Trustees are often caught out as not everything is covered by an exemption and there are times where tax will be due unless it is thought about beforehand.
What is taxable?
Charity law permits charities to carry on non-primary purpose trading in order to raise funds, provided that there are no significant risks to the charity.
There are no general exemptions from corporation tax or income tax for non-primary purpose trading so any profits made on this income are potentially subject to tax, even if the funds raised are used for the purpose of the charity.
There are two specific exemptions, the lotteries exemption and the fundraising exemption. There are specific rules for both and trustees shouldn’t just assume that the income falls within fundraising.
So what is non-primary purpose trading?
Non-primary purpose trading is trading which is intended to raise money for the charity rather than activities which further the objects of the charity.
The following may be examples of potentially taxable income:
Hiring out spare land, property or office space. The grounds held by the charity may for example be an ideal wedding venue at the weekends, when the charity doesn’t use it.
Running a bar from a village club or sports club.
The sale of promotional items such as pens, mugs, tea towels etc.
Small scale exemption
If the trading mentioned above is small in relation to the total income of the charity, then it may fall under the small scale exemption. The following table shows the amount which would qualify and hence not be liable to tax.
Total of all incoming resources in a particular chargeable period of the charity
£20,000 to £200,000
Maximum permitted annual turnover of the relevant trading in that chargeable period
25% of charity’s total incoming resources
Should your charity exceed these limits then it may be time to consider a trading subsidiary. The company can trade, with no limits and give its profits to the charity. As long as the company gives all its taxable profits to the charity then no corporation tax will be due.
How can Essex Abel help?
The information contained above is a brief overview and trustees should carefully consider whether any of the charity’s income is taxable. We can help you identify if you have any potential issues with taxable income and can discuss both the positive and negative points about running a trading subsidiary. For a free consultation to discuss your charity please contact us.