Trading by Charities. IR booklet CS2, edited (original) (raw)

INLAND REVENUE booklet CS2, September 1998, edited and annotated

2.1 Normally a trade involves the sale of goods or services to customers as part of a commercial enterprise. A one-off or occasional venture may be treated as a trade for tax purposes if it involves the sale of goods or the provision of services for profit.

2.2 In most cases it will be clear whether an activity is, or is not, a trade. But sometimes it will not be easy to decide whether there is a trade. Whether an activity is, or is not, a trade depends on the facts in each case. When it is not clear which way the decision should fall it will be necessary to look at all the circumstances surrounding the activity.

2.3 When deciding whether an activity amounts to a trade it is irrelevant that the profits are intended to be used for charitable purposes.

Note: Bookselling, including educational bookselling is incontrovertibly a trade - A.M.

2.4 Trading by charities can take a number of different forms. But in general trades carried on by charities fall into one of two broad categories:

2.5 This distinction between primary purpose trades and other trades is important because it may determine how the trade is treated for tax purposes.

2.6 The following sections describe the tax rules which apply to trades carried on by charities and then go on to consider how those rules apply to different sorts of trades.

3.1 The Taxes Acts provide for a limited exemption from tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the purposes of the charity. In addition the trade must satisfy one of these two conditions:

3.2 If a trade does not satisfy one or other of the above conditions statutory exemption will not be available for the profits of the trade. Unless concessional relief is available (paragraphs 6.1 to 6.15) tax will be payable on the profits regardless of whether or not they are used for the purposes of the charity.

Note: Neither book-distribution nor educational book-distribution (let alone -selling) are per se charitable aims or purposes. - A.M.

4.1 A primary purpose trade is one that is exercised in the course of the actual carrying out of a primary purpose of the charity. A charity's primary purposes can be identified from its trust deed or constitution.

Note: OUP has no trust deed or 'governing document'. - A.M.

4.2 Some trades organised by charities may, in themselves, amount to primary purpose activities and therefore qualify for exemption. Examples of such trades are:

4.3 In each of the above examples it is assumed that the organisation carrying on the activity is a charity and that it is part of the organisation's charitable objects to undertake the activity described.

Trades which are ancillary to the carrying out of a primary purpose

4.4 All of the examples listed above involve trades which are, themselves, primary purpose activities. The exemption from tax also extends to other trades which are not primary purpose activities but which are ancillary to the carrying out of a primary purpose so that they can be said to be exercised in the course of the actual carrying out of a primary purpose. Examples of trades which qualify as primary purpose trades because they are ancillary to the carrying out of a primary purpose are: the provision of accommodation to students by a school or college in return for rent; the sale of goods or services for the benefit of students by a school or college; the provision of a creche for the children of students by a school or college in return for payment; the sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum; the sale of food and drink in a restaurant or bar to members of the audience by a theatre; the sale of confectionery, toiletries and flowers to patients and their visitors by a hospital.

4.7 In any case where the profits of a trade cannot be exempted because part of the trade is not related to a primary purpose, the whole of the profits will be liable to tax, including that part of them which is related to a primary purpose. 6.1 Where trading activities carried on by a charity are not covered by the statutory exemptions described above the profits will be taxable. However, by concession the Inland Revenue do not seek to tax the profits of some small scale events arranged to raise funds for charity. The full text of this concession is set out below.

6.2 "Bazaars, jumble sales, gymkhanas, carnivals, firework displays and similar activities arranged by voluntary organisations or charities for the purposes of raising funds for charity may fall within the definition of "trade" in Section 832, Income and Corporation Taxes Act 1988, with the result that any profits will be liable to corporation tax. Tax is not, however, charged on such profits provided all the following conditions are satisfied: the organisation or charity is not regularly carrying on these trading activities; the trading is not in competition with other traders; the activities are supported substantially because the public are aware that any profits will he devoted to charity, and; the profits are transferred to charities or otherwise applied for charitable purposes."

11.1 Charities carrying on trades outside the statutory and concessional exemptions usually arrange for the trade to be carried on by a wholly owned trading company. Using this approach it is possible for the trading profits to be applied for charitable purposes tax free.

11.2 Companies owned by charities are liable to pay tax on trading profits in the same way as other companies. But, like other companies, they can get tax relief for donations to charity. By donating all of their taxable profits to charity the company can get a tax deduction equal to the amount of the profits, so that no tax will be payable. In the hands of the charity the donation will not be regarded as trading income, so that it will be exempted from tax (provided, of course, it is used for charitable purposes).

11.3 The most common method of paying up the profits of a wholly owned company to the parent charity is by way of a "profit-shedding" deed of covenant. This is a deed which commits the company to paying up the whole of its profits each year. The Inland Revenue cannot comment on draft profit-shedding deeds of covenant prior to their execution. Trading companies should consider taking legal advice when drawing up their own profit-shedding deed of covenant.

Note: OUP has no deed of covenant with the University and until recently has annually donated only fractions - sometimes small fractions - of its profits to the University. - A.M. See cuttings The Times, 17/7/99 and Cherwell, 25/2/00.

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