Charity Trading - Do I need a trading subsidiary?

This is a question I've been asked a couple of times recently so I thought it might be sensible to re-visit. Charities often worry about whether their trading activities are primary purpose or non-primary purpose.

If the former no tax is payable. If the latter then subject to small trading exemption tax is payable which is why may charities who do trade consider the formation of a trading subsidiary to be essential.

Examples of primary purpose trading where the profits are used for the charity's primary purpose include:

  • An independent school charging students school fees for their education
  • A care home charging residents for accommodation and care
  • A college selling students text books
  • A museum running a cafe for visitors
  • Students who help run a farm on an agricultural college
  • Disabled staff of a cafe run by a charity that helps people with their disabilities
  • There are also specific rules for lotteries, fundraising events such as jumble sales, barn dances, dinners etc but be aware of these and any VAT consequences

There are however some small trading tax exemptions.

If your gross annual income (i.e total turnover before deducting tax and expenses is below the following then no tax is payable on non-primary purpose trading:-

Charities Gross Annual Income                     Maximum permitted small trading turnover

Under £32,000                                               £8,000

£32001 to £320,000                                       25% of your charity's total annual turnover

Over £320,000                                              £80,000

If your charities small trading turnover from non-primary purpose trading is higher than the exemption limits above then you will have to pay tax on all of the profits from that trade.

Note the words ALL THE PROFITS FROM THAT TRADE. It doesn't affect your primary purpose trading and it is tax on your taxable profits not income which is a misconception some people have. You pay tax at corporation tax rates, currently 19%. So for every £1,000 of taxable profits you pay £190. Compare that cost with the cost and additional administration of operating a trading subsidiary and trustees will need to bear that in mind when choosing whether to form a subsidiary company or not. There are of course other reasons to use a trading subsidiary including VAT and asset protection but you need to look at all the issues not just saving tax.