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August 2009 Institute of Fundraising©

Charities and Trading

Introduction

This briefing sets out some guidance for charities about trading and when they would be
allowed to trade or when they would need to set up a trading subsidiary.

Can I trade?

Charities can trade, but there are many issues to be considered. Before beginning to
trade, charities need to ensure that their constitution gives them the power to trade
and that this is supported by their charitable objects. If not, the charity will need to
look into amending these before any trading takes place. They will also need to
consider the tax and charity law implications of the proposed trading activity.

What types of trading are there?

There are two broad types of trading:-


(i) Primary Purpose Trading; and
(ii) Non-Primary Purpose Trading.

Charities need to be aware of where their trading activities fall.

What is Primary Purpose trading?

Primary purpose trading is trading that directly contributes to one or more of the charity’s
objects. This includes trading that is mainly carried out by beneficiaries of the charity.
There are no restrictions on primary purpose trading under charity law. Any profits of
primary purpose trading are exempt from tax, as long as they are used for the charity’s
charitable purposes. There is no blanket exemption from VAT for primary purpose
trading, so VAT implications would still need to be considered.

Ancillary trading is that which complements a charity’s primary purposes – for example a
shop in a hospital or a café in a museum. This trading will be treated as primary purpose
trading for tax and charity law purposes, so long as there is primary purpose trading also
occurring.

The Institute is a charity registered in England and Wales (No. 1079573) and Scotland (No.
SC038971) as well as a company limited by guarantee (No. 3870883). VAT registration number
547 8930 96.
August 2009 Institute of Fundraising©

What is Non-Primary Purpose trading?

Non-primary purpose trading is carried out purely to raise funds for the organisation, and
does not further the charity’s purposes. Charity law allows charities to carry out non-
primary purpose trading as long as there is no significant risk to the charity’s assets. Any
profits will be taxable, unless there is a specific tax exemption.

What are the tax exemptions for non-primary purpose trading?

Small scale trading does not give rise to a tax bill, as long as the trading income is:

- Less than £5,000 annually or


- If the charity’s annual turnover exceeds £5,000, the trading income can be no
more than 25% of the charity’s total incoming resources, up to a maximum of
£50,000.

If a charity exceeds these limits, the whole amount can be taxed.

There is a helpful tax and VAT exemption for one-off fundraising events.

Strictly speaking, lotteries are trading, but there is a special tax exemption for charity
lotteries. Lotteries cause no problem under charity law, as any risk to the charity’s
assets is considered as negligible.

Another exception from tax applies to the sale of donated goods. This is not considered
as trading for tax or charity law purposes, but simply the process of converting a
donation into cash. The sale of donated goods is also zero rated for VAT purposes.

Are there any particular traps to be aware of?

Fundraising activities, such as running events and working with corporates, may well be
trading. Many charities do not realise this: before undertaking such activities it may be
prudent to seek advice.

What should I do if my trading is taxable or not permitted under charity law?

Charities can set up trading subsidiaries to carry out their trading activities, whether the
trading falls into accepted trading categories or not.

What is a Trading Subsidiary?

A trading subsidiary is a company limited by shares, all of which are owned by the
charity. The charity funds the subsidiary, which carries out the trading and then pays its
profits to the charity via Gift Aid. If all the trading subsidiary’s profits are paid to the
charity under Gift Aid, it will have no tax to pay, so the trading is effectively carried out
tax free.

The charity must think carefully about how it will fund the subsidiary: the money will
usually be loaned on arms length terms or used to buy shares in the subsidiary.

The Institute is a charity registered in England and Wales (No. 1079573) and Scotland (No.
SC038971) as well as a company limited by guarantee (No. 3870883). VAT registration number
547 8930 96.
August 2009 Institute of Fundraising©

Trustees need to carefully consider which method works best for them, and the
relationship between the two organisations needs to be properly set up and managed.

There are both advantages and disadvantages to using this method and before anything
is done, it is imperative that trustees consider all the implications and get professional
advice.

Further information is available in the Charity Commission’s publication CC35, Trustees,


Trading and Tax: http://www.charity-commission.gov.uk/publications/cc35.asp

About the Institute of Fundraising

The Institute of Fundraising is the professional membership body for fundraisers,


working to promote the highest standards in fundraising practice and management.
The Institute of Fundraising’s mission is to support fundraisers, through
leadership, representation, standards setting and education, to deliver excellent
fundraising.

Committed to raising standards in fundraising practice and management, we engage


with charities, Government, media, the general public and other bodies to positively
influence the UK fundraising environment. We work to nurture the knowledge and
standards of all those who undertake fundraising, offering an extensive range of
training and networking opportunities.

The Institute represents over 5,000 fundraisers and 300 fundraising organisations,
providing information and support services for Individual and Organisational
members.

Contact information
Institute of Fundraising
Park Place, 12 Lawn Lane
London SW8 1UD
Tel: 020 7840 1046
Fax: 020 7840 1001
Email: policy@institute-of-fundraising.org.uk
www.institute-of-fundraising.org.uk

Please bear in mind that the Institute does not give professional legal or accounting advice, and
while care has been taken with this briefing, you should seek advice before taking any actions or
incurring costs.

The Institute is a charity registered in England and Wales (No. 1079573) and Scotland (No.
SC038971) as well as a company limited by guarantee (No. 3870883). VAT registration number
547 8930 96.

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