It is often assumed that charities are not allowed to trade commercially. In fact, they can, but only if the activity they are carrying out is in pursuit of their primary aim(s). Known as ‘primary purpose trading’, this means, for example, that an educational charity can sell educational materials, a social welfare charity can deliver welfare services under a contract, and a community centre can rent out rooms for community activities.
However, if a charitable organisation sets up a significant trading activity, which is unrelated to the charity’s primary aims, and is purely aimed at raising funds, it needs to do so through a separate organisation. This is often achieved through setting up a ‘trading arm’ of the organisation. This is where, for example, an organisation established to run a shop donates any profit the shop makes to the charity or voluntary organisation.
So, if an educational centre also runs a souvenir shop and café – and if the income from these is significant – the shop and café probably need to be separately constituted. Charity shops are common examples of separate trading arms.
A key issue here is the tax status of charitable activity. Charity income is usually exempt from tax, whereas non-charitable trading income is not. It is the act of converting the surplus from a trading arm into a donation to a parent charity that provides a tax exempt status for the funds. It is the donation that attracts the tax exemption, not the trading income. For more information on tax issues see our Introductory Overview on Taxation.
