West Yorkshire Community Accounting Service

Voluntary Sector Accounting Information

Social Enterprise - producing vital income

Generating income for your charity - what are the tax implications?

With Social Enterprise being very much flavour of the month it would seem a good moment to write about the position of charity trading in relation to corporation tax as there seems to be a certain amount of confusion around. In these days of grants being reduced and the uncertainty of investments, it is an excellent idea to look at the opportunities for your charity to generate at least some income through trade.
When charities carry on trades, provided certain conditions are met, the profits of these trades are exempted from corporation tax (VAT has different rules from corporation tax and I am not covering VAT in this article). The definition of trading is:- 'the sale of goods or services to customers as part of a commercial enterprise.'

Primary purpose trading - this is trading that forms part of the primary purposes or charitable objectives of the charity as set out in the governing document. This also includes 'ancillary trades', which are best defined as supplementary to the primary purpose trade for example payments for a crèche by students on a course that an educational charity is running. In this case the crèche would count as ancillary trading because it is ancillary to the primary purpose of providing education.
Trades which are not part of the primary purpose of the charity but which are intended to raise funds for charitable purposes (eg selling Christmas cards)

When are charities' trading profits exempt from tax?

To qualify for exemption from tax, the profits from any trading must be used only for the purposes of the charity, and the trade must meet one of the following three conditions:

1 The trade must be part of a primary purpose of the charity or ancillary to this trade -see above

2 The work in connection with the trade must be mainly carried out by beneficiaries of the charity.

3 The turnover of a non-primary purpose trade must fall below certain limits as follows:
- Either below £5000
- Or 25% of the charity's gross income (from all sources), but
- no more than £50,000

As long as the trading meets one of the above three conditions it will be exempt from tax.

In addition there is something called the Extra-Statutory Concession for fund-raising activities.
What is this concession?
Certain fund-raising events arranged by charities (eg a big concert) may fall within the definition of trade but not be exempt according to the three conditions outlined above, however if the event is of a kind which is exempt from VAT and the profits are being applied for charitable purposes then you may be able to get what is called an Extra-statutory concession. This is decided on an individual basis by Customs and Excise (the VAT people) who you will need to contact for advice (see Customs and Excise in your local telephone book.). Basically if Customs and Excise allow an extra-statutory concession for VAT purposes, you should also automatically qualify for exemption from corporation tax.

Lotteries

Finally there are special rules relating to the profits arising from lotteries. Charities may run lotteries in order to raise funds for their charitable purposes as long as it meets the conditions of the Lotteries and Amusements Act 1976. Providing the profits are used only for the purposes of the charity these profits are exempt from tax.

This article is based on the Inland Revenue leaflet IR2001 'Trading by Charities', which goes into much more detail than is possible in this article. If you would like to obtain a copy it is available by ringing the Inland Revenue Order line on 0845 9000 404 or from their web-site which is: www.inlandrevenue.gov.uk
Charity Commission booklet CC35 Charities and Trading is also useful on this subject, and can be ordered by ringing the Charity Commission on 01823 345427, or from their web-site which is: www.charity-commission.gov.uk