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.

Primary purpose trading exemption for charities

Corporation tax and income tax exemption for trading that fulfils or helps a charity's stated purpose.

Profits from trading that is part of, or helps, a charity's stated primary purpose are exempt from corporation tax or income tax, with no separate turnover threshold. Trading that helps rather than directly fulfils the primary purpose is treated as primary-purpose trading for this exemption.

Example - fee-charging education: An independent school charging tuition fees (education is its primary purpose)
Example - care provision: A care home charging residents for accommodation and care
Example - ancillary trading: A college selling students textbooks, or a museum running a visitor cafe
Beneficiary-worker exception: Profits are also exempt, regardless of the primary-purpose link, where beneficiaries do most of the work and profits are applied to the primary purpose (for example students running a farm at an agricultural college, or disabled staff at a cafe run by a disability charity)
Beneficiary-worker PAYE duty: The charity must operate PAYE on beneficiaries' earnings and pay at least the National Minimum Wage, unless they are volunteers
Non-primary-purpose trading: Profits from trading unconnected to the primary purpose are taxable unless turnover falls below the small trading tax exemption limit or the trade is run through a trading subsidiary
Example - taxable trading: A university renting student accommodation to the public over the summer break may pay tax on the rental profits, because its primary purpose is education, not accommodation letting

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.

Small trading tax exemption thresholds for charities

Sliding-scale turnover limits for non-primary-purpose trading profits to remain exempt from corporation or income tax.

Gross annual income under £32,000: Maximum permitted small-trading turnover is £8,000
Gross annual income £32,001 to £320,000: Maximum permitted small-trading turnover is 25% of total annual turnover
Gross annual income over £320,000: Maximum permitted small-trading turnover is £80,000
Effect if turnover exceeds the limit: Tax is due on all profits from that trade, not just the amount over the limit
Short accounting periods: The £8,000 and £80,000 figures are reduced proportionately where the accounting period is shorter than 12 months
Origin of current figures: The £8,000 floor and £80,000 ceiling were substituted into the legislation by Finance Act 2019, section 41
Historic legal basis: This exemption was originally enacted as Finance Act 2000, section 46, which has since been repealed and rewritten as Corporation Tax Act 2010, sections 480 and 482

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.

Charity trading subsidiaries - when needed and reliefs available

When a trading subsidiary is required to protect charity assets, the VAT reliefs it can access, and Gift Aid profit-shedding to its parent charity.

One or more charities can set up a trading subsidiary, an ordinary limited company for tax purposes, to trade on their behalf. Charity Commission guidance CC35 requires a trading subsidiary for any non-primary-purpose trade that would expose the charity's assets to significant risk. A subsidiary is also useful, though not legally required, where trading profits are unconnected to the primary purpose, close to or above the small trading tax exemption limit, or where trustees want to ring-fence trading losses and liabilities away from the charity.

Subsidiary VAT relief - donated goods: Zero-rating on profits from sale of donated goods, provided those profits are given to the parent charity
Subsidiary VAT relief - fundraising events: VAT exemption on fundraising events the subsidiary runs for its parent charity, on the same conditions as apply to the charity itself
Other subsidiary income: All other income and profits of the trading subsidiary are taxed and VAT-treated as for an ordinary limited company; other charity VAT reliefs are not available to the subsidiary
Gift Aid profit-shedding effect: The Gift Aid payment is deductible for the subsidiary, reducing or eliminating its corporation tax liability; the parent charity does not pay tax on the amount received, provided it is used for charitable purposes
Timing of the tax return entry: The payment is shown in the subsidiary's tax return for the accounting period in which the payment, not the profit, was made
Investment in the subsidiary - conditions to preserve exemption: The charity must have evidence the investment benefits the charity, agreed terms including a rate of interest and repayment date, and must actually receive a fair return spent on the charity's primary purpose
Risk of failing the investment conditions: An investment that fails these conditions is non-charitable expenditure, and the charity must pay tax on all its profits, not only the investment-related amount

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.

Related guidance

Charity tax and business rates reliefs (opens in a new tab)
HMRC recognition, corporation tax exemptions, VAT position and business rates relief
Claim Gift Aid on donations (opens in a new tab)
How to claim Gift Aid, including on payments from a trading subsidiary
Prepare charity accounts using SORP (opens in a new tab)
How trading subsidiary income and group accounts are reported

Charity trading rules and when you need a trading subsidiary

How taxes work for limited companies

Charity tax and business rates reliefs

Business name rules

Register a trademark

Choose a partnership structure

Primary purpose trading

The small trading tax exemption

When you need a trading subsidiary

Gift Aid profit-shedding to your parent charity

Charity shops

Related guidance

Official guidance on GOV.UK

Related guides in Business Structure

Primary purpose trading

The small trading tax exemption

When you need a trading subsidiary

Gift Aid profit-shedding to your parent charity

Charity shops

Related guidance

Official guidance on GOV.UK