A charity’s primary purpose is stated in its governing document. Some constitutions call a charity’s primary purpose its “object”. There is no limit to the amount of primary purpose trading that a charity can undertake, and a charity won’t pay tax on profits it makes from primary purpose trading.
A theatre charity can therefore charge for tickets to see its shows, and museums and galleries can charge for entrance to their exhibitions provided that those activities contribute directly to one or more of the objects of the charity as set out in its governing document.
The profits from primary purpose trading are exempt from corporation tax (or income tax in the case of charitable trusts) as long as the profits are applied solely to the purposes of the charity. However the sales which have given rise to those profits will be regarded as a business activity for the purposes of determining liability to VAT.
‘Ancillary trading’ contributes indirectly to the purposes of the charity. This is treated as part of primary purpose trading for both charity law and tax purposes. An example of ancillary trading is the sale of drink by a theatre to audience members. Although the sale of drink does not fulfil the charitable purposes of a theatre charity, it will contribute indirectly by making sure that the audience feel welcome and enjoy the theatrical experience. It follows that the sale of drink to passers-by who do not attend the production does not contribute directly or indirectly to the purposes of the charity, and therefore cannot be classed as primary purpose trading or ancillary trading.
There is no defined limit on the annual turnover that will be regarded as ancillary. If bar sales become a significant proportion of total turnover, then there will come a time when a tipping point is reached, and the theatrical experience will then be seen as ancillary to the sale of drink. We therefore suggest regular reviews of ancillary trading to make sure that trustees are comfortable that the trading is, in practice, ancillary to the charitable primary purpose trading.
Trading is not regarded as ancillary to the carrying out of a primary purpose of the charity simply because its purpose is to raise funds for the charity.
‘Non-primary purpose trading’ is trading intended to raise funds for the charity, as distinct from trading which in itself furthers the charity’s objects. Charities may engage in such trading only where no significant risk is involved. Charity law permits charities to carry on non-primary purpose trading in order to raise funds, provided that the trading involves no significant risk to the assets of the charity.
The ‘significant risk’ to be avoided here is that the turnover is insufficient to meet the costs of carrying on the trade, and the difference has to be financed out of the assets of the charity.
Whether or not the risk of non-primary purpose trading is ‘significant’ depends on a number of factors, including:
- the size of the charity;
- the nature of the business;
- the expected outgoings;
- turnover projections; and
- the sensitivity of business profitability to the ups and downs of the market.
Inevitably, the assessment of the significance of the risk will involve an element of judgment on the part of trustees and their advisers. In general, however, a lottery, or trading which qualifies for the ‘small-scale exemption’ may be considered not to involve significant risk.
There is no general exemption from corporation tax (or income tax in the case of charitable trusts) on the profits of non-primary purpose trading carried on by a charity, even where the profits are all applied for the charity’s purposes. However, some exemptions do apply, including an exemption for lotteries, if beneficiaries carry out the trading activity, the ‘small-scale exemption’, and the fundraising exemption.