For direct tax purposes, where a charity's trading activities are not covered by one of the three main statutory exemptions for trading referred to previously (at paragraphs 6, 10 and 13), the profits are taxable. However, if the profits arise from the holding of a fund-raising event, exemption from tax will be available provided the conditions at section 483 CTA 2010 or section 529 ITA 2007 are satisfied.
The exemption applies where the trading profits arise to a charity from certain fund-raising events so far as the profits:
a.) arise from an event that is VAT-exempt in relation to the charity
b.) are applied to charitable purposes or transferred to another charity
The direct tax exemption mirrors the VAT exemption for fundraising events. If an event meets the criteria for the VAT exemption (under Group 12 of Schedule 9 to the VAT Act 1994), then it will automatically qualify for the exemption from direct tax subject to the profit being applied for charitable purposes.
The statutory provision for the VAT exemption is Group 12, Schedule 9 of the VAT Act 1994. Under this provision, supplies of goods and services by charities and other qualifying bodies in connection with certain fundraising events are exempt from VAT.
Detailed guidance on the bodies that qualify for the exemption and all the conditions that must be met are contained in the tax and VAT helpsheet 'Fund-raising events: Exemption for charities and other qualifying bodies'.
If the conditions for the exemption are met, the supplies made in connection with the event are exempt from VAT. This means that no VAT is due on the supplies and, if not already VAT registered, this income should not be taken into account when considering liability to register.
There is no entitlement to recover VAT incurred in making the exempt supplies or organising the event.
However, if, within a VAT-exempt fundraising event, sales of goods or service are made to which the zero rate normally applies (eg, printed matter or children's clothing) then those zero-rated sales can remain taxable at the zero rate despite the fact they are sold in the course of a VAT-exempt fundraising event. As these are taxable supplies, any VAT incurred in the making of the zero-rated supplies will be recoverable, subject to normal rules if VAT registered. If VAT is incurred on expenses relating to both exempt and taxable supplies a portion of the VAT may be recoverable subject to partial exemption calculations.
For more information on partial exemption please see VAT Notice 706 'Partial exemption'.
If an event falls outside the terms of the exemption, VAT may be due on all or some of the supplies made in connection with the event. There will also be entitlement to recover VAT incurred, subject to normal input tax rules.
If not already VAT-registered, the income from the event will need to be taken into account when considering liability to register.
If the event is not charitable putting on the event may amount to trading and so there may be a direct tax liability (subject to the small scale trading exemption). Deciding whether trading is taking place is not always straightforward. This is explored further in HM Revenue & Customs' (HMRC) Business Income Manual BIM20200. Professional advice can be helpful in this area.
If a charity believes that a particular event or series of events will not fall within the exemptions, it may be possible to organise the event so as to minimise the amount of tax payable.
For example, the charity might set a basic minimum charge and invite those attending the event to supplement the charge with a voluntary donation. This minimum charge will be standard-rated for VAT (unless exempt under another provision) and for direct tax purposes will be taxable trading income.
The additional contributions will not be taxable income for direct tax purposes and will also be outside the scope of VAT if all the following conditions are met:
a.) It is clearly stated on all publicity material, including tickets, that anyone paying only the minimum charge will be admitted without further payment.
b.) The additional payment does not secure any particular benefit - for example, admission to a better seat in the auditorium. (For direct tax purposes only, the payment may still be treated as non-taxable income if the benefit is within the limits specified in Gift Aid legislation).
c.) The extent of further contributions is ultimately left to ticket-holders to decide (even if the organiser indicates a desired level of donation). These further contributions may be made under Gift Aid, subject to them meeting the requirements of the scheme.
d.) For film or theatre performances, concerts, sporting fixtures and similar events the minimum charge is not less than the usual price for the particular seats at a normal commercial event of the same type.
e.) For dances, dinners and similar functions the total sum of the taxable minimum charge is not less than the total costs incurred in arranging the event.
If trustees are considering making no charge and relying on expected donations to more than cover costs, professional advice is recommended. Donations received in such circumstances may be eligible for Gift Aid. However, any trustees adopting this approach would have to be able to demonstrate that they had made a properly informed and considered decision that a better return on funds laid out could be achieved by not charging for tickets. Failure to do this could result in the costs being treated as non-charitable expenditure and the trustees being personally liable for any loss of funds.
An event would not fall within the VAT exemption if it creates distortions of competition with other commercial providers of similar events which do not benefit from the exemption. HMRC would only use the distortion of competition clause where
If a commercial organisation alleged competitive disadvantage HMRC would look carefully into the particular circumstances of the case.
If a charity carries on a substantial, regular trading activity it may be required by charity law to set up a subsidiary company to carry on the trade, even if the profits are exempt for both tax and VAT purposes. A subsidiary company may be needed to protect charitable property from being used for non-charitable trading purposes (see the Charity Commission booklet CC35 'Charities and Trading').
The statutory VAT exemption for fundraising events also covers fundraising events organised by a corporate body wholly owned by a charity and whose profits (from whatever source) are payable to a charity. This means that a charity's own trading company can hold qualifying fundraising events on behalf of the charity, while still benefiting from the VAT exemption.
Charities are exempt from tax on profits from lotteries run to raise funds
for their charitable purposes. This applies so long as the lotteries are
promoted and conducted in accordance with a lottery operating licence issued
under section 98 of the Gambling Act 2005 or Article 133 or 135 of the Betting,
Gaming, Lotteries and Amusements (Northern Ireland) Order 1985.
The profits of such lotteries, promoted by charities, are exempt from tax provided the lottery is conducted within the statutory requirements set out above and the lottery profits are applied solely to the purposes of the charity.
Where a subsidiary company, rather than the charity, is registered as the society under the Gambling Act 2005, or the Northern Ireland equivalent, the lottery profits will belong to the company and not to the charity for tax purposes. The exemption will not apply and the company will need to pass the profits to the charity under Gift Aid to obtain relief from tax.