As announced in the Budget, from April 2019, the Government has increased the upper limit for trading that charities can carry out without incurring a tax liability. Updated guidance can be found here and the relevant sections are reproduced below.

This will allow charities to undertake more trading activity before a trading subsidiary is needed and is a welcome change having been at the same rate for almost 20 years. CTG called for this change in its Budget submission and the Minister was asked about it directly at the CTG Tax Conference. A letter from CTG Chairman John Hemming calling for this change following discussion at the CTG Tax Conference in 2018 can be read here.

HMRC guidance: Annex iv: trading and business activities – basic principles

9. Chargeable periods beginning on or before 21 March 2006, where all the trade does not qualify as primary purpose

For chargeable periods beginning on or before 21 March 2006, where the whole trade might not qualify as a primary purpose trade because part of the trade was not related to a primary purpose, HMRC will, in practice, accept that all of the profits of the trade will be within the exemption from tax if:

• that part of the trade which is not within a primary purpose is not large in absolute terms
• the turnover of that part of the trade is less than 10% of the turnover of the whole trade

A turnover (for the part of the trade which is not primary purpose) of £80,000 per annum or less would be considered ‘not large’ for the purposes of the first part of this test. So, a mixed trade with a non-primary purpose turnover of less than £80,000 per annum and representing less than 10% of the total trade turnover would satisfy this test.

Where the profits of a trade cannot be exempted because part of the trade is not related to a primary purpose and:

• its turnover represents 10% or more of the turnover of the whole trade
• the non-primary purpose turnover is greater than £50,000 per annum
• the whole of the profits may be liable to tax, including that part which is related to a primary purpose

The following examples illustrate this.

Example 1

Charity A carried on in the year ended 5 April 2005 a trade with an annual turnover of £60,000. Of this, £55,000 was primary purpose and £5,000 was not. Because the non-charitable purpose turnover (£5,000) was less than 10% of the total (£6,000) and less than £80,000, the whole trade is treated as charitable.

Example 2

Charity B carried on a trade in the year ended 5 April 2005 with an annual turnover of £100,000. Of this, £85,000 was primary purpose and £15,000 was not. Because the non-charitable turnover exceeded 10% of the total (£10,000) the whole trade is treated as non-charitable.

15. Calculation of the annual turnover limit

The annual turnover limit is:

• £8,000
• if the turnover is greater than £8,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £80,000

For the purpose of this limit, ‘total incoming resources’ means the total receipts of the charity for the year from all monetary sources (grants, donations, investment income, all trading receipts, etc), calculated in accordance with normal charity accounting rules (whether the income is taxable or not). It does not include capital receipts (for example, from the sale of shares or a property).

This table illustrates the application of these rules:

Total incoming resources of the charity	Maximum permitted turnover
Under £20,000	£8,000
£20,001 to £320,000	25% of charity’s total incoming resources
Over £320,000	£80,000

Examples

A charity sells greetings cards to raise funds and applies all its income charitably. This is not charitable trading, but the sale of cards. The message on the cards does not alter this and so for example, a Christian church, selling cards with a religious message would still be carrying out a non-charitable trade.

Example 1:

• assume this is the only taxable trading activity
• the turnover from the cards amounts to £4,500 in the year
• any profits will be exempt from tax, because the turnover does not exceed £8,000 (the minimum small scale trading turnover limit)

Example 2:

• a charity has a turnover from non-charitable trading of £40,000 for the year
• its total incoming resources for the year are £160,000 (including the £40,000 turnover)
• the income from non-charitable trading (£40,000) is not more than 25% of total income (£160,000) and less than £80,000
• profits are exempt from tax because the turnover from the non-charitable trading does not exceed the small scale trading turnover limit

Example 3:

• a charity has turnover from non-charitable trading of £40,000 for the year
• its total incoming resources are £150,000 (including the £40,000 turnover)
• the £40,000 turnover exceeds the annual turnover limit (£150,000 @ 25%= £37,500) – so profit from the whole of the £40,000 is taxable
• however, the profits on sales may still be exempt from tax for this year if the charity could demonstrate that it had a reasonable expectation at the start of the year that the turnover would not exceed the small scale trading limit