Trading Activities

The Charity Commission has published new practical guidance (CC35) on when and how charities may engage in trading.

Unfortunately what constitutes as trading in a charity is not straightforward; however, a key feature of trading is the sale of goods or services. The identification of trading activities is important as trading profits may be taxable and subject to corporation tax.

Trading which furthers the objects of the charity, or where the trading profits are to be used for the furtherance of those objects, does not prevent an activity from being regarded as ‘trading’.

Factors to consider when identifying trading include the number and frequency of transactions, the nature of the goods, the intention of the charity in acquiring the items to be sold, the nature of the sale and the presence or absence of a profit motive.

Charity law allows charities to trade provided that the trading falls into one of the following categories listed below.

• ‘primary purpose trading’ – trading which contributes directly to the objects of the charity as included in its governing document
• ‘ancillary trading’ – it contributes indirectly to the successful furtherance of the purposes of the charity
• ‘non-primary purpose trading’ – it does not involve significant risk to the resources of the charity

The following activities are not considered as trading and any profit derived is not regarded as trading profits:

• the sale or letting of goods donated to a charity for the purpose of sale or letting
• the sale of investments
• the sale of assets which the charity uses, or has used, for its charitable purposes
• the letting of land and buildings where no services are provided to the user

Charity trading profits are exempt from corporation tax (or income tax in the case of charitable trusts) where the trading is:

• ‘primary purpose trading’
• ‘ancillary trading’
• within the terms of the ‘small scale exemption’ – profits from small-scale non-primary purpose trading are exempt if the profit is applied for the charity’s purposes
• a lottery – the profits from such lotteries are exempt from tax
• connected with certain fundraising events

Further details can be found in the Charity Commission’s guidance Charities and fundraising (CC20).

Alternatively, trading can be undertaken in a subsidiary trading company. This is a company owned and controlled by the charity in order to generate income for its parent charity. Where there is risk involved in non-primary purpose trading a subsidiary company must be used.

The main benefit is to protect the parent charity and its assets from the risks involved in the trading, however there are disadvantages including the additional costs associated with establishing and operating a trading subsidiary. The profits in the subsidiary will be subject to corporation tax if profits are not gifted to the charity.