Accounting for tax on trading activities

Primary purpose and non-primary purpose trading activities

Your charity should keep accounts for all trading activities on normal commercial principles. This generally means that all trading activities are treated as being part of a single trade.

However, from 22nd March 2006 where your charity has primary purpose trading activities and non-primary purpose trading activities they are treated as two separate deemed trades for tax purposes. All non-primary purpose activities are treated as one trade.

Profits from the primary purpose deemed trade will be exempt from tax (as long as they are used for charitable purposes). Profits from trading activities carried out mainly by charitable beneficiaries can be treated as being part of the deemed primary purpose trade.

The profits from the non-primary purpose deemed trade will be taxable unless those profits are covered by the small trading exemption.

Your charity is responsible for identifying primary purpose and non-primary purpose elements of trading and keeping adequate records to establish the profits applicable to each element

For more information see the detailed guidance notes about accounting periods covering spanning 22nd March 06.

Treatment of certain costs

If your charity receives goods or services free (or at less than cost) you can include a reasonable estimate of their costs when working out your profits for tax purposes.

If your charity shares any costs and/or business overheads with another business, a trading subsidiary, or between primary purpose and non-primary purpose trading activities these costs should be apportioned on a reasonable basis.

Example

You could consider apportionment in terms of the number of rooms occupied by each or, time spent on each activity etc.

Trading losses

If your charity incurs a loss on trading activities the tax treatment will depend on whether they arise on primary purpose or non-primary purpose elements of the trade.

For more information please see the detailed guidance notes about trading losses.