Corporation tax : Charities

Charities are generally considered to be exempt from income and corporation tax and are able to agree exempt status with HMRC. This avoids having to complete income tax or corporation tax returns.

However, charities have become far more sophisticated in how they operate, particularly with regard to fund raising, and it is common, even for comparatively small charities, to carry on activities which might be considered to be trading.

The Charity Commission and HMRC classify the activities (and income) of charities into three categories:

• primary purpose trading: directly connected with the charity’s objects
• ancillary trading: indirectly connected with the charity’s objects
• non-primary purpose trading: commercial activities for fund raising  

If annual turnover from non-primary purpose trading exceeds certain thresholds, this could render profits from these trading activities as liable to corporation tax.

If this is the case, the trustees or directors of the charity must carefully consider tax planning issues, which will include:

• whether the tax payable is relatively low and should be suffered as the “least worst” alternative;
• if the potential tax cost is substantial, whether to restructure the charity by, for example, creating a subsidiary company to operate the trading activity.

Creation of a subsidiary might be seen as complex but it should enable the charity to shelter profits from corporation tax using Gift Aid and donations.  If fund raising from commercial activities is substantial, it is likely to prove beneficial to follow this route.

If you require advice or would like to discuss how we might assist you, please do not hesitate to contact us.