Many charities trade, either as an integral part of their charitable activities or to raise funds.
The tax implications of trading are different for direct taxes (Income Tax and Corporation Tax) and VAT. The rules for direct taxes are based on trading and profits. The rules for VAT are based on supplies made and received in the course of carrying out business activities. Charities need to be familiar with both the direct tax and VAT rules when they are deciding how to organise their trading activities.
The Charity Commission also produces guidance in leaflet CC35 -Trading by Charities which should be read by English and Welsh charities in conjunction with this guidance. Other UK charities may also find CC35 helpful. The Office of the Scottish Charity Regulator is responsible for providing guidance for charities established in Scotland.
Usually, trading involves the provision of goods or services to customers on a commercial basis. Simply because a venture is a one-off or occasional does not mean that it will not be trading for tax purposes.
Whether an activity is, or is not, trading depends on the facts in each case. When it is not clear it will be necessary for HM Revenue & Customs (HMRC) Charities to look at all the circumstances surrounding the activity. Further guidance can be found in the Business Income Manual at paragraph 20200.
When deciding whether an activity amounts to trading it is not relevant that the profits are intended to be used for charitable purposes.
The VAT rules are based on the concept of making supplies in the course or furtherance of business. Generally, if goods or services are provided in return for a charge, there is a business activity for VAT purposes. Guidance on the meaning of 'business' for VAT purposes is contained in VBNB: VAT Business/non-business.
Under general case law a charity can have only one trade. However, for tax purposes, in order to apply the exemptions from tax, it is necessary to divide trading undertaken by charities into two different statutory forms - charitable and non-charitable trading. These rules apply for chargeable periods beginning on or after 22 March 2006.
There are two forms of charitable trading, primary purpose trading and trading mainly carried out by beneficiaries.
a.) Primary purpose trading
Trading exercised in the course of carrying out a primary purpose of the charity such as a religious charity selling bibles, a charitable school charging pupils, or a charitable clinic charging patients or selling medicines.
b.) Trading mainly carried out by beneficiaries
Trading mainly carried out by a charity’s beneficiaries, for example, the manufacture and sale of items by disabled people working for a charity whose purpose is the relief of disabled persons. This is discussed further at Paragraph 10 onwards.
The profits arising from charitable trading are exempt from tax provided they are applied for charitable purposes.
Non-charitable trading is trading which does not fall within a) or b) above but which is undertaken to raise funds to be applied for charitable purposes, for example, the sale of promotional items such as pens, pencils, mugs, etc. The profit from non-charitable trading is taxable unless it is exempt under the small trading exemption (Paragraphs 13-14).
Where the trading is all charitable or all non-charitable the tax treatment is fairly straightforward.
Where an activity involves both charitable and non-charitable trading the tax position must be calculated as if there were two entirely separate trades. So the income and expenditure must be apportioned accordingly.
The legislation covering the tax exemptions for charitable trades is:
For VAT purposes thereis no distinction between charitable and non-charitable trading. Even though an activity is carried out for the benefit of the community or in the furtherance of charitable objects, it can still be a business activity for VAT purposes and VAT may due on the income.
Guidance on the VAT implications of trading by charities can be found at the following link. This includes guidance on what is a business activity for VAT purposes, when a charity is required to register for VAT and the VAT reliefs available for charities.