What are the tax implications if our charity charges for some services?

Corporation Tax and Trading income for Charities

Charities are allowed to trade just like a company.   However, depending on weather the trading income is classified as primary purpose trading or trading for fundraising purposes they need to be aware of the rules which determine if the profits from the activities are exempt to Corporation tax.   

What’s the difference between primary purpose trading and trading for fundraising purposes?

  1. If the trading income is related to activities are part of the charities objects the trading income is classed as primary purpose trading income.
  2. If the trading income was from activities which concerns supplies that are not part of the objects, these activities are classed as trading for fundraising purposes.

Corporation Tax Exemptions for Charites

As a charity, profits from any activity that is classified as primary purpose trading are exempt from corporation tax.

You can also benefit from a number of exemptions to corporation tax on fundraising activity.  These include an exemption to corporation tax:

  • where the trade is carried out mainly by the beneficiaries of the charity.
  • where the total income (not profit) from fundraising is below the higher of the small-scale trading limit which is £5,000 or 25% of the total income up to a maximum of £50,000.  

VAT Rules on Trading Income for charities

When does a charity need to register for VAT?

The VAT registration threshold goes up most years in April and is £82,000 (as at March 2018).   As long as the charities total trading income, excluding trading income which is classified as exempt from VAT (such as sales of educational services) is below the VAT registration threshold, then the charity will not be required to register for VAT.   When calculation the total trading income, you must look at the total for the previous 12 months.  

What about Grant Income?

Income from funders are normally classified as grants not trading income and therefore not added to the total income from trading activities.   However, if the charity is involved with selling goods or services to your funder (i.e. they are purchasing from the charity), the amounts you receive from them would count as trading income as opposed to grant income and would therefore be included.

What are the implications of being VAT registered?

There are a huge quantity of VAT rules, exemptions and schemes so please make an appointment if you would like me to discuss this in more detail.

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