Resources / Charity trading: what you can sell, and when it becomes taxable
Charity trading: what you can sell, and when it becomes taxable
Charities are allowed to charge for things. Whether the profit is taxable depends on one question: is the trading itself how you carry out your purposes? That is the same question as "does this further our objects", so the answer sits in your governing document, not your accounts.
The three kinds of trading
Primary purpose trading
The trade is how you deliver your objects. The people paying are usually the people you exist to help.
- A charitable school charging tuition fees
- A theatre selling tickets to its own productions
- A care charity charging for places
- A training charity charging course fees
Profits are exempt from corporation tax, as long as you use them for your purposes. There is no turnover limit.
Ancillary trading
The trade is not a charitable purpose in itself, but it exists to support one and would not exist without it.
- A museum café for visitors
- A theatre bar for the audience
- A hospital shop for patients and visitors
Treated the same as primary purpose trading, so the same exemption applies. The test is whether it genuinely serves the people using your charitable service. A café open to the street and advertised to passing trade is a different thing from a café for visitors.
Non-primary purpose trading
Trading done to raise money, with no link to your objects beyond the funds it produces.
- Selling Christmas cards
- Renting the hall out commercially
- A shop selling bought-in goods
- Selling advertising space
This is taxable, unless it stays within the small trading exemption or you run it through a trading subsidiary.
The small trading exemption
HM Revenue and Customs lets you do a limited amount of non-primary purpose trading tax free. The limit depends on your charity's total gross annual income.
| Your total annual income | Most non-primary trading turnover allowed |
|---|---|
| Under £32,000 | £8,000 |
| £32,000 to £320,000 | 25% of your total income |
| Over £320,000 | £80,000 |
The important detail: go over the limit and the profits on all your non-primary purpose trading become taxable, not just the part above the line. This is why it is worth watching the figure during the year rather than finding out afterwards.
Note that it is turnover that counts, not profit. A stall that turns over £30,000 and makes £900 is measured on the £30,000.
When you need a trading subsidiary
A trading subsidiary is a separate company the charity owns. It carries on the trading, and gifts its profits to the charity. Those payments are not taxed as long as they go to the parent charity's purposes.
It is usually the answer when one of these is true.
- Your non-primary purpose trading is over the exemption, or heading there.
- The trading carries real risk you do not want sitting against charitable assets.
- The scale of the trading would make the charity look like a business with a charity attached.
A subsidiary is not free. It needs its own accounts, its own directors and genuine separation from the charity. Get the boundaries wrong and you have added cost without adding protection. Three things go wrong most often.
- The charity funds the subsidiary's losses. Charity money can only be invested in a subsidiary as a proper investment decision, on commercial terms, that the trustees can justify. Propping up a loss-making subsidiary is spending charity funds on a non-charitable purpose.
- Nobody keeps them apart. Shared staff, shared premises and shared equipment need written agreements and real charges, or the two blur together.
- The same people sit on both boards. Some overlap is normal. A majority is a conflict of interest that has to be recognised and managed, because the two organisations will not always want the same thing.
What to do this year
- List everything you charge for.
- Against each one, write which of your objects it furthers. If you cannot, it is non-primary purpose trading.
- Add up the non-primary purpose turnover and compare it with your limit.
- If you are within about 80% of the limit, put it on the next board agenda. If you are over it, talk to your accountant now.
This is not just a tax exercise. The same list answers the Commission's question about whether your activities still further your objects.