Do trading charities need to pay tax and VAT?
The first step is to understand what counts as 'trading' so that taxes can be calculated for purposes of trading profits. This is not always clear, but the following are generally not considered to count as trading:
the sale of goods donated to a charity
the sale of investments
the sale of assets that the charity uses (or has used) for charitable purposes
the letting of land and buildings where no services are provided to the user
For further information, see the Government's guidance on Trading by charities.
In terms of activities that do count as trading, charities are generally not liable for trading profits (which would normally be payable by non-charities) in the following scenarios:
if money is being made to help the charity's aims and objectives (known as 'primary purpose trading')
if the level of any non-primary purpose trading falls below the charity's small trading tax exemption limit
if the charity trades through a subsidiary trading company
Charities are not exempt from paying Value Added Tax (VAT) when trading (if their trading income is above the VAT registration threshold of £85,000), but they are eligible for certain VAT reliefs.
What is the primary purpose?
The primary purpose of a charity should be stated in its governing document. It does not need to pay tax on any profits generated from trading which:
is part of the charity's primary purpose (eg an independent school with charitable status which charges for tuition)
helps its primary purpose (eg an independent school with charitable status which sells textbooks to students)
Trading carried out by beneficiaries
If a charity makes profits from a trading activity carried out mainly by beneficiaries of the charity (eg disabled staff working in a charity shop that raises money for disabled people) and these profits are used for the primary purpose and tax on profits is exempt.
Lotteries and fundraising
Charities are not liable to pay tax on profits generated from lotteries or fundraising events, as long as all the profits are used for the primary purpose. Fundraising events must qualify for exemption from VAT and lotteries must have an operating licence.
What is the small trading tax exemption?
Even if trading does not relate to a charity's primary purpose, it may be exempt from tax if the turnover falls below the small trading tax exemption. See the Government's page for the latest limits.
How can a subsidiary trading company be used?
Charities can set up a subsidiary trading company in order to avoid being directly liable for tax on profits from trading which is not related to its primary purpose. A subsidiary trading company is a company owned and controlled by a charity (or multiple charities).
The charity does not need to pay tax on these profits as long as it uses the money for its charitable purposes. For more information on how charities can use subsidiary trading companies, read the Government's guidance on Using a subsidiary company.
For more information about charity trading, see the Government’s guidance and Ask a lawyer if you have any questions.