How can a charity trade legally?

Charities are allowed to trade in respect of their charitable objects. A charity set up to provide drug & alcohol support to people suffering with addictions will be trading in providing its services for example. Surpluses from these activities are not subject to tax because of an exemption.

Charities may also trade in a small way outside their charitable objects. The income threshold for non-charitable trading (or non-primary purpose trading) is £80,000 per financial year. With income below this threshold a charity is not liable to tax on profits arising from non-primary purpose trading.

Some charities either exceed this threshold and would commonly consider setting up a trading subsidiary to do this. A trading subsidiary is a company, wholly owned by the charity, which would undertake the trading activity.  Such subsidiaries are subject to tax; but can donate their profits to their parent charity to minimise tax liabilities.

 If any of the following issues affect your charity, we are able to help

  • We have more than £80,000 of non-primary purpose trading and want to set up a subsidiary, how do we do it?
  • Will the subsidiary have to register for VAT?
  • Should we transfer staff into the subsidiary?
  • Should we transfer assets into the subsidiary?
  • Should the subsidiary own assets?
  • How does the charity fund the subsidiary to get it started?
  • Can the subsidiary borrow money?
  • Who should the directors of the subsidiary be?
  • How do we ensure that the subsidiary pays no Corporation Tax on its profits?
  • Our existing subsidiary has brought forward losses; can we make Gift Aid donations?

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