Charities may find that within their trading activities they receive goods or services for either nil cost or at undervalue. It is possible that suppliers will not charge full market value for goods supplied to a charitable trading activity or that advisers are willing to work for no fee or at a reduced level of fee.
When computing the profits of a trading activity a charity can deduct the notional costs of such goods or services. The deductions should be calculated on a reasonable basis and should reflect the market price at which the charity could have been expected to have been charged for the goods or services. An example given by HMRC is that if a celebrity acts as a volunteer waiter at a gala dinner, the notional cost would need to be restricted to the going rate for the employment of a waiter, not of the celebrity.
The deduction of notional costs can be very beneficial where a charity has conducted a non-primary-purpose trading activity via the charity and wishes to establish the level of taxable profits in cases where the small trades threshold has been exceeded.
The ability to deduct notional costs does not extend to trading subsidiary companies.