This is a common myth. Charities are allowed to trade and most do, in some form or another. Any charity that, for example, has a local authority contract to provide services, sells tickets for events, charges for use of a community venue or sells merchandise to raise funds is trading. As trading or “earned” income becomes increasingly important for charities, it is important that this myth is debunked and that Trustees understand what are the rules around charities and trading.

So where does the myth come from?

In part, it arises from a natural risk aversion many Trustees have because of their overriding duty to safeguard the charity’s assets - what happens if trading makes a loss?

In part, it arises from the public benefit requirement that all charities must comply with, which, amongst other things, says that if charities charge more than “the poor” can afford, the trustees must run the charity in a way that does not exclude those who are “poor”.

Mostly it arises from the tax rules around charity trading. In general charities are exempt from corporation tax, providing any trading profit is derived from “primary purpose trading” or the level of trading is “small”.

Primary purpose trading is any trading that is part of the charity’s primary purpose (e.g. a museum charging for entry or care home charging for accommodation and care) or “ancillary” to the primary purpose (e.g. a museum running a cafe for visitors). Trading is also primary purpose if the trading activity is carried our mainly by beneficiaries of the charity and the profits are used for the primary purpose (e.g. people with disabilities running a cafe in a charity that helps people with disabilities). Of course, even if all trading is primary purpose, it may be subject to VAT if the level of trading is high enough (the VAT rules can be very complicated though).

Profits from any other trading activities (i.e. non-primary purpose trading) are subject to corporation tax unless the turnover from such trading falls below the small scale exemption limit (£8,000 for charities with gross annual income under £32,000 or 25% of gross annual income for all other charities up to a maximum of £80,000). This is particularly intended to help charities with small scale fundraising activities such as selling branded merchandise or tickets for fundraising events.

If the level of non-primary purpose trading is close to or above the small scale exemption limit, then it is usually advisable for the charity to set up a trading subsidiary to undertake the trading in question. The trading subsidiary can then donate its profits back to the parent charity and no corporation tax liability will usually arise. The trading subsidiary needs to be set up properly to satisfy HMRC requirements, but this is a standard way for charities to ensure they are tax efficient. Setting up a trading subsidiary can also be helpful if the charity wants to protect its assets from any trading losses.

And that, in a nutshell, is that. Of course there are many more nuances and complexities depending on the specific circumstances, but in essence it is pretty simple.

If you would like to discuss further anything from this short introduction to charity trading please do contact us at julian@almondtreeconsulting.co.uk. We would be delighted to hear from you.