Charities are exempt from income tax, corporation tax and capital gains tax on all income applied for charitable purposes.

This will include:

• rental income
• bank interest and investment income such as dividends
• fundraising activities such as lotteries
• grants, donations, legacies, membership subscriptions as support for the charity’s objects

Selling goods or services will also be exempt if it falls within one of the categories below:

• Primary purpose trading – activities undertaken to achieve the charitable objectives such as fees for a care home
• Trade undertaken mainly (more than 50%) by the charity’s beneficiaries. The trade itself need not be a primary purpose trade and the beneficiaries can be paid or unpaid
• Ancillary trading – when the trade is undertaken in the course of carrying out a primary purpose activity, such as selling refreshments to beneficiaries

If your charity sells Christmas cards, for example, or undertakes similar trading activities that are not primary purpose, as above, then this may be subject to tax. However, a further exemption is made if the trading is small-scale. Total turnover from all such activities needs to be below £5,000, or the lower of £50,000 and 25% of the charity’s incoming resources.

HM Revenue and Customs (HMRC) is the body which administers and regulates taxation on behalf of government. HMRC allows charities to undertake small fundraising activities without incurring tax liabilities. The types of activities they list as examples are ‘bazaars, jumble sales, gymkhanas, carnivals, firework displays’. In practice, the exemption will be extended to all small-scale fundraising events providing:

• the charity is not regularly carrying out these trading activities
• the trading is not in competition with other traders
• the activities are supported substantially, because the public is aware that any profits will be donated to charity
• the profits are applied for charitable purposes

In addition, there is a general exemption from tax (and VAT) for fundraising events, where charities may have up to 15 events of the same kind in one location in one financial year. Events may be held by the charity or its trading subsidiary, but the limit of 15 events would apply to them jointly. Events can be widely interpreted, so that it can include an event on the internet or participatory events, such as golf days.

Events must be organised with a clear fundraising purpose, which should be made known to the public. Any events which create a distortion of competition and place a commercial enterprise at a disadvantage will not be considered exempt fundraising events.

Small-scale events can be ignored, as long as the aggregate gross takings from events of that type in that location do not exceed £1,000 in a week. This means that normally jumble sales and coffee mornings are not included when counting up the number of events.

If a charity has larger-scale trading activities that are not primary purpose, then they can channel these activities through a trading subsidiary, which then donates profits to the charity under Gift Aid within certain time limits.

Some voluntary organisations are not registered charities, and so do not qualify for tax exemptions. Organisations may find that they have to pay tax on any surplus at the end of the financial year. However, if such organisations have income from voluntary sources, then this is not trading and not taxable. This would include gifts, donations, legacies and grants. If the organisation has some trading activity, such as the sale of publications, then it is possible to prepare a tax computation for that activity.

This should bring in the direct costs and a proportion of the overheads to arrive at the taxable profit figure. The taxable profit is often very low, and so the tax payable not significant. The organisation will, however, have to pay tax on interest earned, and no exemption from this is available for non-charitable voluntary organisations.