Charity Trading

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1. Charity trading

1.1 Introduction

Some may think that charities cannot trade and others may think that charities are not subject to tax in respect of any trading which they do carry on.  Whilst both these propositions can be true in particular cases, they are not universally applicable and charities need to know their true situation.

1.2 What is trading?

First of all, what counts as trading?  It involves buying goods or services or the benefit of a right which the charity has.  This will cover many things from selling Christmas cards to selling goods in a charity shop to charging for the charity’s services and to licensing the use of the charity’s name or logo.

1.3 Can a charity lawfully carry on trading?

The answer lies in the charity’s governing document.  The question is whether the charity’s governing document (trust deed, Constitution or articles (if any company)) permits expressly or impliedly the carrying on of the trade in question.

1.4 Primary purpose trading

The carrying on of the particular trade may be authorised as part and parcel of carrying out the purpose of the charity.  For instance, an educational charity may have power to charge fees for the educational courses which it provides.  The very purpose of the charity is education and so when it charges for providing those educational services it is trading, but it is what is known as “primary purpose trading”, i.e. trading in the course of carrying out the purpose of the charity.

1.5 Non-primary purpose trading

On the other hand, if the charity wants to raise funds by selling bought in goods or, for example, by holding a dance for which tickets are sold, then such trading would not be in furtherance of the purposes of the charity but would rather be fund raising and would be regarded as what is known as “non-primary purpose trading”.  Again, the charity must have power within its governing document to do that.  Such authority could be read into a power to raise funds provided for in the governing document or some general clause such as a power to do all such other lawful activities as shall be in furtherance of the objects.

1.6 Breach of trust

If a charity does not have the appropriate power to trade, the trustees run the risk of being in breach of trust by trading without authority. We are able to review your charity constitution for you.

1.7 Is there a limit under the law to charity trading?

There is no limit for primary purpose trading but in other cases where there is non-primary purpose trading the Charity Commission’s advice is that a charity can carry on such trading so long as there is no significant risk of loss.  In general terms, small scale trading will not involve significant risk.  Small scale trading is regarded by the Commission as trading where the annual total turnover does not exceed:-

(i) £5,000, or

(ii) 25% of the charity’s total incoming resources subject to a limit of £50,000.

Thus, if a charity’s income from all sources including donations, trading and investments is £200,000, £50,000 of that may be trading income so long always, as the charity has power to carry on the trade in question in its governing document.

The Charity Commission do however qualify this test for small scale trading by saying that various other factors such as the size of the charity, the nature of the business, the expected outgoings and turnover projections, should all be taken account of in assessing risk.

1.8 What if the income from non-primary purpose trading exceeds the limit of 25% or £5,000 referred to above, or is regarded as involving significant risk from the outset?

The usual answer is that the charity should establish a wholly owned non-charitable subsidiary company which will carry on the trade and donate its profit from the trading activity to the charity, thus avoiding the charity trading problem and avoiding tax on the profit by the gift aid scheme.  More guidance on the trading subsidiary solution is given later in this note.

2. Taxation of trading profits made by charities

2.1 General rule

As a general rule, profits from a trade carried on by a charity are taxable unless an exemption or concession applies.  Thus, if a charity sells new goods in its shop, the profit from the sale of those goods is liable to be taxed.  However, there are a number of important exemptions and concessions which charities can take advantage of.

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