Charity trading rules and when you need a trading subsidiary

If your charity sells goods or services, you need to know which tax rules apply to the profits. Trading that fulfils or helps your charity's stated purpose is treated differently from trading that does not, and the distinction determines whether you pay corporation tax on the profits and whether you need a separate trading company.

This guide explains primary purpose trading, the small trading tax exemption, and when you need a trading subsidiary. It also covers how a subsidiary can pass its profits to your charity through Gift Aid, and where charity shops fit within these rules.

Primary purpose trading

Trading that is part of, or helps, your charity's stated primary purpose is exempt from corporation tax or income tax on the profits. There is no turnover threshold for this exemption. Trading that helps your primary purpose, rather than directly fulfilling it, is treated the same way for tax purposes.

Profits are also exempt, regardless of the primary-purpose link, where your beneficiaries do most of the work and the profits go to your primary purpose. If you employ beneficiaries in this way, you must operate PAYE on their earnings and pay at least the National Minimum Wage, unless they are volunteers.

Trading unconnected to your primary purpose is a different category. You need to work out whether it falls within the small trading tax exemption or whether you need a trading subsidiary.

The small trading tax exemption

Non-primary-purpose trading profits stay exempt from corporation tax if your trading turnover falls below a limit set on a sliding scale against your charity's gross annual income.

When you need a trading subsidiary

A trading subsidiary is an ordinary limited company owned by one or more charities, set up to trade on their behalf. It is not itself a charity and is taxed as any other company, but it has access to specific reliefs connected to the parent charity.

Charity Commission guidance CC35 requires you to use a trading subsidiary for any non-primary-purpose trade that would expose your charity's assets to significant risk. You may also choose to use one, even where it is not required, if your non-primary-purpose trading profits are close to or above the small trading exemption limit, or if you want to keep trading losses and liabilities separate from your charity's assets.

Gift Aid profit-shedding to your parent charity

A trading subsidiary can pay its profits to its parent charity as a Gift Aid payment. This reduces or eliminates the subsidiary's corporation tax bill, and your charity does not pay tax on the amount received, provided it is applied to your charitable purposes.

The payment must be made within 9 months of the end of the accounting period in which the subsidiary made the profits. Your directors decide when to make the payment, and it appears in the subsidiary's tax return for the accounting period in which the payment itself, not the underlying profit, was made. Claiming the Gift Aid relief follows the same claim process your charity uses for other Gift Aid income.

Charity shops

Charity shops mainly trade by selling goods that have been donated to your charity or its trading subsidiary. Selling donated goods is treated differently from ordinary trading: it does not count against the small trading exemption limit, and the VAT treatment of these sales is separate from the reliefs described above. If your shop also sells bought-in goods, such as new stock alongside donated items, those sales are ordinary trading and are assessed against the primary purpose and small trading rules on the same basis as any other trade.

If your charity runs shops through a trading subsidiary, the subsidiary can still access the donated-goods VAT zero-rating, provided its profits go to your charity.