The Tax Implications for Charity Trading
As a specialist advisor on taxation to the charity and not for profit sector, Nigel Armstrong, our
Head of Taxation summarises the tax implications of trading for charities and not for profit
organisations.
Introduction
Where a charity carries out trading activities these may be primary or non-primary.
Any trading activity which carries a significant risk to the charity’s assets must be carried out in a trading
subsidiary. This applies even for primary purpose activities which would be exempt from profits tax if
carried out by the charity itself.
Trading profits in a subsidiary will be subject to Corporation Tax but any profit arising which is paid to the
charity by ‘gift aid’ within 9 months of the year end will be a tax deductible expense for the subsidiary so
that no corporation tax liability should arise. The gift aided payment will be exempt from tax in the hands
of the charity.
Non taxable income

Primary purpose trading
This includes trading which contributes directly to one or more of the objects of a charity as set out in its
constitution. Primary purpose trading is not taxable.

Ancillary trading
This type of trading contributes to the furtherance of the purposes of the charity and is non taxable.

Small scale exemption
If the turnover from non primary and non ancillary trading is below the threshold, then it is non taxable.
For a charity with over £200,000 of annual income the exemption applies to turnover of up to £50,000.

Fundraising events
The profits from fundraising events are exempt from tax if the qualifying conditions are met.
Other trading income
Other trading income will generally be taxable if received by the charity and such profits can be sheltered
from tax by the use of a trading subsidiary.
Vat
Vat will generally apply to supplies made by charities on the same basis as it applies to non charities.
The main exceptions are the sale of donated goods and services, and the sale of goods and services at
certain fund raising events.
This information is intended for guidance only and is our understanding as at the time of going to press.
We recommend that you seek professional advice before taking or refraining from taking any action.
London: Imperial House, 15 Kingsway, London WC2B 6UN t. 020 7240 9971
Guildford: Friary Court, 13-21 High Street, Guildford GU1 3DL t. 01483 533 119
www.alliotts.com
Trading Subsidiaries
Trading subsidiaries are wholly owned companies set up to generate income for the charity through
trading activities. They must always be used for non-primary purpose trading which involves any
significant risk to the charity’s assets and may be appropriate for primary purpose trading which carries a
risk.
Protection of the charity’s assets is the main reason for setting up a trading subsidiary.
Secondary reasons are the ability to create a separate accounting or management unit for certain
undertakings and finally to reduce or eliminate tax liabilities arising from such undertakings.
Profits will be subject to Corporation tax but can be paid to the charity by ‘gift aid’ within 9 months of the
year end where the subsidiary is wholly owned by the charity. Such payments are tax deductible in the
subsidiary but non taxable in the hands of the charity. Where the subsidiary is not wholly owned gift aid
payments are only tax deductible in the year of payment.
It should be noted that there are cost implications in setting up and running a trading subsidiary and
these must be outweighed by any tax saving or other benefits.
Funding
Trading subsidiaries will normally be funded by the charity, either by share capital, loan capital or a
combination of the two. As any profits arising will normally be paid to the charity by gift aid, funding from
retained earnings will not usually apply except in the period after the profits have arisen and before the
gift aid payment is made.
Where the subsidiary is carrying out non-primary purpose activities, any funding from the charity will
have to be justifiable as an appropriate investment of the charities funds. In particular, the charity must
be satisfied as to the financial viability of the proposed trading activities based on its business plan, etc.
Unless the loan is small it should be at arms length with proper provision for repayment, a commercial
rate of interest charged and security obtained where possible.
It is essential that any investment in a trading subsidiary does not fall to be treated as ‘non-charitable
expenditure’ as this could result in some of the charity’s tax exemptions being restricted. To avoid this,
the charity must be able to convince HM Revenue and Customs that the investment was made for the
benefit of the charity and not primarily for the avoidance of tax.
Funding of subsidiaries carrying out only primary purpose trading will normally be a charitable application
of funds and not an investment of funds for profit.
The ‘substantial donor’ provisions may have the effect of treating the charity’s investment in a business
as ‘non-charitable expenditure’ where the business has made substantial donations to the charity.
However these provisions do not apply where the trading company is wholly owned by the charity.
This information is intended for guidance only and is our understanding as at the time of going to press.
We recommend that you seek professional advice before taking or refraining from taking any action.
London: Imperial House, 15 Kingsway, London WC2B 6UN t. 020 7240 9971
Guildford: Friary Court, 13-21 High Street, Guildford GU1 3DL t. 01483 533 119
www.alliotts.com
Employees
Some of the trustees of the charity will normally be directors of the subsidiary; however it is not good
governance for the board of trustees and the board of directors to be exactly the same individuals. There
should be at least one person on each board who is neither on the other board nor an employee of the
other entity.
The restrictions on paying remuneration to charity trustees also apply to any work they may do for the
subsidiary.
Other staff should be separately employed by the subsidiary where appropriate.
Where staff are employed by the charity but work for both entities a relevant proportion of their payroll
cost should be recharged to the subsidiary.
However, this recharge would be potentially subject to Vat at standard rate, subject to Vat registration
thresholds, and it may be more appropriate for staff to have joint contracts of employment (i.e. with both
entities) so that their total payroll cost can be apportioned between the two entities. This arrangement
will then not give rise to any potentially vatable supply from one entity to the other.
Use of charity’s facilities
Any use of the charities facilities for non-primary purpose trading should be on a proper arms length
basis. For primary purpose trading a licence agreement for use of facilities at a notional fee is normal.
The vat registration threshold must be considered when recharging the use of facilities to the subsidiary,
although letting of space will normally be an exempt supply for vat purposes.
Any recharges should be no more than a reimbursement of cost otherwise the charity could be deemed
to be realising profits from carrying on a trade which may not be tax exempt. However, pure rental
income is always treated as investment income and not trading.
Vat
The subsidiary will have to register for vat where its taxable supplies exceed the registration threshold.
This will enable it to recover input vat suffered on its purchases subject to the normal rules.
Corporation Tax
The subsidiary will be subject to Corporation tax on its profits but these may be eliminated by a suitable
gift aid payment to the parent charity.
If you have any questions or would like further information please contact Nigel Armstrong on
020 7240 9971 or email nigel.armstrong@alliotts.com.
This information is intended for guidance only and is our understanding as at the time of going to press.
We recommend that you seek professional advice before taking or refraining from taking any action.
London: Imperial House, 15 Kingsway, London WC2B 6UN t. 020 7240 9971
Guildford: Friary Court, 13-21 High Street, Guildford GU1 3DL t. 01483 533 119
www.alliotts.com