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What are the tax implications for trading charities?

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Charities are associated with giving, but most also actively trade. In fact, the sector gains twice as much income from trading as it does from donations.

For businesses, trading means exposure to tax. Charities have no general exemption from tax and pay some taxes at the same rate as businesses. However, there are specific measures that reduce the burden, especially for tax on profits (corporation tax).

It’s important for trustees to understand the tax position of their charity so that trading is lawful. Make sure that the right structures are in place to achieve efficient tax compliance.

What trades are lawful for charities?

The main types of trading that a charity can undertake are those that are directly related to the charitable objective, or provide support to it. These types are known as primary purpose and ancillary trading.

Charities can also lawfully undertake trading that is unconnected to its charitable purpose, as long as it doesn’t involve significant risk.


If carried out by a charity, profits from primary purpose and ancillary trading are exempt from tax. Non-primary purpose profits are exempt but only if the non-primary purpose income is less than the small scale exemption, which is £50,000 for most charities. If the income breaches the threshold, all of the non-primary purpose profits are taxable.

Trading subsidiaries

A trading subsidiary is a commercial company, normally 100% owned by a charity. They can be used to carry out:

  • trading activities the charity cannot lawfully undertake;
  • other risky activities the charity does not wish to expose charitable funds to; or
  • non-primary purpose trading that would be taxable if conducted by the charity.

Whilst a trading subsidiary’s profits are subject to corporation tax, it can usually mitigate a tax liability by donating its profits to the charity. The donation is deductible for tax purposes.

With MHA, we have created 11 Key Steps for Trustees, 1 Giant Leap for Your Charity, a monthly guide for trustees to allow them to upskill and improve standards in a stepped and measured way. Each month’s article covers a different area. The article for month six considers trading, tax and trading subsidiaries in more detail and can be viewed here.

Need help?

For more information on how we can help, please speak to your usual  Larking Gowen contact.

Call 0330 024 0888 or email

Julia Croucher


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Larking Gowen

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