Is your Charity Trading Tax Exempt?

Source https://stevejbicknell.com/2017/02/14/is-your-charities-trading-tax-exempt/

Charity shop

Charities need to find ways to increase their income and many will explore Trading.

The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:

  • trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries) or is ancillary to carrying out a primary purpose of the charity
  • non-charitable trading turnover falls below the charity’s small trading turnover limit
  • trading activity is a VAT exempt fundraising event

If a trade doesn’t satisfy 1 of the above conditions, the profits of the trade won’t be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.

Primary purpose trading

A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).

Examples of such primary purpose trading include the:

  • provision of educational services by a school or college in return for course fees
  • holding of an exhibition by an art gallery or museum in return for admission fees
  • sale of tickets for a theatrical production staged by a theatre
  • provision of health-care services by a hospital in return for payment
  • provision of serviced residential accommodation by a residential care home in return for payment
  • sale of certain educational goods by an art gallery or museum

In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity.

Trading which is ancillary to the carrying out of a primary purpose

Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:

  • sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
  • provision of a crèche for the children of students by a school or college in return for payment
  • sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
  • sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
  • sale by able bodied staff of items produced by the disabled in a disabled workshop
  • sale of confectionery, toiletries and flowers to patients and their visitors by a hospital

Trading which isn’t wholly charitable trading

Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:

  • a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which aren’t (promotional pens, mugs, tea towels, stamps, all postcards, etc)
  • the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
  • the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity – ancillary) and the general public (non-beneficiaries – not ancillary)
  • the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% aren’t charitable beneficiaries

In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades – sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption

How does the small trading exemption apply?

The small trading exemption applies to the profits of all trading activities that aren’t otherwise exempt from tax, provided the:

  • total turnover from all of the activities does not exceed the small scale trading annual turnover limit
  • total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
  • profits are used solely for the purposes of the charity

Calculation of the annual turnover limit

The annual turnover limit is:

  • £5,000
  • if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000

Using a subsidiary trading company

You may find this useful if your charity:

  • makes profits on trading that’s not linked to its primary purpose
  • makes a profit that comes close to or is higher than the small trading tax exemption limit
  • wants to protect its assets from any trading losses
  • wants to have a separate organisation to carry out all its trading activities

Further details are at

https://www.gov.uk/government/publications/charities-detailed-guidance-notes/annex-iv-trading-and-business-activities-basic-principles#primary-purpose-trading

http://www.cfg.org.uk/Policy/~/media/Files/Policy/Tax%20and%20VAT/20100426%20CFDG%20%20The%20Tax%20implications%20of%20Charity%20Trading%20FINAL%20with%20links.PDF

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508202/CC35.pdf

http://www.bournemouthcvs.org.uk/documents/CharitiesCanTrade.pdf

steve@bicknells.net

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