The Taxes Acts provide for a limited exemption from tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the purposes of the charity. In addition the trade must satisfy one of these three conditions:
If a trade does not satisfy one of the above conditions, the profits of the trade will not be exempt from tax regardless of whether or not they are used for the purposes of the charity. Some fund-raising events may qualify for concessional relief under an extra statutory concession (ESC). See the guidance at Paragraph 36 et seq.
‘Primary purpose trading’ is exercised in the course of the carrying out of the primary purposes or charitable objects of the charity. The profits are exempt from tax, as long as they are used for the purposes of the charity. A charity’s purposes or objects can be identified from the charity's trust deed, constitution or other governing document.
Some trading undertaken by charities may, in itself, amount to a primary purpose activity and therefore qualify for exemption. Examples of such trading include:
In each of these examples the organisation carrying on the activity is a charity and it is part of the organisation's charitable objects to undertake the activity described.
Charities should be aware that in the unusual situation in which trading takes place which is of a charitable nature but which falls outside the charity’s objects or “primary purpose”, a liability to tax can arise.
HMRC has endorsed guidance on the Corporation Tax Treatment of Universities (Opens new window) issued by the British Universities Finance Directors Group. Other charities may also find this guidance helpful.
More information about the tax treatment of affordable home ownership can be found in the detailed guidance notes.
The exemption from tax can also extend to other trading, which is not overtly primary purpose in nature but which is ancillary to the carrying out of a primary purpose. This trading can still be said to be exercised in the course of the carrying out of a primary purpose. It is therefore part of the primary purpose trade. Any impression that it is a separate category is incorrect.
Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are:
As mentioned earlier, charities will usually only have one trade. For some charities the trade may be partly primary purpose and partly non-primary purpose. 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:
In these circumstances, S505 (1B) ICTA 1988, (introduced by S56 FA 2006), deems the primary purpose and non-primary purpose parts of the trade to be two separate trades. The primary purpose deemed trade is exempt, as long as its profits are used for charitable purposes. The non-primary purpose deemed trade is taxable, although the exemption for small trading can apply to this trade see the guidance at paragraph 19. Any receipts or expenses relating to the overall trade should be apportioned to the separate trades on a reasonable basis.
This applies for chargeable periods (that is tax years for charitable trusts and accounting periods for other charities) beginning on or after 22nd March 2006. Charities will find it extremely helpful if their accounting systems are set up to permit the identification of primary purpose and non-primary purpose trading, and the proper allocation of costs to each.
For chargeable periods beginning on or before 21st March 2006, where the whole trade might not qualify as a primary purpose trade because part of the trade is not related to a primary purpose, HMRC will, in practice, accept that all of the profits of the trade will be within the exemption from tax if:
A turnover (for the part of the trade which is not primary purpose) of £50,000 per annum or less would be considered ’not large' for the purposes of the first part of this test. So, a mixed trade with a non-primary purpose turnover of less than £50,000 per annum and representing less than 10% of the total trade turnover would satisfy this test.
Where the profits of a trade cannot be exempted because part of the trade is not related to a primary purpose and:
the whole of the profits may be liable to tax, including that part which is related to a primary purpose.
The following examples illustrate this:
Example 1:
Charity A carries on a trade with an annual turnover of £60,000. Of this, £55,000 is primary purpose and £5,000 is not. Because the non-primary purpose turnover is less than 10% of the total and less than £50,000, the whole trade is treated as primary purpose.
Example 2:
Charity B carries on a trade with an annual turnover of £100,000. Of this, £85,000 is primary purpose and £15,000 is not. Because the non-primary purpose turnover exceeds 10% of the total, the whole trade is treated as non-primary purpose.
Charities can claim exemption from tax on the profits of a trade where the work in connection with the trade is mainly carried out by beneficiaries of the charity, referred to for convenience as a ‘beneficiary trade’. Where work carried out by the beneficiaries has a therapeutic, remedial or educational value, the profits from the trade may qualify for exemption from tax, as long as they are used for the purposes of the charity. Where the work is mainly carried out by beneficiaries, the trade itself need not be a primary purpose trade.
Examples of trades carried on by charities where the work is mainly carried out by beneficiaries are:
Some of the work of a trade may be carried out by employees, contractors or volunteer workers who will not rank as beneficiaries of the charity. In these circumstances exemption under S505 (1)(e)(ii) will still be available provided it can be shown that the greater part of the work in connection with the trade is carried out by beneficiaries of the charity.
For chargeable periods beginning on or after 22nd March 2006, S505 (1B)(b) ICTA 1988 extends the exemption where the work is carried out partly but not mainly by beneficiaries. The part carried out by beneficiaries is deemed to be part of the charity’s exempt beneficiary trade. Receipts or expenses relating to the overall trade should be apportioned to the separate parts on a reasonable basis
From April 2000 there is a statutory exemption for the profits of ‘small trading’ carried on by a charity that are not otherwise already exempt. Before charities consider whether this particular exemption applies, they may first want to consider whether the Extra Statutory Concession (ESC C4) for fund-raising events applies. See Paragraph 36.
The small trading exemption applies to the profits of all trading activities that are not already exempt from tax, provided:
VAT. The small trading exemption does not apply to VAT.
The annual turnover limit is:
This table illustrates the application of these rules:
| Total incoming resources of the charity | Maximum permitted turnover |
|---|---|
| Under £20,000 | £5,000 |
| £20,001 to £200,000 | 25% of charity's total incoming resources |
| Over £200,000 | £50,000 |
For the purpose of this limit, "total incoming resources" means the total receipts of the charity for the year from all sources (grants, donations, investment income, all trading receipts, etc), calculated in accordance with normal charity accounting rules (whether the income would otherwise be taxable or not).
A charity sells Christmas cards to raise funds. This trading is not primary purpose nor does it fall to be considered under ESC C4 because it is not raising income from a fund-raising event
Example 1
Example 2
Example 3
Example 4
If the total turnover of taxable trading does exceed the limits, profits may still be exempt if the charity can show that, at the start of the relevant accounting period, it was reasonable for it to expect that the turnover would not exceed the limit. This might be because:
HMRC Charities will consider any evidence the charity may have to satisfy the reasonable expectation test.
Example:
The type of evidence needed to demonstrate the levels of turnover and incoming resources which were expected might include:
If the charity expects to be regularly trading at or around the small trading exemption limits, it might be better for the charity to consider using a trading subsidiary company see the guidance at paragraph 56 using a trading company.
