Trading as a Charity

Many community groups or organisations with charitable status sell goods or services that is, they trade as part of their main charitable activities or to raise funds. They may do so only if:

• their constitution gives the committee the powers to do so

• they have a suitable legal structure (if they need to lease or buy premises/land or employ staff then becoming incorporated will limit personal liability for the Trustees)

• the decision to trade is made with due consideration of the charity Trustees’ legal responsibilities

• trading does not compromise the charity’s compliance with current charity legislation

The scale and nature of the trading which the group is considering, will determine how they can trade. It will also be important for the Charity Trustees to give due consideration to the financial implications of trading, particularly in relation to VAT and eligibility for tax exemptions on surplus income (or ‘profits’) generated from the trading activity.

Primary Purpose Trading

Primary Purpose trading is where a group or organisation with charitable status trades on a relatively small scale with the sole purpose of furthering their primary purposes.

Charity income from ‘primary purpose trading’ is usually exempt from tax.

For example, an educational charity can sell educational materials, a social welfare charity can deliver welfare services under a contract, and a community centre can rent out rooms for community activities.

Charity Trading Arms

If the group or organisation with charitable status, is considering setting up:

• a larger-scale trading activity - likely to generate significant income

and which is

• unrelated to the charity’s primary purpose, being aimed solely at raising funds

then it would need to do so through a separate organisation. This is usually done by setting up a separate ‘trading arm’ of the organisation. Trading arms are separately constituted and incorporated and do not have charitable status themselves.

Charity shops are common examples of separate trading arms. Another example would be if an educational centre running a souvenir shop and café (both of which would be separate ‘trading arms’).

A community group or organisation with registered charitable status setting up a separate trading arm needs to be aware of any VAT and tax implications. Non-charitable trading income is not eligible for tax exemptions. This means that the income generated by the trading arm does not in itself benefit the charity.

However, the group or organisation with charitable status can benefit from the tax relief on donations made to them by the trading arm - as long as those funds are used to further the group or organisation's charitable purposes.

This is how charity shops work – they donate their surplus income (‘profit’) back to the parent charity. Converting the surplus (‘profit’) from a trading arm into a donation to a parent charity grants these funds tax exemption status, in other words, it is the donation that attracts the tax exemption, not the trading income.