As a charity, your ability to trade is limited, because making money is not in itself a charitable purpose, even you are doing it to support your charitable activities.
The risks of trading outside what is allowable are:
If you want to make money for your charity through trading that isn’t allowable, then you need to look into setting up a trading subsidiary. This is a separate company that is usually owned by the charity, and donates the bulk of its profits to the charity via gift aid.
This page takes you through the basics of trading, and there is a lot of good detailed guidance on how to get all this right.
Trading is an exchange of goods or services for money. It's a bit of a grey area in tax - there is no statutory definition of trading, and it doesn’t precisely match the parameters used for liability to VAT.
What are known as the ‘badges of trade’ have been built up through case law as a set of indicators:
HMRC don’t need you to fulfil all of these to decide that you are trading, it could just take one of the criteria.
The key is that any trading a charity does should not risk its charitable purpose, so you need to think first about whether the trading you want to do, of itself, furthers your cause, or if not if it is too small to risk everything, or falls into a special category.
Primary purpose trading – is when what you want to do to make money is part and parcel of your charitable work, it includes the situation where the trade is mainly carried out by the beneficiaries of the charity. Examples include:
Ancillary trading – you have apply a bit more judgement because these are activities which contribute indirectly to carrying out your work but aren’t just fundraising, for example:
Mixed trades – if a trade is partly primary purpose/ancillary and partly not, you have to look at it as two separate trades and account for them separately. The exempt trading element remains exempt, but the non-primary purpose element is taxable (unless it falls into the exemption for small trading). This is best illustrated by using the Charity Commission example:
You can do a small amount of trading that does not relate to your main purpose, but anything above this will either be subject to tax or should be put through a trading subsidiary.
The current definition of small is:
Gross annual income is the total income before deducting any expenses)
See the GOV.UK website for more information
You won’t have to pay tax on lotteries and certain fundraising events as long as:
As there are strict limitations on what trading a charity can do, you might want to set up a trading subsidiary to raise funds, for example running charity shops or selling consultancy and services to people other than your beneficiaries.
Key issues that arise:
You'll find detailed advice on all the issues in Trustees trading and tax: how charities may lawfully trade (CC35) Section 4 and the Sayer Vincent Made Simple Guide.
And if you decide to go ahead, check out our guidance and take professional advice.
Last reviewed: 31 March 2022
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