How charities may lawfully trade
(Version April 2007)
You can also view a colour PDF version of Trustees, trading and tax (CC35)
Contents
A. Introduction
A1. This guidance
This guidance explains when and how charities may engage in trading. It is mainly about trading for the purpose of raising funds, rather than trading to carry out the charity's objects. It also explains when a separate trading company should be established to carry on such activity. Information about fundraising by means other than trading can be found in the Commission's guidance Charities and Fundraising (CC20).
The present guidance also contains some basic information on the application of income and corporation tax on trading profits, as this is a significant factor in determining the sort of organisational structures which should be adopted by charities to carry on a trade for fundraising purposes.
Detailed information on the taxation of trading profits earned by charities can be obtained from www.hmrc.gov.uk, the website of HM Revenue & Customs (‘HMRC') – see the Trading and business activities guidance within the Detailed Guidance notes for Charities section which deals with charities . We refer to that information throughout this guidance.
A2. 'Must' and 'should': what do we mean?
In this guidance, where we use the word 'must', we mean that the Commission's understanding is that there is a specific legal or regulatory requirement affecting trustees or a charity. To help you easily identify those sections which contain a legal or regulatory requirement we have used the 
symbol next to the short answer in that section.
We use 'should' for items we regard as minimum good practice, but for which there is no specific legal requirement. Trustees should follow the good practice guidance unless there's a good reason not to.
A3. Previous guidance
This guidance replaces the previous guidance Charities and Trading (CC35), published in July 2001. As well as being written in a clearer style, this guidance provides more practical advice on charities investing in and using trading subsidiaries, and reflects developments in the law and our experience of advising on the issues.
A4. Using this guidance
This guidance has two main parts.The first is Part C, which deals with the position of charities which are themselves directly engaged in trading activities, or are considering doing so. This is followed by Part D, which is about charities which have set up a trading subsidiary, or which may need to do so.
Each part is divided into a number of sections, each beginning with a question, to which a summary answer is given, followed by a more detailed explanation.
A5. Terms and definitions
The following terms are used throughout this document, and should be interpreted as having the specific meanings given below.
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(The) 1988 Act
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The Income and Corporation Taxes Act 1988.
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(The) 1993 Act
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The Charities Act 1993.
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Ancillary trading
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Trading ancillary to a charity's primary purpose, legally part of the charity's 'primary purpose trading'.
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Chargeable period
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A tax year for income tax purposes, and an accounting period for corporation tax purposes. The trustees of a charitable trust are (subject to the charity exemptions) liable to income tax. Corporate charities and charitable unincorporated associations are (subject to the exemptions) liable to corporation tax.
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Charitable expenditure
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This is defined in section 506 of the 1988 Act. In effect, expenditure made for exclusively charitable purposes
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(The) Commission
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The Charity Commission.
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(The) Gambling Commission
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The Gambling Commission was set up under the Gambling Act 2005. It has taken over the role previously played by the Gaming Board for Great Britain in regulating casinos, bingo, gaming machines and lotteries.
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Gift Aid
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This scheme provides tax relief for companies and individuals making gifts to charities. Where a gift has been made by an individual who pays UK tax, the charity can claim repayment of the tax (and if liable to higher rate tax, the donor gets additional tax relief). Where a gift is made by a company, the amount of the gift reduces the company's taxable income.
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Governing document
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Any document which sets out the charity's purposes and, usually, how it is to be administered. It may be a Royal Charter, trust deed, constitution, memorandum and articles of association, will, conveyance or Charity Commission scheme.
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HMRC
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Her Majesty's Revenue and Customs.
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Incoming resources from miscellaneous activities
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Non-trading income of a charity which is taxable, and is not covered by any of the charity tax exemptions, or is not covered by any of the tax exemptions apart from the small-scale exemption.
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Incorporated charity
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A charity which is set up as a company, an Industrial and Provident Society, or as another type of incorporated body.
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Non-primary purpose trading
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Trading which is not primary purpose trading. In practice this will mean that the trading is carried on with the main or sole aim of raising funds for a charity.
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Non-charitable expenditure
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Expenditure by a charity which is not charitable expenditure within the meaning of section 506 of the 1988 Act, ie it is not expenditure for exclusively charitable purposes. The making of investments (including loans, whether they are investments or not) is not ordinarily 'expenditure‘. But, in some circumstances, section 506 treats the making of loans/investments as non-charitable expenditure. Also, payments to a body situated outside the United Kingdom may automatically be treated as non-charitable expenditure, if the charity making the payment has not taken such steps as are reasonable in the circumstances to ensure that the payment will be applied for charitable purposes.
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Parent charity
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The charity or charities which own(s) a trading subsidiary.
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Primary purpose trading
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Trading that is carried on by a charity in the course of carrying out a primary purpose of the charity. For present purposes, it includes trading in which the work in connection with the trading is mainly carried out by beneficiaries of the charity. This type of trading will normally, in any case, be carried on in the course of carrying out a primary purpose of the charity, but, whether this is so or not, the treatment of the two types of trading is similar.
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(The) small-scale exemption
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The provision in section 46 Finance Act 2000 which exempts from income and corporation tax charity trading profits, and some other income of charities, which would otherwise be liable to tax, provided that the trading turnover, together with the other relevant income, does not exceed a specified threshold.
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Trustees
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Trustees means charity trustees. Charity trustees are the people who are responsible for the general control and management of the administration of the charity. In the charity's governing document they may be called trustees, managing trustees, committee members, governors, or directors, or they may be referred to by some other title.
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Trading subsidiary
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Any non-charitable trading company owned by a charity or charities to carry on a trade on behalf of the charity (or charities). Throughout this guidance it is assumed that any such company is established in one of the UK countries – England, Wales, Scotland or Northern Ireland. In this guidance 'trading subsidiary‘ includes a company which is wholly owned by more than one charity, even if it is not technically a ‘subsidiary‘ of any of the charities which own it.
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Unincorporated charity
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A charity which does not have any form of legal incorporation. The trustees themselves represent the charity
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VAT Group
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A group of organisations (generally comprising parent and subsidiary companies) which is treated as a single entity for VAT purposes
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B. Summary
Under the law of England and Wales, charities may engage in some types of trading.
Compared to ordinary commercial companies, charities enjoy considerable advantages in the tax treatment they receive in relation to trading and trading profits. For example, in terms of VAT, certain sales and purchases are exempt or zero-rated. In terms of direct tax, there are a number of benefits - for example:
- A charity's trading profits are, in certain circumstances, exempt from tax. This includes profits from primary purpose trading, and profits made from lotteries and from certain types of fund raising event. Exemption is subject to conditions relating to the application of the profits received by the charity.
- Income received by a charity from the sale of goods that have been donated to it is not generally regarded as trading profits, and is not taxable.
However this preferential treatment comes at a cost. While charities may trade more or less freely in pursuit of their charitable objectives, there are restrictions on engaging in trades the objective of which is to generate funds for the charity. In particular, charities may not engage in such commercially-oriented trades where a significant risk to their assets would be involved.
Where trading (other than trading in pursuit of its charitable objects) involves significant risk to a charity's assets, it must be undertaken by a trading subsidiary. But even where it is not essential for the trading to be undertaken by a trading subsidiary, the use of trading subsidiaries may produce benefits, for example in reducing tax liabilities. In particular, trading subsidiaries may make donations to their parent charity as 'Gift Aid', so reducing or eliminating the profits of the subsidiary which are liable to tax.
But the use of trading subsidiaries where it is not essential to do so is not always beneficial, since it may involve additional management and other costs. And there may be fiscal drawbacks to balance against the advantages to be obtained, although direct financial considerations may not be the only ones which are relevant. Trading operations may benefit from using a trading subsidiary due to the organisational and financial clarity conferred by distinguishing a trading operation from the charity's main work.
Trustees of charities with one or more trading subsidiaries need to be aware of their responsibilities. In particular they need to remember, in all decisions made in regard to a trading subsidiary, that the interests of the charity are paramount. The interests of a trading subsidiary, its directors, creditors or employees, must all be secondary to those of the charity.
This is because the purpose of using a trading subsidiary is to benefit the charity in some way, for example to protect the charity's assets from the risks of trading, or to increase the level of financial return to the charity by saving tax. If the charity's assets are employed or put at risk for the benefit of the subsidiary, or its directors, creditors or employees, then that purpose is frustrated. In such cases, the trustees of the charity may be personally liable for any loss of, or decline in value of, the charity's assets.
This guidance sets out the main principles and considerations which apply to trading by charities themselves, and to trading through trading subsidiaries. However, due to the complexity of the law in this area, and the potential scale of adverse consequences if mistakes are made, charities and the trustees of charities engaging in substantial trading operations should also take independent advice from appropriately qualified professional persons.
Further information
See Part C for more information on trading by charities.
See Part D for more information on trading subsidiaries.