Charities and trading

Charities which sell goods or services may be subject to tax, depending on what kind of trading they are doing. It's important for a charity to understand its position with regard to 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 which 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 read Trading by charities.

In terms of activities which do count as trading, charities are generally not liable for trading profits (which would normally be payable by non-charities) in the following scenarios:

  • Primary purpose trading - if money is being made to help the charity's aims and objectives.

  • 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 VAT when trading (if their trading income is above the VAT registration threshold of £82,000), but they are eligible for certain VAT reliefs.

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 (i) is part of the charity's primary purpose (eg an independent school with charitable status which charges for tuition) or (ii) 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 trading activity carried out mainly by beneficiaries of the charity (eg disabled staff working in a charity shop which raises money for disabled people) and these profits are used for the primary purpose, 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.

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 Gov.uk page for the latest limits.

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. The trading company can then donate profits to the charity - and the charity does not need to pay tax on these profits as long as is it uses the money for its charitable purposes. For more information on how charities can use subsidiary trading companies read Using a subsidiary company.