The Charity Commission has issued new guidance for charities engaged in trading activities.
The new guidance, named Trustees trading and tax: how charities may lawfully trade (CC35), clarifies and builds on existing guidance published in July 2001, providing further "practical advice” for charities using trading subsidiaries and reporting on legal developments implemented after 2001.
Charities currently enjoy “considerable advantages in the tax treatment they receive in relation to trading and trading profits”, according to the regulator.
The new guidance states that trading activities are permitted on the basis that they "contribute directly to the furtherance of charitable objects”, including primary purpose trading, ancillary trading and non-primary purpose trading.
In terms of VAT, “certain sales and purchases” are exempt or zero-rated, while trading profits are primarily exempt from tax. Income generated from donated goods is also primarily tax-exempt, according to the guidance.
“The selling or letting of donated goods is not considered as trading,” the regulator states. “It is a business activity for VAT purposes and such, sale or letting is within the scope of VAT. However, the sales are zero rated if the goods are sold or let through charity shops, or through charity auctions or similar events.”
Trading profits from general fundraising events are exempt from corporation tax, the regulator states, although it adds this is “subject to strict conditions”. Profits from charitable lotteries are also tax-exempt, subject to conditions, the regulator said.
The guidance also clarifies the position of trading subsidiaries – companies owned and controlled by one or more charities with the aim of generating income for the parent charity – stating that trustees must make effort to ensure the interests of the parent charity is put before the interest of the subsidiary at all times.