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Charities need to find ways to increase their income and many will explore Trading.
The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:
- trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries) or is ancillary to carrying out a primary purpose of the charity
- non-charitable trading turnover falls below the charity’s small trading turnover limit
- trading activity is a VAT exempt fundraising event
If a trade doesn’t satisfy 1 of the above conditions, the profits of the trade won’t be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.
Primary purpose trading
A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).
Examples of such primary purpose trading include the:
- provision of educational services by a school or college in return for course fees
- holding of an exhibition by an art gallery or museum in return for admission fees
- sale of tickets for a theatrical production staged by a theatre
- provision of health-care services by a hospital in return for payment
- provision of serviced residential accommodation by a residential care home in return for payment
- sale of certain educational goods by an art gallery or museum
In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity.
Trading which is ancillary to the carrying out of a primary purpose
Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:
- sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
- provision of a crèche for the children of students by a school or college in return for payment
- sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
- sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
- sale by able bodied staff of items produced by the disabled in a disabled workshop
- sale of confectionery, toiletries and flowers to patients and their visitors by a hospital
Trading which isn’t wholly charitable trading
Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:
- a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which aren’t (promotional pens, mugs, tea towels, stamps, all postcards, etc)
- the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
- the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity – ancillary) and the general public (non-beneficiaries – not ancillary)
- the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% aren’t charitable beneficiaries
In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades – sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption
How does the small trading exemption apply?
The small trading exemption applies to the profits of all trading activities that aren’t otherwise exempt from tax, provided the:
- total turnover from all of the activities does not exceed the small scale trading annual turnover limit
- total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
- profits are used solely for the purposes of the charity
Calculation of the annual turnover limit
The annual turnover limit is:
- if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000
Using a subsidiary trading company
You may find this useful if your charity:
- makes profits on trading that’s not linked to its primary purpose
- makes a profit that comes close to or is higher than the small trading tax exemption limit
- wants to protect its assets from any trading losses
- wants to have a separate organisation to carry out all its trading activities
Further details are at
The supply of advertising to a charity is zero-rated. The zero-rating covers advertisements on any subject, including staff recruitment. A charity can also purchase pre-printed collecting boxes, envelopes and appeal letters at the zero rate. Low cost lapel stickers, emblems and badges that a charity gives in acknowledgement of a donation can also be zero-rated. More information can be found in Notice 701/58 Charity advertising and goods connected with collecting donations.
Any medium which communicates with the public. This includes all the conventional advertising media such as television, cinema, billboards, the sides of vehicles, newspapers and printed publications. The important factor is whether the advertisement is placed on someone else’s time or space. If it is not there will be no scope for zero-rating.
If space is sold to a charity for advertising on other items, such as beer mats, calendars, or the reverse of till rolls, this will also be covered by the zero rate. The sale of the items themselves will not be VAT free, unless they qualify for other reliefs for example as books or children’s clothing.
Recently I was asked if a website would be able to zero rated, but its specifically excluded under UK Law VCHAR11000
10B None of items 8 to 8C includes a supply used to create, or contribute to, a website that is the charity’s own.For this purpose a website is a charity’s own even though hosted by another person. 10C Neither of items 8 to 8C includes a supply to a charity that is used directly by the charity to design or produce an advertisement.
ONE OF THE UK’s largest charities was acting as a front for a tax avoidance scheme which abused Gift Aid incentives in order to help donors avoid £46m in tax.
The Cup Trust, a registered charity, raised around £176m over two years from 2010 – more than the Royal Society for the Protection of Birds, the British Heart Foundation and the Salvation Army – yet only £55,000 was put towards its stated cause of “improving the lives of young children and adults”.
The head of Britain’s charity regulator will be hauled before MPs next month to explain how wealthy investors were able to use a charity scam to avoid £46 million in tax.
William Shawcross, the new head of the Charity Commission, will be questioned by the Public Accounts Committee about the Cup Trust, a charity exposed by The Times yesterday as a front for massive tax avoidance. MPs are also expected to ask him about other examples of charity rules being abused for tax purposes.
There are further articles at
What would you do to stop this avoidance scheme? or do you think if its legal it’s ok?
Bartercard has many charity members who all love getting donations http://belmontmail.co.uk/ZFF-YPOC-E24SJ4HO59/cr.aspx
But often charities and those making donation fail to claim the cash back relating to the donations, for example:
25% tax refunds in cash http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/GivingMoneyToCharity/DG_10015097
This means that for every £1 donated, you can claim an extra 25 pence.
Individual Tax Relief
If you pay higher rate tax and make a donation through Gift Aid you can claim some tax back too.
Corporation Tax Relief
When your company makes a qualifying donation to a charity the amount paid is treated as a ‘non-trade charge’ – this means your company can make a claim in its Company Tax Return to set the amount of the donation against its taxable profits.