Structuring Supporting Trades and Property
Charities frequently look for ways to generate additional income beyond donations and grants. Operating a charity shop, renting out rooms, or offering paid services can all help meet financial needs. However, these activities fall under supporting trades or involve property use, and must be properly structured to maintain access to tax exemptions and avoid unintended liabilities.
At My Tax Consultants, we provide expert guidance on the structuring of supporting trades and property for charities. Our approach protects both income and compliance, aligning activities with HMRC guidance while supporting the long-term goals of your charitable organisation.
Understanding Supporting Trades in Charities
Supporting trades refer to income-generating activities that may fall outside a charity’s main objectives. These include operations such as second-hand shops, cafés, training programmes, or paid-for advisory services. While these can provide valuable revenue, they must be carefully managed to avoid challenges to tax status.
Charities may carry out primary purpose trading, where the trade is directly aligned with the charitable objectives. For example, a charity promoting education might charge fees for courses or workshops. Income from such activity qualifies for charitable exemption rules.
However, if the activity is not considered primary purpose, it may be classed as non-charitable trading. To prevent tax exposure, charities are limited by the small trading exemption, which allows them to earn a modest amount of non-primary trading income without setting up a separate entity. If that threshold is exceeded, the charity must consider establishing a charity trading subsidiary.
When and Why to Use a Charity Trading Subsidiary
A charity trading subsidiary is a limited company that is wholly owned by the charity. It enables the charity to conduct non-primary purpose trading in a tax-efficient manner. The trading company earns revenue, pays expenses, and donates any profits to the parent charity via Gift Aid and trading income structures. This allows profits to be transferred without incurring corporation tax.
Using a charity trading subsidiary helps protect the charity from risk. It separates trading activity from the main body of the charity, preserving its status and public image. It also ensures that any liabilities from commercial activity do not affect the charity’s core funds or operations.
Establishing such a subsidiary requires thoughtful planning. We assist with incorporation, VAT registration, setting up proper agreements between the charity and the trading arm, and ensuring that all financial flows are documented in accordance with HMRC expectations. This includes full support for Gift Aid and trading income reconciliation and annual reporting.
Property Use and VAT Considerations
Charities often hold or lease buildings for a variety of uses—some for charitable delivery, others for revenue. Use of property must be evaluated for tax and VAT implications. For example, hiring out a hall for community events or renting office space to third parties may trigger VAT responsibilities.
If the property is used wholly for charitable purposes, it can benefit from full relief under charitable exemption rules. However, if the property has a mixed use, or is used for generating income outside the charity’s objectives, partial relief or none at all may apply. This is particularly significant when dealing with VAT on property transactions, which includes sale, lease, refurbishment, or construction.
We work closely with charities to evaluate property portfolios, contracts, and use cases to determine whether VAT registration is necessary and how to recover VAT where applicable. We also provide guidance on when opting to tax may be beneficial and how to properly allocate VAT between business and non-business use.
Complying with Primary Purpose Trading Rules
Not all revenue-earning activities fall outside charitable purpose. As mentioned, primary purpose trading occurs when the trade directly furthers the charity’s objectives. For instance, a healthcare charity offering paid rehabilitation services, or a religious organisation selling materials used in worship, are examples of trades that align with their primary purposes.
Understanding whether a trade is considered primary purpose is essential. Misclassification can result in unexpected tax bills and, in some cases, jeopardise charitable status. We help assess whether your activity meets the requirements and whether income qualifies under the charitable exemption rules.
If the activity does not qualify, and income exceeds the small trading exemption, using a charity trading subsidiary becomes not just helpful but necessary.
Small Trading Exemption Thresholds
To reduce administrative burden, HMRC provides a threshold under the small trading exemption. This allows a charity to carry out a small amount of non-primary purpose trading without forming a subsidiary. The exemption is currently £80,000 or 25% of the charity’s gross income, whichever is lower, up to a cap of £320,000.
Breaching this threshold without the correct structure in place exposes the charity to taxation and compliance issues. We regularly assist with annual reviews of trading income and advise when it’s time to formalise a separate company to remain within the rules.
Structuring Gift Aid and Trading Income
Where a charity trading subsidiary exists, it is common for profits to be passed to the charity via Gift Aid and trading income schemes. This must be done according to company law and charity law. Only distributable profits can be donated, and the transaction must take place within nine months of the company’s year-end.
Mistakes in this area can result in unnecessary tax charges, accounting errors, or HMRC penalties. We assist in calculating distributable reserves, preparing required documentation, and helping both the charity and its trading company stay aligned.
Speak to My Tax Consultants
Incorrect structuring of supporting trades or property use can result in loss of tax exemptions, liability for VAT, and damage to a charity’s financial integrity. Our experience in structuring supporting trades and property helps trustees and finance officers make informed, compliant decisions.
From assessing whether you qualify for primary purpose trading to setting up a charity trading subsidiary, dealing with VAT on property transactions, or managing Gift Aid and trading income — we provide a complete advisory service tailored to the charitable sector.
Contact My Tax Consultants today to ensure your charity’s activities meet all relevant rules and retain full benefit from the charitable exemption rules.
