Charities and trading

Charities and trading is a complicated topic and advice is should be sought from the Charity Commission and HMRC before going ahead with any trading plans.  The Charity Commission has written an in-depth guide – this is a good place to start.

Is your group affected by charity law?

It is the group’s constitution that determines whether or not it is a charity, not registration with the Charity Commission.  Your group may be subject to charity law and charity taxation rules even if it is not a registered charity.

Charity law and trading

Under charity law, charities are permitted to trade. Charity trading is divided into three types:

  • primary purpose trading
  • ancillary trading
  • non-primary purpose trading

Primary purpose trading contributes directly to one or more of the objects of a charity as set out in its governing document. For example, if your charity aims is to educate, charging course fees is regarded as primary purpose trading.

The profits from primary purpose trading are exempt from corporation tax, but only if they are applied solely to the purposes of the charity.

The sales which have created the profits are regarded as a business activity for the purposes of determining liability to VAT.

Always contact HMRC Charities for advice about your trading activities and tax liabilities. The advice is free, and it’s the only advice that really counts. Ask for a summary of their advice in writing or by email.

Ancillary trading is less easily defined. It is trading that contributes indirectly to one or more of the objects of a charity as set out in its governing document. Ancilliary is treated as part of ‘primary purpose trading’ for both charity law and tax purposes.

Ancillary trading must be linked to your primary purposes. Selling refreshments to people attending your educational classes may be regarded as ancillary, whereas just running a café may not be.

Always contact HMRC Charities for advice about whether your trading is ancillary or not. Have as much information available as possible, including expected levels of income as this may influence their view. Ask for a summary of their advice in writing or by email.

Non-primary purpose trading raises funds for a charity but doesn’t directly further the charity’s objects. A charity can only undertake a limited amount of non-primary purpose trading (up to 25% of its annual turnover). If the activity is going to be larger than that, you would need to set up a trading subsidiary.

Charities can also only trade in this way if there is no significant risk that the charity will have to subsidise the trading activity or cover any debts if the trading activity should fail.

A significant risk  would depend on things like:

  • the size of the charity
  • the type of trading activity
  • the expected income, expenditure and overall turnover
  • the sensitivity of business profitability to the ups and downs of the market.

There is no general exemption from corporation tax on the profits of non-primary purpose trading carried out by a charity, even where the profits are all applied for the charity’s purposes.  If a charity loses money on non-primary purpose trading then trustees may be liable for breach of trust. If a charity wants to undertake non-primary purpose trading involving significant risk then they must set up a trading subsidiary often called a “trading arm”.

Mixed trading
Sometimes your trading may be a mix of primary, ancillary and non-primary trading. For example, a community centre may run a café which provides training for unemployed people (primary trading), provides refreshments for centre users (ancillary trading) and also sells food and drinks to passers-by (non-primary trading). You would have to make a reasonable judgement about what percentage of the income is related to each of these types of trading, and seek advice from HMRC about tax and VAT liabilities.  In this situation, a trading subsidiary may offer a less complex solution.

Alcohol and charities

It is not a charitable purpose to sell alcohol, and you should seek professional advice if your group (or organisations using your premises) decides to sell alcohol. In particular, pay attention to:

  • whether it is in the best interests of your group
  • whether it risks charity funds, property or ability to meet your aims
  • licensing laws
  • your own constitution
  • your deeds or lease
  • supporters, neighbours, service users and members opinions

If you wish to run a bar, the Charity Commission's view is that you will need to establish a separate trading subsidiary or club.


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