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As the funding environment for charities becomes increasingly constrained many charities are seeking to diversify their income. Within the museum sector these diversifications often include the sale of merchandise, rental of spare building space, venue hire for events and conferences, sponsorship and advertising opportunities with local businesses and diversifying the catering offering to become a destination in its own right.
When performed well, such commercial activities can provide a vital additional source of income to support the charity’s work. However, there are several matters to consider from a tax perspective before commencing any new income-generating activities to ensure that they are structured effectively.
Trading within a charity which is neither in furtherance of its charitable objects nor ancillary to those objects is known as non-Primary Purpose Trading (“non-PPT”). Corporation Tax Relief is only available on non-PPT where the turnover from such trading is less than 25% of the charity’s total gross annual income, subject to a current upper limit of £50,000 for charities with income exceeding £200,000. Charities with income under £20,000 can have non-PPT trading up to £5,000, regardless of whether this exceeds 25% of their total income.
This is an all or nothing relief, meaning that if the charity’s non-PPT turnover exceeds the relevant limit, the whole of the charity’s profits from that trading will be liable to corporation tax.
Examples of activities that may constitute non-PPT trading are:
HMRC have announced a welcome increase to the small charities trading limit from 1 April 2019. The maximum limit will increase to £80,000, with charities within income under £32,000 allowed non-PPT trade up to £8,000.
As well as corporation tax, VAT must also be considered as conducting VATable activities which exceed the VAT registration threshold would require the charity to register for VAT.
When non-PPT exceeds the above-mentioned thresholds, it may be advantageous for the charity to establish a trading subsidiary to carry out these activities. Taxable profits generated by trading subsidiaries are eligible for corporation tax relief provided that they are distributed to the charity within 9 months of its financial year end.
If you are performing non-PPT activities it is essential that you regularly monitor the financial return from the trade to ensure it is generating an income stream for the charity, and that the total costs do not outweigh any income raised. As well as the direct costs of the trade, make sure that you consider overheads and administration costs, including how much staff time is taken in managing the activities.
Poorly structured trading activities can lead to unnecessary tax liabilities, so it is important to consider this at an early stage and to take professional advice where appropriate.
HMRC and the Charity Commission have issued a number of useful guides on trading within charities, including CC35 – Trustees trading and tax: how charities may lawfully trade and charities and trading.
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