Charities - Trading and business activities

Trading and business activities- basic principles

1. Introduction

Many charities trade, either as an integral part of their charitable activities or to raise funds.

The VAT rules relating to trading by charities are based on the concepts of ‘business activity’ and ‘taxable turnover’ rather than trading and profit. These concepts are explained in this guidance. To distinguish between the different treatments this guidance will use the terms “tax” in relation to direct taxes and “VAT” when referring to Value Added Tax.

Charities need to be familiar with the tax and VAT rules that apply to trading profits and business activities when they are deciding how to organise their trading activities.

The Charity Commission also produce 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 find CC35 helpful. The Office of the Scottish Charity Regulator is responsible for providing guidance for charities established in Scotland.

2. Tax. What is trading for tax purposes?

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 treated as 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 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.

3. VAT. What is a business activity for VAT purposes?

For VAT purposes business activity is anything that is carried on for a consideration. This means that where a charity supplies goods or services for a consideration it is in the same VAT position as a commercial organisation. Generally such supplies will be subject to the standard rate of VAT. However some supplies made by charities benefit from the reduced rate, the zero rate or are VAT exempt. Further information on these supplies can be found at V1-9 Charities.

Income from non-business activities falls outside of the scope of VAT. For example: freely given donations will always be outside the scope of VAT.

4. VAT. The Business Test

The definition of business for VAT purposes is governed by specific rules and regulations. These rules and regulations are based on EU VAT law, UK VAT law, and UK VAT Tribunal and Court decisions. The rules mean that even though an activity may be performed for the benefit of the community or in the furtherance of charitable aims and objectives, it may still be regarded as business activity for VAT purposes.

5. VAT. What are the normal features of business activity?

The normal features of business activity are identified in the following questions, which need to be considered when determining whether an activity is business for VAT purposes:

  • is the activity a serious undertaking earnestly pursued? (This considers whether the activity is carried on for business or daily work rather than pleasure or daily enjoyment)
  • is the activity an occupation or function which is actively pursued with reasonable or recognisable continuity? (When considering this test you should consider how frequently the supplies will be made)
  • does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  • is the activity conducted in a regular manner and on sound and recognised business principles?
  • is the activity predominately concerned with the making of taxable supplies for a consideration?
  • are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

6. VAT. Do all of the features have to be present for there to be business activity?

These questions are not a checklist since business activity may have some but not all of the features indicated. Instead they should be seen as a set of tools designed to help you compare an activity you are uncertain about with features of activity that are clearly business.

When considering these questions please remember that VAT exempt supplies as well as taxable supplies (standard rate, reduced rate and zero-rate) are business supplies.

More detailed information can be found at V1 - 6 Business/Non Business.

7. VAT: Concession for below cost welfare services to be treated as non business activity

Welfare services cover the following supplies:

  • care, treatment or instruction designed to promote physical or mental welfare of elderly, sick, distressed or disabled people
  • care and protection of children or young people
  • spiritual welfare provided by a religious institution as part of a course of instruction or a retreat, not being designed primarily to provide recreation or a holiday

More information about these definitions can be found in VAT notice: 701/2 Welfare.
Charities that provide welfare services at significantly below cost, to distressed persons for the relief of their distress, may treat these supplies as non-business and therefore outside the scope of VAT.

‘Significantly below cost’ means subsidised by at least 15% and the subsidy must be available to everyone. The charity must be providing the service to distressed individuals and not a local authority.

‘Distressed’ means someone who is suffering pain, grief, anguish, severe poverty etc. Further information can be found at V1-9 Charities.

8. VAT Registration

A charity’s income, from business activity, is only subject to VAT if the charity is VAT registered.

Supplies of any goods or services which are subject to VAT at the standard rate, reduced rate and zero rate are called taxable supplies. They are referred to as taxable supplies whether the charity is registered for VAT or not. VAT registration is compulsory if at the end of any month the value of the charity’s taxable supplies in the previous 12 months or less exceeds the registration threshold or if at any time the charity expects the value of its taxable supplies in the next 30 days alone to exceed the registration threshold. If a charity is registered for VAT, it must charge and account for VAT on all its taxable supplies from the date that it is first registered.

A charity can choose to apply for voluntary VAT registration if it is making business supplies and its taxable turnover does not exceed the threshold for compulsory registration. The registration threshold is reviewed annually at the time of the Budget

VAT registration, whether compulsory or voluntary, means that a charity has to account for VAT on its taxable business activities. At the same time it can reclaim VAT incurred on expenses relating to those taxable business activities.

9. VAT. Business activity - reclaiming VAT on purchases

VAT can only be reclaimed in respect of expenses incurred in carrying out business activity. Where purchases relate to non-business activity, the VAT on the purchases cannot be reclaimed.

Where the purchases on which VAT has been paid are for both business and non-business use the VAT has to be apportioned. If a charity is also partly engaged in making taxable (standard-rate, reduced rate, or zero rate) and exempt sales a further partial exemption apportionment calculation will have to be carried out before an amount can be reclaimed on the charity’s VAT return, For more information please see VAT notice 706: partial exemption.

10. Tax & VAT. Trading by charities

Tax Typically, a charity will have only one trade. This follows from case law. In order to safeguard the exemptions from tax, which it is intended that charities should enjoy, it has been necessary to divide the charity’s trade into a number of different statutory forms, which, for chargeable periods beginning on or after 22 March 2006, include ‘deemed trades’.

For chargeable periods beginning on or after 22 March 2006, the position is as follows:

a) Primary purpose common
All trading exercised in the course of carrying out a primary purpose of the charity (e.g. a religious charity selling bibles, a charitable school charging pupils, or a charitable clinic charging patients or selling medicines). This, together with (d) below, is referred to for convenience as ‘primary purpose trading’. S505 (1)(e)(i) ICTA 1988. Not taxable

b) Beneficiary (main) unusual
Trading which is not primary purpose (‘non-primary purpose’) but carried out mainly by beneficiaries (e.g. the manufacture and sale of items by disabled people). This is discussed further at Paragraph 16 et seq. Together with (f) below, it is referred to for convenience as beneficiary trading. S505 (1)(e)(ii) ICTA 1988. Not taxable. This is an unusual scenario as much trading which appears to be beneficiary trading will be covered by the primary purpose exemption.

c) Non-primary purpose unusual
This refers to trading which is not part of the primary purpose of the charity but which is typically undertaken to raise funds to be applied for charitable purposes (e.g. sales of promotional items). This, together with (e) and (g) below, is referred to for convenience as ‘non-primary purpose trading’. It is unusual for all the trading of a charity to be non primary purpose. Unless this is carried out mainly or partly by beneficiaries (see (b) and (f)), non-primary purpose trading is taxable as it enjoys no exemptions - apart from the small trading exemption (Paragraph 19)

d) Deemed primary purpose trade common
For chargeable periods beginning on or after 22 March 2006, where a charity's trade is carried out partly in the course of carrying out a primary purpose of the charity, and partly for non-primary purposes, Section 505 (1B) ICTA 1988 deems each part as a separate trade for tax purposes. The primary purpose deemed trade is not taxable. S505 (1B)(a) ICTA 1988.

e) Deemed non-primary purpose trade common
For chargeable periods beginning on or after 22 March 2006, where a charity's trade is carried out partly in the course of carrying out a primary purpose of the charity, and partly for non-primary purposes, Section 505 (1B) ICTA 1988 deems each part as a separate trade for tax purposes. The charity’s non-primary purpose deemed trade is not exempt from tax, unless the work is carried out mainly or partly by beneficiaries (S505 (1)(d)(ii) ICTA 1988) - or the small trading exemption applies (paragraph 19).

f) Part beneficiary (exempt) unusual
For chargeable periods beginning on or after 22 March 2006, where the work in connection with a charity’s trade is carried out partly by beneficiaries, that part is deemed to be a separate trade, which enjoys exemption from tax (S505(1)(B) ICTA 1988). In this guidance, both these deemed trades and the trades where work is mainly carried on by beneficiaries are referred to for convenience as ‘beneficiary trades’.

g) Part beneficiary (taxable) unusual
For chargeable periods beginning on or after 22 March 2006, where the work in connection with a charity’s trade is carried out partly by beneficiaries, the part not carried out by beneficiaries is deemed to be a separate trade, which, assuming it is non-primary purpose, will be taxable unless the small trading exemption applies (paragraph 19). S505 (1B)(b) ICTA 1988.

For chargeable periods beginning before 22 March 2006, only (a), (b) and (c) above applied. The implications are explored at paragraph 15.

The profits of non-primary purpose trading carried on by charities, which fall outside the statutory and concessional exemptions ((c), (e) and (g) above) will be taxable.
In general, where charities have taxable trading, those constituted as trusts are subject to income tax, while other charities are subject to corporation tax.

Profits from primary purpose and beneficiary trading are exempt, so long as they are applied for charitable purposes.

VAT For VAT purposes there is no distinction between primary purpose, beneficiary and non-primary purpose trading. Each can qualify as business activities for VAT purposes.