A charitable event

Writing for Tax Journal, BKL tax partner David Whiscombe analyses the tax implications and possible pitfalls when a charity becomes involved in trading activities.



  • The normal ‘badges of a trade’ apply to charities as for any other business.
  • The fact that trading profits are used for charitable purposes does exempt them from tax.
  • The distinction between primary purpose and ancillary trading.
  • Subject to conditions, profits from trading are exempt if they derive from a ‘VAT-exempt event’
  • Corporate gift aid may be a solution but complications can arise.

The circumstances in which charities can trade, the tax consequences of doing so, and even whether a charity’s actions amount to trading at all – these are all matters on which the trustees of charities may have questions. This article aims to deal with some of the questions that, in the writer’s experience, are among those most commonly asked by trustees. It deals only with taxation consequences. Trustees (or directors of charitable companies) contemplating trading will also need to consider the legal implications of such activity. In particular, trustees who contemplate trading to raise money (as distinct from directly furthering the stated purposes of the charity) must be cautious of exposing the charity’s assets to the risk of loss.

What is trading?

In determining whether a trade is carried on, the same factors apply to a charity as to any other entity, including the notorious ‘badges of trading’.

Being the passive recipient of donations of money, goods or services for which no consideration is given is not trading, regardless of how diligently such donations have been solicited.

If a donation made under gift aid is applied to a non-charitable purpose, the donation itself may become taxable; but that is another matter. Acknowledging a donation does not render it taxable; but there comes a point at which the relationship between donor and charity takes on the character of sponsorship or the provision of a marketing service. For example, giving a donor naming rights for an event in return for an agreed donation may well amount to a transaction in the nature of trading.

Selling on goods or services that have been donated (including at an ‘auction of promises’) is not trading and does not become so if the goods undergo sorting, cleaning or minor repairs before sale. But carrying out more substantial work on the donated goods before selling them may amount to trading. Finally, the letting of land or buildings where no services are provided is not trading, but gives rise to exempt rental income. However, if services are provided with the letting, the activity may take on the character of trading. For example, subletting office space will not amount to trading, but providing fully serviced office accommodation is likely to.

Is trading taxable?

In principle, the trading income of a charity is chargeable to tax: income tax in the case of a charitable trust or corporation tax in the hands of a charitable company. The mere fact that the profits of trading are applied to charitable purposes does not render them exempt from tax – although if the profits are not applied to charitable purposes they will not be exempt. Broadly, five categories of trading income are exempt in the hands of a charity.

‘Primary purpose’ trading

This is trading that contributes directly to the stated objects of the charity. Examples would be:

  • the sale of goods manufactured by disabled people by a charity established to benefit people with a disability;
  • provision of education by a school established as a charity; and
  • entry fees charged by a museum or art gallery.

The distinction here is between an activity that is itself what the charity is established to do – even though in doing so the charity may generate income – and an activity whose sole purpose is to generate income which the charity may use to further its objectives. The former is ‘primary purpose’ trading; the latter is not.

‘Ancillary’ trading

This is trading that contributes indirectly to the stated objects of the charity. An example would be the sale of food and drink to patrons of a charity running a theatre. Such a charity is established, broadly, to put on plays rather than to sell food and drink, but running the bar is so closely allied to running the theatre that the profits of it remain exempt as ‘ancillary’ trading. However, if the facilities are open to the general public when no performance is in progress, the trading then is not ‘ancillary’ to any primary purpose of the charity and the profits deriving from it are taxable – subject to the possibility of falling under other exemptions. Similarly, a shop attached to a museum might sell some items ancillary to the charity’s objectives (say, guide books and educational materials) and some purely to raise funds (souvenirs, pencils, and related items). In such cases careful record-keeping will be required to separate out the profits from ancillary and non-ancillary trading.


Running a lottery is a trading activity. But a charity is exempt from tax on profits from some lotteries. The most common exemption is for ‘incidental non-commercial lotteries’ under the Gambling Act 2005, Sch 11 Pt 1. Broadly, this exempts raffles held at fetes, coffee mornings, and other fund-raising events. Exemption is also available for lotteries conducted in accordance with Sch 11 Pt 4, one requirement for which is that the promoter is registered.

Fund-raising events

Profits from trading are exempt from tax to the extent that they arise from a ‘VAT-exempt event’. The requirements are set out in VATA 1994, Sch 9 Gp 12 and include the following.

  • The event must be organised for charitable purposes, must have as its primary purpose the raising of money, and must be promoted as such.
  • No more than 15 events of the same kind may be held by the charity in any year at the same location – if the limit is breached, the exemption is lost for all the events, not just the excess over 15. However, if the aggregate gross takings of events in a particular week do not exceed £1,000, events held in that week do not count towards the total.
  • If accommodation is provided in connection with the event, exemption is available only if it is for no more than two nights.

‘Event’ is not defined and could therefore encompass all manner of things: dances, fetes, exhibitions, pub quizzes, concerts, auctions, sporting events and firework displays could all qualify. There is an important caveat: exemption does not apply if it would be ‘likely to create distortions of competition such as to place a commercial enterprise carried on by a taxable person at a disadvantage’. In principle, therefore, running a charitable quiz night in the village hall on the same evening as that promoted by the landlord of the ‘Rat and Goldfish’ pub next door could fall foul of the requirement. That said, HMRC is on record as saying that it would take the point only if there was ‘significant and systematic evidence of commercial distortion’.

Small-scale exemption

The final exemption is for profits of ‘small-scale trades’. Profits of a trade are exempt for a tax year if turnover, together with (broadly) other non-exempt income, does not exceed the ‘requisite limit’. That limit is 25% of the charity’s total ‘incoming resources’, but it can never be less than £5,000 or more than £50,000. Even if the ‘requisite limit’ is breached, exemption will still be available if the trustees had, at the beginning of the tax year, a reasonable expectation that it would not be.

‘Incoming resources’ has no statutory definition, but is understood to be interpreted as the total receipts of the charity from all sources, including grants and donations as well as income from trading, rentals and investments (but not sales of capital assets). The small-scale exemption can thus be useful in particular to cover any liability which might otherwise arise from trades that are mainly ‘primary purpose’ or ‘ancillary’, but which include some profits from small amounts of otherwise non-exempt turnover.


A charity may consider establishing a subsidiary company through which to conduct all or part of the trading operations, in the expectation that profits will be paid up to the charity under gift aid. There are two principal reasons why a charity may consider this.

First, many trustees will not wish to undertake trading directly that is neither ‘primary purpose’ nor ‘ancillary’. Any profits resulting from such trading will be taxable, subject to the possibility of other exemptions. Further, if there are losses, not only may the resulting diminution of the charity’s assets cause problems under charity law for the trustees, but the meeting of the loss by the charity will also represent ‘non-charitable expenditure’. This in turn may cause part of the charity’s other exempt income to become taxable.

It is true that, in many cases, the income becoming taxable may be offset by relief for the trading losses themselves, but this will not always be the case. This is because one will be determined by the amount of the commercial loss and the other by the tax-adjusted loss. Although in principle the profits from non-exempt trading will be subject to corporation tax in the hands of a subsidiary company, the gift aid payment will normally be deductible so no tax will be payable. Consequently, the whole of the profits will accrue to the charity.

The second reason is when the trading is ‘primary purpose’ or ‘ancillary’ so could be legally and tax-efficiently undertaken directly by the charity, but the trustees prudently wish to protect the assets from any trading loss that may be incurred. Against this must be set the additional management and compliance costs that may arise from establishing and running a separate legal entity. Further, there are some benefits afforded to charities that do not apply to companies owned by charities: these include charity rate relief and relief from stamp duty land tax.

Corporate gift aid

Although the basic idea of stripping out profit from a company in a tax-efficient way by the use of gift aid is, in principle, straightforward, it is not without its complexities. In considering these it is important to appreciate that the responsibilities (and therefore the viewpoints) of the company directors and the trustees may differ and indeed be in conflict.

Any decision to make a payment under gift aid is that of the directors. Since the release of the ICAEW’s Technical Note 16/14 BL [1] it is considered that a payment of gift aid is a distribution for the purposes of company law. Thus, gift aid payments are limited to the distributable profit. When, because of a mis-match between the accounting and tax measures, taxable profit exceeds commercial profit it will not be possible to shelter the full amount of the company’s profit with gift aid payments. The result will be a residual charge to tax in the company. This may be particularly galling if the trade carried on by the company would have been ‘primary purpose’ and exempt from tax had it been carried on by the charity directly.

Both HMRC and the Charity Commission have indicated that they expect the view espoused in Technical Note 16/14 BL to be applied for accounting periods starting on or after 1 April 2015. However, in many cases it will be necessary to recognise that gift aid payments made for earlier accounting periods, which were believed at the time to be lawful, were in fact unlawful as being in excess of distributable profits. The implications for past years (whether, for example, HMRC can withdraw tax relief for the unlawful element of the payments) and the consequences of repaying (or not) the prior unlawful distributions are potentially complex. More detail may be found in the Technical Note.

Subject to the limitation to distributable profits, it will normally be tax-efficient for a company to distribute the full amount of its taxable profits under gift aid. However, that leaves the problem of how the continuing operations of the company are to be financed. If the company’s trading is ‘primary purpose’ or ‘ancillary’ (so that it could legitimately have been carried out by the charity itself) it is comparatively unlikely that funding by the charity will give rise to any tax or legal issues. In particular, a loan made by the charity to support a subsidiary carrying out such trading should not be at risk of being categorised as ‘non-charitable expenditure’.

Things become more complicated if the company’s trading is not ‘primary purpose’ or ‘ancillary’. In that case the charity’s involvement with the company must be judged (both for tax purposes and for charity law purposes) purely on investment criteria, as regards both share capital and loan. Thus any funding required by the company must be found from:

  • retention of profits (which will be liable to tax);
  • loans from the parent charity on commercial terms;
  • loans from third-party lenders (which will normally require the retention of profits in order to meet costs of servicing and repayment and to comply with any lending covenants); or
  • a combination of the above.

Development land

A particular difficulty may arise in respect of land previously held by a charity as a capital asset but is sold for development. If the land is sold for a fixed sum, any resulting capital gain will be exempt if applied for charitable purposes. However, should the trustees seek to participate in development profits, as their fiduciary duty may compel them to consider, it is all too likely that the profits will fall, at least in part, within the transactions in land rules introduced by FA 2016. Such profits will not be exempt from tax in the hands of the charity.

One possible solution may be to sell the land to a subsidiary company for a fixed capital sum, leaving the company to negotiate ‘slice of the action’ terms with the developer and to pay the profits up by way of gift aid. But care is needed here. Quite apart from the possible mismatch between accounting and taxable profits referred to above, the SDLT payable on the initial transfer to the company may absorb a considerable part of the hoped-for tax saving.

In the special case of the charity is itself being a company, a further difficulty may arise. Although charity law may require the sale to the (non-charitable) subsidiary to be made at market value, the transfer will be made for capital gains purposes at a no-gain/no-loss figure. Hence the taxable gain in the subsidiary may exceed the accounting profit by a very considerable margin, leaving the bulk of the profit exposed to tax in the subsidiary and defeating the point of the exercise.

Final thoughts

Trustees of charities all too often look on tax as something to be gratefully received from HMRC on a gift aid claim rather than as something that the charity may be obliged to hand over in respect of its activities. It may be the place of advisers to plant the idea that, not least in the context of trading and quasi-trading activities, this may sometimes be an unwise assumption, the continuance of which may lead to nasty surprises.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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