Trading
When a charity decides to begin trading, careful consideration is essential from both a financial and governance perspective. The nature of the trading activity plays a significant role in determining tax implications.
Primary purpose trading
If the trading activity directly supports the charity’s purpose, such as a museum selling tickets or a mental health charity charging fees for the care services it provides, it may qualify as primary purpose trading and benefit from tax exemptions. If a charity’s trading activity involves beneficiaries - for instance, an employment training program that operates a café run by disabled people, this engagement will offer substantial personal benefits to the charity’s beneficiaries and is likely to be classed as primary purpose trading.
Ancillary trading
Ancillary trading refers to commercial activities that support a charity’s primary purpose trading. While these activities do not directly fulfill the charity’s purposes, they are closely linked to it and enhance the overall delivery of services. For example, a drama and education charity for young people selling refreshments to audience members during performances, or a museum operating a gift shop that sells exhibition-related merchandise may be considered ancillary trading. These activities complement the charity’s main work and encourage participation in its charitable objectives. Profits from ancillary trading may be exempt from tax, provided they are entirely used to support the charity’s purposes. If the trading expands beyond a reasonable scale, the charity may need to consider setting up a trading subsidiary to manage financial risks.
Non-primary purpose trading
Non-primary purpose trading, such as a charity selling branded merchandise like Christmas cards or calendars, is subject to taxation unless it falls within the small trading exemption. Beyond tax concerns, charities must be mindful of VAT obligations. If trading income exceeds the VAT threshold, registration becomes mandatory, although certain VAT reliefs may apply. To navigate potential financial risks, charities engaging in substantial non-primary purpose trading often establish trading subsidiaries, which help ring-fence commercial risks and ensure charitable funds remain protected. This Wiki explores Community Interest Companies as efficient vehicles for trading subsidiaries.
Governance perspective
From a governance perspective, charity trustees carry a significant responsibility in overseeing trading operations. They must ensure compliance with charity law, uphold ethical standards, and safeguard charitable assets from undue risk. Financial risks associated with trading necessitate robust risk management strategies and charity trustees should implement financial controls to monitor income and expenditure carefully. Tax law is UK wide legislation, so CCEW and Scottish guidances refer to the same details in law. OSCR outlines different types of charity trading and provides advice on when charities should set up trading subsidiaries. Charity trustees must ensure that trading aligns with the charity’s mission and complies with Scottish charity law.
Further resources and links
For further information, please refer to
- UK government’s joint HMRC and CCEW official guidance on charity trading
- SCVO’s insights on charity trading and governance
- OSCR’s guidance on charities and trading.
The TSI Learning Portal includes an introduction to trading slide presentation
For smaller charities that are members, SCVO has a Free Tax and VAT advice service
For further free, well-informed information, find your local Third Sector Interface (TSI) at the directory page here