30 May 2019
Sectors:
Charity and Not for profit
Services:
Supporting our Voluntary, Community & Social Enterprise Sector
As of April 2019, the government has introduced a series of measures to reduce cost and administrative burdens on charities in order to ensure that they are ‘able to maintain effective delivery of their charitable aims’. In order to do this, the small trading tax exemption limits for charities has increased.
The changes are as follows:
| Charity’s gross annual income | Maximum permitted small trading turnover |
| Under £20,000 | £8,000 |
| £20,001 to £320,000 | 25% of your charity’s total annual turnover |
| Over £320,000 | £80,000 |
Trading income is generated for the exchange of goods or services for the purpose of making a profit. There is no specific definition of what trading income is as it can vary for the individual charity. The key is that if the activity falls under the charities ‘primary purpose activities’ then it will not be considered as trading income by HMRC.
Primary purpose activities
This is when your trading directly advances the charity’s mission which is stated within the governing documents. Some examples of primary trading that may be considered as part of the exemption include:
• Running an institution that provides educational services in return for a fee
• A theatre charity selling tickets for their productions
• Hospital health care services in return for a fee
Ancillary primary-purpose
You have to apply slightly more judgment to these activities as they are not to directly advance the charities objects but contributes to the success, for example;
• The sale of food and drink to the audiences at a theatre performance
• The sale of stationery and books by a college to its students
Other exemptions
Your charity will not have to pay tax on lotteries or fundraising events if all profits go toward the charities primary purpose, fundraising events qualify under the VAT rules and the lottery has an operating license.
What if trading income exceeds the limits?
Due to the limits imposed on the levels of trading income, a charity can generate and you find that you are exceeding or getting close to the limits the trustees may wish to consider setting up a trading subsidiary.
This will allow more flexibility in the levels of activities performed and will protect the charity for a tax liability, however it will create a further administrative burden to the administration function of the charity.
To find out how we can help as your specialist charity accountants, get in touch today.
