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Charities can benefit financially from tax exemption for some or all of their trading profits. To qualify, your charity must use the profits solely for its charitable purposes.
Charities can benefit from tax exemptions on profits from:
Charities can also use subsidiary trading companies and benefit from the tax relief for trading companies that donate their profits to charity.
If your charity carries out trading activities, this guide will help you understand which tax exemptions you could use to reduce your tax bill.
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Sometimes a charity is involved in trading (selling goods or services to customers) as part of carrying out its 'primary purpose' - its main charitable aim or objective. Some examples of charitable organisations whose primary purpose would normally involve trading include:
If your organisation is a charity and the activity that it earns money from is part of its primary purpose, then any profits it makes are exempt from tax as long as they're used only for the charitable purposes of the charity.
You can find out what the primary purpose of your charity is by looking in its governing document - usually a memorandum and articles of association, constitution or trust deed.
There are some trading activities that may not be part of actually carrying out your charity's primary purpose, but which are closely associated with carrying out a primary purpose. For example:
If your charity carries out this type of additional trading activity alongside its primary purpose activity, then the profits can also be exempt from tax as part of the primary purpose trade.
Some trading activities have nothing to do with a charity carrying out its primary purpose. For example, an educational establishment may let its student accommodation plus associated services to the general public out of term time. If the charity's primary purpose is to advance education then this trading activity is unrelated to it.
The primary purpose tax exemption doesn't apply to profits from trading activities that aren't related to your charity's primary purpose, even if those profits are used for charitable purposes only.
Read more on primary purpose trading by charities in the detailed guidance notes
If your charity's trading activity is carried out mainly by beneficiaries of the charity, any profits from it may be exempt from tax provided the profits are used only for the charitable purposes of the charity.
For example, an organisation that helps people with disabilities might have a shop or café staffed mainly by disabled people who are themselves beneficiaries of the charity. Any profits made by the shop or café can be exempt from tax.
Not all of the workers have to be beneficiaries of the charity. You might, for example, need some supervisors or managers who could be employees, contractors or volunteers. But for all of the profits to be exempt from tax, the beneficiaries must do most of the work.
If your charity pays workers who are beneficiaries, the profits from their trading activities can still be exempt from tax. But the beneficiaries become the charity's employees, so it will need to operate PAYE on their earnings in the usual way. The national minimum wage rules also apply in the same way as for other employees.
Read more on trading by charity beneficiaries in the detailed guidance notes
Find out more about PAYE and taking on staff
If your charity makes profits from trading activities that aren't covered by a specific tax exemption, they may still be exempt from tax if the gross income (the turnover before expenses and tax are deducted) from those activities falls within certain limits. So profits from a trading activity that's nothing to do with your charity's primary purpose and doesn't involve any beneficiaries can still be exempt from tax.
To find out if your charity could take advantage of this small trading tax exemption, you'll need to calculate your small trading turnover limit by reference to the table below. Your small trading turnover limit depends on the size of your total gross annual income (total gross annual income includes the turnover from the trade in question).
Total gross annual income of your charity from all sources |
Turnover limit for a trading activity's profits to be exempt from tax |
|---|---|
Under £20,000 |
£5,000 |
£20,000 to £200,000 |
25% of your charity's total annual income |
Over £200,000 |
£50,000 (the maximum limit) |
The profit will be exempt from tax provided that:
Some of your charity's profits may already be exempt from tax because they're from a trading activity that's part of its primary purpose. But you can still claim this additional exemption for other trading profits if they fall within the small trading exemption.
If the small trading turnover limit is exceeded then the whole of the profit arising from that trade is liable to tax.
Read more on small trading by charities in the detailed guidance notes
You could consider using a subsidiary trading company if your charity carries out non primary purpose trading and is liable to tax on the profits. This might be a suitable option if your charity's trading income is regularly close to or over the small trading exemption limit.
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, the charity won't have to pay tax on it.
Get more information on using a charity subsidiary trading company
Many charities organise special events from time to time to raise funds. Although income from these fundraising events may be trading income, the profits may be exempt from tax as long as both the following conditions are met:
The main purpose of the event must be to raise money for charity. Some examples of the types of event that could be eligible for this tax exemption include:
Find out more about VAT exemption for fundraising events
Read the help sheet on charity fundraising events
Profits from lotteries organised by charities for fundraising purposes are exempt from tax as long as both the following conditions are met:
If a subsidiary trading company organises a lottery to raise funds for its parent charity, it will need to donate part or all the profits to the charity to avoid paying any tax on them.
Lottery ticket sales are exempt from VAT.
There's no general exemption from VAT for charities. If your charity's total taxable income from business activities is over the VAT registration threshold - currently £70,000 - your charity must register for VAT in the same way as any other business.
There are several VAT reliefs specifically for charities. You can find out more about these reliefs in our guide on Charities and VAT below.
Find out more about charities and VAT
For more information you can contact the Charities Helpline.
Contact the Charities Helpline
Read more about tax exemptions on trading profits in the detailed guidance notes
Find out more about using profits for charitable purposes
Read more about charity trading and tax on the Charity Commission website (Opens new window)
