

C6 What is ’primary purpose trading’?

The short answer

’Primary purpose trading‘ is trading which contributes directly to one or more of the objects of a charity as set out in its governing document. For present purposes, it includes trading in which the work in connection with the trading is mainly carried out by beneficiaries of the charity, as that will normally be primary purpose trading. Whether it is so or not, both the charity law and the tax treatment are similar.

In more detail

Typical examples of primary purpose trading include the:

  • provision of educational services by a charitable school or college in return for course fees;
  • sale of goods manufactured by disabled people who are beneficiaries of a charity for the disabled;
  • holding of an art exhibition by a charitable art gallery or museum in return for admission fees;
  • provision of residential accommodation by a residential care charity in return for payment;
  • sale of tickets for a theatrical production staged by a theatre charity; and
  • sale of certain educational goods by a charitable art gallery or museum.

The profits from primary purpose trading are exempt from corporation tax (or income tax in the case of charitable trusts). This exemption from tax is only available if the profits are applied solely to the purposes of the charity. However the sales which have given rise to those profits will be regarded as a business activity for the purposes of determining liability to VAT.

Further information

HMRC Charities will advise trustees whether, in their opinion, a particular activity is within the definition of primary purpose trading. In case of any doubt or difficulty trustees may need to consult their own professional advisers as well.

C7 What is ’ancillary trading’?

The short answer

‘Ancillary trading’ contributes indirectly to the successful furtherance of the purposes of the charity. This is treated as part of ’primary purpose trading‘ for both charity law and tax purposes.

In more detail

An example of ancillary trading is the sale of food and drink in a restaurant or bar by a theatre charity to members of an audience. The level of annual turnover in trading which is said to be ancillary may have a bearing on the question whether the trading really is ancillary, but there is no specific level of annual turnover beyond which trading will definitely not be regarded as ancillary. Trading is not regarded as ancillary to the carrying out of a primary purpose of the charity simply because its purpose is to raise funds for the charity.

Further information

More detail can be found in the HMRC website guidance Trading and business activities within the ’Charities‘ section.
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C8 What is ’non-primary purpose trading‘, and when may charities engage in it?

The short answer

’Non-primary purpose trading‘ is trading intended to raise funds for the charity, as distinct from trading which in itself furthers the charity's objects. Charities may engage in such trading only where no significant risk is involved.

In greater detail

Charity law permits charities to carry on non-primary purpose trading in order to raise funds, provided that the trading involves no significant risk to the assets of the charity.

The ’significant risk‘ to be avoided here is that the turnover is insufficient to meet the costs of carrying on the trade, and the difference has to be financed out of the assets of the charity.

Whilst this is not invariably the case, the trade creditors would normally have a right of recourse to any of the assets of the charity, whether those assets had any connection with the trading or not. The consequent depletion of the charity's assets could have the effect of preventing the charity from being able to continue serving the community as effectively as it might otherwise have done, or at all. Those who provided the charity's assets are likely to have expected that those assets would be used to further the charity's purposes, or invested prudently, and would not be put at risk in trading activities the object of which was simply to raise further funds.

Whether or not the risk of non-primary purpose trading is ’significant‘ depends on a number of factors, including:

  • the size of the charity;
  • the nature of the business;
  • the expected outgoings;
  • turnover projections; and
  • the sensitivity of business profitability to the ups and downs of the market.

Inevitably, the assessment of the significance of the risk will involve an element of judgment on the part of trustees and their advisers. In general, however, a lottery, or trading which qualifies for the ’small-scale exemption‘ (see C12) may be considered not to involve significant risk.

There is no general exemption from corporation tax (or income tax in the case of charitable trusts) on the profits of non-primary purpose trading carried on by a charity, even where the profits are all applied for the charity's purposes. However, some exemptions do apply, ie the lotteries exemption (see C11), the ’small-scale exemption‘ (see C12), and the fundraising exemption (see C13).

If charities wish to carry on non-primary purpose trading involving significant risk, they must do so through a trading subsidiary, as set out in Part D. This whether or not the trading profits would, if the trading were to be carried on by the charity itself, be tax exempt.

C9 What if trading comprises both ’primary purpose‘ and ’non-primary purpose‘ elements? L symbol

An example of this sort of trading is a shop which is run by a charity providing a public art gallery, and which may sell a range of goods, some connected with furthering the charity's primary purpose (eg books relating to the exhibition, copies of the charity’s paintings), and some not so connected (eg promotional pens, mugs and tea towels).

Although in general terms a charity will actually only have one trade, for tax purposes this type of mixed primary and non primary purpose trading activity must be treated as two separate trades, and the rules applying to primary purpose and non-primary purpose trading apply separately to each. There must be a reasonable apportionment of expenses and receipts between the notionally separate trades.

This treatment is new and applies for accounting periods commencing on or after 22 March 2006 . Previously this type of trading was treated as wholly primary purpose or wholly non-primary purpose, depending on the size of the non-primary purpose element. The trustees of charities carrying on this type of trading will need to consider whether any re-structuring is desirable.

C10 What if donated goods are sold together with other goods?

The short answer L symbol

The sale of goods which have been donated to a charity, is not trading. Where donated goods are sold together with other goods the sale of which is trading, the income from the sale of donated goods has to be separated from the trading profits.

In more detail

The sale or letting of donated goods is not regarded as trading (see C3). Income from the sale or letting of donated goods must be separately identifiable in the charity’s records from trading profits. The connected trading must be considered separately, whether as ’primary purpose trading‘ (see C6 and C7), or as ‘non-primary purpose trading’ (see C8).

This situation might arise in a charity shop run by a charity whose aim is to enhance the skills of disabled people. The shop might sell, for example:

  • books, CDs and videos donated for sale - not trading;
  • wooden toys made by disabled people - ’primary purpose trading‘; and
  • bought-in soft toys - ‘non-primary purpose trading’ whose only purpose is to raise funds.

In this case, the only trading being conducted is that in wooden toys and soft toys. The trade is separated into its primary purpose and non-primary purpose elements, as indicated in C9.

Further information

If trustees are concerned about the tax implications of a business of this nature, professional advice should be taken, or HMRC Charities contacted for information. Trustees may also find it helpful to refer to the trading guidance on the HMRC website.

C11 Does running a lottery count as ’trading’?

The short answer L symbol

Yes. Conducting a lottery is trading. However, subject to conditions, charities are allowed to hold lotteries and the profits from such lotteries are exempt from tax.

In more detail

The promotion and conduct of a lottery in accordance with either section 3 or section 5 of the Lotteries and Amusements Act 1976 is not regarded as contravening the charity law restrictions on carrying on non-primary purpose trading, since any risk to the charity's assets from carrying on this sort of trading is negligible.

The profits from a lottery which is promoted and conducted by a charity are exempt from corporation tax (or income tax in the case of charitable trusts), provided that:

  • the lottery is promoted and conducted in accordance with either section 3 or section 5; and
  • the profits from the lottery are applied only for the purposes of the charity.

A section 3 lottery, also known as a ’small lottery‘ must abide by these conditions:

  • it must be genuinely incidental to what are called in the 1976 Act ’exempt entertainments‘, including fêtes, bazaars, sales of work, etc;
  • the total value of the prizes must not exceed £250;
  • the proceeds of the lottery must be devoted to purposes other than private gain;
  • no cash prizes may be given; and
  • the sale and issue of tickets and the announcement of results must be carried out during the entertainment and on the premises where it is held.

A section 5 lottery, also known as a ’society's lottery‘, is more tightly regulated, and the general public can be invited to participate. Such a lottery can only be conducted by a body registered with the Gambling Commission, or with a local authority, depending on the size of the lottery business. Charities and trading subsidiaries can seek registration.

If a trading subsidiary, rather than the charity itself, is registered as the ’society‘ under section 5 of the 1976 Act, it will promote and conduct the lottery, and there is no special tax treatment for any profits of the trade.

The provisions of the 1976 Act which are referred to above have been replaced by the Gambling Act 2005 with corresponding provisions. The latter provisions are not yet in force.

C12 What is the small-scale exemption?

The short answer

The small-scale exemption is an exemption from corporation tax (or income tax in the case of charitable trusts) on the profits from small-scale non-primary purpose trading and the income from some other business activities carried on by charities. It applies only where all the relevant profits or income are applied for the charity's purposes. It does not apply where the trading profits or other income are exempt from tax on some other basis.

In more detail

The small-scale exemption applies to profits from non-primary purpose trading, plus certain other income falling into the category of ’incoming resources from miscellaneous activities‘. In order to qualify for the small scale exemption within a given chargeable period, either:

  • the annual turnover of the relevant non primary purpose trading of the charity, plus the ’incoming resources from miscellaneous activities‘ potentially qualifying for exemption, must not exceed the ’relevant threshold‘ during the chargeable period; or
  • if it does exceed the ’relevant threshold‘, the charity must have had a reasonable expectation at the start of the chargeable period that it would not do so.

The turnover of trading, the profit from which is subject to specific tax exemptions, such as trading connected with fundraising events (see C13, below), should not be counted when determining what the ’relevant threshold‘ is. Nor should ’incoming resources from miscellaneous activities‘ which do not potentially qualify for the small-scale exemption.

The table below indicates how the relevant threshold is calculated. It assumes that the charity has no applicable ’incoming resources from miscellaneous activities‘ in the chargeable period which would qualify for the exemption.

Total of all incoming resources in a particular chargeable period of the charity Maximum permitted annual turnover of the relevant trading in that chargeable period
Under £20,000 £5,000
£20,000 to £200,000 25% of charity’s total incoming resources
Over £200,000 £50,000

There is no statutory definition of the term ’all incoming resources‘. However HMRC Charities consider that it means the total receipts of the charity for the chargeable period from all sources - grants, donations, investment income, trading receipts, etc - calculated in accordance with normal charity accounting rules.

If the turnover of the relevant trading (taken with the relevant ’income from miscellaneous activities‘) exceeds the maximum level (as indicated in the right-hand column in the above table) the small-scale exemption does not apply unless the charity had a reasonable expectation at the start of the chargeable period that it would not exceed that level.
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The carrying on by a charity of trading the turnover of which is within the scope of the small-scale exemption is unlikely to contravene the charity law restrictions on carrying on non-primary purpose trading (see C8, above). The low maximum permitted level of trading turnover means that any risk to the charity's resources from the trading is likely to be small.

Therefore, unless prohibited by its governing document, any charity can carry on small-scale, non-primary purpose trading, and be exempt from corporation tax (or income tax in the case of charitable trusts) on the profits, provided that the profits are applied for the purposes of the charity.

Further information

More details of the exemption can be found in the HMRC website guidance Trading and business activities within the ’Charities‘ section. If trustees have any difficulties with the application of the exemption they should contact HMRC Charities.

C13 What tax privileges apply to charity fundraising events?

The short answer

The supply of goods or services at or in connection with a wide range of fundraising events is exempt from VAT, and the trading profits are exempt from corporation tax (or income tax in the case of charitable trusts), subject to strict conditions.

In more detail

  • Certain tax exemptions apply to sales/income at or in connection with events that fall within the terms of Group 12 of Schedule 9 to the VAT Act 1994. We refer to these events as ’qualifying events‘. They are subject to the following conditions:
  • the event must have a charitable purpose;
  • the event must be organised by a charity, or a trading subsidiary (see Part D) or another qualifying body, for the charity's own benefit;
  • trading is not being undertaken through a series of events (multiple events – such as, say, a regular weekly dinner dance);
  • accommodation for the event is not provided for more than 2 nights duration;
  • there may be no more than 15 events of the same kind in a charity's financial year at any one location by a charity (including its trading subsidiary) or qualifying body.

(Note that if a charity does hold more than 15 events of the same kind at the same location during its financial year, none of the events will qualify for exemption.)

There are no restrictions as regards the nature of the event. The following list, which sets out examples of events which can be held for fundraising purposes, and where the profits from occasional trading may be exempt from corporation tax (or income tax in the case of charitable trusts), and where sales may be exempt from VAT, is not exhaustive:

  • dances, for example balls, dinner dances, discos or barn dances;
  • live performances, for example concerts, theatrical productions, ballets, gymnastic performances, puppet shows and similar events with a paying audience;
  • film, video or DVD showings;
  • fetes, fairs and festivals;
  • horticultural shows;
  • exhibitions, for example of objects of artistic, historical, cultural, educational, religious, scientific, mechanical, sporting, ecological or environmental interest;
  • bazaars, jumble sales, car boot sales and good-as-new sales;
  • games of skill, knowledge or ability, including contests and quizzes;
  • firework displays;
  • meals, such as dinners, lunches, teas and barbecues;
  • auctions of donated goods; (Note that donated goods are zero-rated for VAT, as opposed to exempt, and that this enables VAT to be recovered on costs associated with the sale; donated goods sold at an event can still qualify for zero rating, as opposed to exemption.);
  • auctions of bought in-goods (which may attract VAT).

The following tax exemptions apply to such qualifying events:

  • goods or services sold by a charity or a trading subsidiary in the course of a trade at, or in connection with, a qualifying event are exempt from VAT; and
  • the profits from such sales by a charity (but not by a trading subsidiary) are exempt from corporation tax (or income tax in the case of charitable trusts) provided that they are applied for charitable purposes only.

This exemption has no turnover limits. It therefore has the potential to provide relief from tax for profits from substantial trading. In some cases such substantial trading might involve significant risk to the assets of the charity which carries on the trading. This would be in violation of the principle that ’non-primary purpose trading‘ must not involve significant risk, as set out in C8, above.

In such cases where significant risk attaches to a charity fundraising event, the event must be conducted by a trading subsidiary, and not by the charity itself. This is regardless of the fact that, had the event been conducted by the charity itself, the profits from it would have been exempt from tax. Sales made by a trading subsidiary at qualifying fundraising events may also be exempt from VAT, but the trading subsidiary enjoys no special corporation tax treatment (see D3).

Further information

See the Commission guidance Charities and Fundraising (CC20), and the HMRC website guidance from paragraph 36 of the Trading and business activities on line guidance.

C14 What happens if a charity loses money from non-primary purpose trading?

The short answer

If a charity incurs losses in non-primary purpose trading which it has carried on, the charity's tax exemptions on other income may be at risk, and the trustees may be liable for breach of trust.

In more detail

If a charity incurs a loss from its non-primary purpose trading, the loss in connection with the trading will be regarded as ’non-charitable expenditure‘, within the meaning of section 506(1) of the 1988 Act. This could result in a restriction of the charity's tax exemptions on other income and/or gains.

The Commission's view is that incurring such a loss would only amount to a breach of trust if the loss had been incurred irresponsibly. There would, in the Commission’s view, be no breach of trust, if :

  • there was a rational expectation that the trading would be successful;
  • it was reasonable for the charity to have carried on the trading itself, rather than use a trading subsidiary; and
  • the expenditure which gave rise to the loss was within the powers available to the trustees.

However, tax exemption is at risk whether the loss has been incurred irresponsibly or not. Trustees, when deciding whether or not trading should be carried on by a trading subsidiary, should consider the fact that, if the trading is carried on by the charity itself, a trading loss could give rise to a restriction of the charity's tax exemptions. In some, but not all, cases, the restriction of these exemptions may be offset by the availability of loss relief. Paragraphs 52 to 55 of the HMRC Charities trading and business activities on-line guidance gives full details.

Further information

See Part D for more information on trading subsidiaries.