In this section:
- Trading and business activities: the basics
- Tax exemptions on charity trading profits
- Tax and charity subsidiary trading companies
- Contrasting Tax and VAT treatment of some activities
Trading and business activities: the basics
If your charity raises money through trading activity, it may be able to benefit from one or more of the tax exemptions that are available. Depending on the type and scale of the trading activities, some or all of your charity's trading profits may be exempt from tax.
For VAT purposes - the term 'business activity' is used to describe trading activities. If your charity receives significant amounts of income from its business activities it may have to register for VAT and account for VAT on sales of goods and services. There are some VAT reliefs and exemptions available to charities and other non-profit making bodies.
This guide will help you understand the tax and VAT reliefs that may be available to your charity when trading or carrying out business activities.
On this page:
- Tax exemptions on trading profits
- Tax relief when using a subsidiary trading company
- Particular trading and business activities
- VAT on business activities
- Contacting the HMRC Charities Helpline
- More useful links
Tax exemptions on trading profits
Charities are able to carry out trading activities that are directly related to their charitable aims and objectives. They're also allowed to trade as a way of raising money, as long as the level of trading is small and there's no significant risk to their assets.
Trading means the selling of goods or services to customers. Usually, this involves selling on an ongoing commercial basis, but sometimes a one-off or occasional venture may be treated as trading for tax purposes.
The trading profits that your charity makes may be exempt from tax, depending on the type and scale of the trading activities.
Your charity may be able to benefit from one or more of the following:
- a 'primary purpose' trading exemption
- an exemption for trading activities that are mainly carried out by the people who benefit from your charity - its beneficiaries
- a 'small trading' exemption
- an exemption on profits from fundraising events
- an exemption on profits from charity lotteries
Or your charity might decide to use a subsidiary trading company. See the section 'Tax relief when using a subsidiary trading company'.
Find out more about the tax exemptions on charity trading profits
Qualifying for tax exemptions
In order to qualify for any tax exemption on trading profits, your charity must use the income generated for charitable purposes only. Income that your charity uses specifically for its charitable purposes is called charitable expenditure. Charitable expenditure might include things like:
- charitable grants your charity makes
- the cost of running and managing your charity
If your charity doesn't use its income from trading for entirely charitable purposes, the tax relief may be restricted - resulting in a tax liability.
Find out more about using income for charitable and non-charitable purposes
Tax relief when using a subsidiary trading company
Charities aren't allowed to carry out non-primary purpose trading activities that are substantial and that involve a significant risk to their assets. So it's common for a charity to set up a subsidiary trading company to trade on its behalf.
The income and profits of a subsidiary trading company are taxable in the same way as the income and profits of any ordinary limited company. And it's also treated as a normal business for VAT purposes - most of the VAT reliefs for charities aren't available for charity trading subsidiaries.
But the subsidiary trading company can give all or part of its profits to its parent charity, and claim tax relief for those payments. This means the trading company doesn't have to pay Corporation Tax on the profits it donates. And as long as the charity uses the income for charitable purposes, it won't have to pay tax on it
Find out more about tax and charity subsidiary trading companies
Particular trading and business activities
Some charities may carry out particular trading and business activities to raise funds.
Sale of donated goods
The sale of donated goods is generally not treated as a trade for tax purposes. But if donated goods are significantly refurbished or altered the sale proceeds may be regarded as trading income. For example, where donated cloth is made into garments for sale this will be a trade.
The sale of donated goods by a charity is always a business activity for VAT purposes.
Property lettings
Rental income from land or buildings, received by a charity, is exempt from tax provided that the profits arising are applied for charitable purposes. However, if the charity provides services such as a caretaker, food or laundry, the provision of the services might amount to a trade.
The income from property lettings is always business income for VAT purposes.
Business sponsorship
Charities may enter into sponsorship arrangements with businesses in order to raise funds. Sponsorship arrangements often link the name of the business with the charity or its project. This can involve payments to support a particular event, payments to use a charity's logo in marketing campaigns, and special arrangements such as the issue of a charity 'branded' credit card.
There are special rules about the VAT treatment of this type of arrangemen
Find out more about sponsoring a charity
Read more about the tax and VAT treatment of particular activities in the detailed guidance notes
VAT on business activities
If your charity charges for goods or services it's carrying out a business activity. If its total taxable income from business activities is over the VAT registration threshold - currently £67,000 - your charity must register for VAT in the same way as any other business.
If your turnover from taxable business activities is below this threshold you don't have to register for VAT - but you can if you want to. This means you will have to account for VAT on your taxable supplies but you will also be able to reclaim VAT you have to pay on purchases that relate to your taxable business.
If you have no business activities or your only business activities are exempt from VAT, you can't register for VAT.
There are, however, several VAT reliefs and exemptions available for charities. Find out more about these in our guide below.
Find out more about charities and VAT
Contacting the HMRC Charities Helpline
For more information you can contact the Charities Helpline on Tel 0845 302 0203 (open from 8.00 am to 5.00 pm, Monday to Friday).
More useful links
Find out how your company can claim Corporation Tax relief on gifts to charities
Find out about trading and business activities for Community Amateur Sports Clubs
