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1. Types of Charity Trading

Published: 26/03/2018
Updated: 26/03/2018

1.1       What is trading?

Trading usually involves the sale of goods or services for the purpose of making a profit. Trading can be carried out directly by the charity, if it has the power in its governing document. In some cases it is advisable that any trading is carried out by a trading subsidiary.   

Tax law defines different types of trading by charities and in this section we describe these and the implications of them in terms of tax law and Scottish charity law

The charity test: To be a charity in Scotland you must meet the charity test. This means a charity must: 


HMRC decides on the type of trading activity and what tax rules apply. 

OSCR decides if an activity advances charitable purposes.

1.2       Primary purpose trading:  trading that advances the charity’s purpose(s)

Primary purpose trading is where the trading activity directly contributes to the charity achieving its purposes. In this Guide we include trading carried out by the charity’s beneficiaries in the explanation of primary purpose trading.


Examples of primary purpose trading are:

  • A health care charity providing therapies and treatments in return for fees.
  • A charity for disabled adults selling goods made by the beneficiaries.
  • A further education college running a restaurant operated by students as part of their catering course.
  • A farm operated by students of an agricultural college.
  • A residential care charity providing residential accommodation in return for fees.
  • A theatre charity selling tickets for their productions.

Tax Law implications: If HMRC are satisfied that the trading is primary purpose trading, and the profits are applied for the purposes of the charity only, you will not pay tax on profits made from this trading. 

Charity Law implicationsIf OSCR is satisfied that the trading activity directly advances the charity’s purposes and provides public benefit, we would be content for the charity to carry out the trading activity.


1.3       Ancillary trading:  trading that complements charitable purposes

Ancillary trading does not directly advance a charitable purpose; but contributes to its success.


Examples of ancillary trading are: 

  • The sale of stationery or text books by a college to its students.
  • The provision of a paid for crèche for the children of parents who are students attending a training course.
  • The sale of refreshments to audiences at a theatre performance. 

Tax Law implicationsAncillary trading can still be said to be exercised in the course of the carrying out a primary purpose. If HMRC are satisfied that the trading is ancillary, it is therefore part of the primary purpose trade and will be exempt from direct tax. 

Charity Law implicationsTrading activities which OSCR is satisfied are being carried out as a by-product of a charity’s main activities will not be regarded as activities which contribute to public benefit, but they are unlikely to be a problem in terms of the charity test.  


1.4       Non-primary purpose trading: trading that provides an income to support charitable activity

Non-primary purpose trading is where the trading itself does not advance the charity’s purposes or provide public benefit. The trading is carried out to raise funds for the charity, but it is not a charitable activity.  Anything which is not primary purpose or ancillary trading falls into this category. Charities might carry out non-primary purpose trading to fulfill social objectives outside the charity’s main purpose or simply to raise funds.

Examples of non-primary purpose trading are:

  • The sale of Christmas cards or calendars to raise funds for the charity. 
  • The operation of a cafe bar at a theatre, which is open to the general public.

Tax Law implications:If a charity carries out non-primary purpose trading, it will have to pay income or corporation tax on its profits from those activities, unless the level of trade that isn’t primary purpose falls within:

The small-scale exemption is an exemption from corporation tax on the profits from small-scale non-primary purpose trading by charities.  It applies only where all the profits or income are applied for the charity's purposes.

Charity Law implications: Charities can undertake non-primary trading activities as long as there is no ‘significant’ risk to the resources of the charity. Charity trustees must always act in the best interests of the charity and consider whether it is appropriate to undertake the trading activity.

With non-primary purpose trading it is important to consider the scale of the risk to the charity. Whether this is ‘significant’, depends on a number of factors, such as:

  • the size of the charity
  • the charity’s legal form
  • the nature of the business involved in the trading
  • the expected cost
  • turnover projections
  • investment required from the charity, and the likelihood of return to the charity.

If the trading activity is considered to be of significant risk you should first decide if the activity should be carried out at all.  If you decide it is worth the risk then you should look at establishing a separate trading subsidiary.


1.5       What doesn’t count as trading?

In some cases charities can sell things without it being considered trading for tax purposes:

  • Selling or letting donated goods – as long as they were given to the charity for that purpose. Where there is a mix of donated goods and other goods being sold, the income from the donated goods must be separated from the other trading profits.
  • Selling investments.
  • Selling assets the charity uses, or has used, for charitable purposes.
  • Letting land and buildings – as long as no additional services are provided to the tenant.

See HMRC for detailed information on what constitutes trading for tax purposes and guidance about other taxes that might apply.


1.6       Tax exemptions and reliefs

  • Being a charity does not automatically mean you are exempt from paying tax. Charitable status can bring with it tax exemptions and reliefs in certain circumstances.
  • As with all organisations, charities must register for VAT if they fall under the appropriate criteria. See VAT for charities for more details.
  • We are aware that, while charities and those that want to become a charity must pass the charity test, they will also want to be recognised as charities for tax purposes. Recognition as a charity for tax purposes is a separate matter for HMRC.

In UK tax law ‘charitable purposes’ are defined in terms of the law of England and Wales, which differs slightly from Scots law. Any definitions of ‘charitable’ or ‘charitable purposes’ in your governing document will need to be acceptable under both the 2005 Act and tax law. More information on these definitions can be found in our Briefing note with HMRC.

Further information on Charities and tax can be found on the gov.uk website