Helen Kidd, Partner and Head of Charities and the Third Sector, highlights the risks of unintended consequences if activities do not reflect charity’s purposes
The landscape of finance and fundraising for charities has changed significantly in recent years. Since the first coronavirus lockdown five years ago, the sector has faced relentless challenges, from rising costs and increased National Insurance contributions to tightening public sector funding and a downturn in fundraising income. Despite these pressures, charities continue to demonstrate resilience, embracing new ways to secure financial stability.
One increasingly common approach has been the expansion of trading activities - whether through charity-run shops, fee-charging services, or other revenue-generating initiatives.
While these efforts can provide much-needed funds, they also come with legal and financial considerations that trustees must not overlook. A failure to align trading activities with the organisation’s charitable purposes can lead to unexpected tax liabilities or regulatory consequences.
Understanding the difference between primary and non-primary purpose trading
In charity law, trading falls into two broad categories: Primary Purpose Trading (PPT) and non-PPT.
If trading directly furthers a charity’s purposes, the profits are generally tax-exempt. However, where trading is non-PPT and exceeds the small tax trading exemption set by HMRC, charities must conduct these activities through a wholly owned trading subsidiary to remain compliant with tax and charity law. The subsidiary can then donate its profits back to the parent charity under the Gift Aid scheme, provided this is done within the required timeframe.
For trustees, the key consideration is whether trading activities advance the charity’s purposes and provide public benefit. OSCR, the Scottish charity regulator, provides examples of PPT, such as a residential care charity charging fees for accommodation, a further education college running a student-led restaurant, or a theatre charity selling tickets to productions.
Any non-PPT activities should only be undertaken if there is no significant financial risk to the charity’s resources. Otherwise, the charity may be liable for income or corporation tax on profits unless exemptions apply.
The importance of compliance and seeking expert advice
Given the complexities involved, working closely with an accountant or auditor is crucial to ensuring compliance and tax efficiency. A well-structured legal and financial approach can prevent the risk of unexpected tax bills or reputational damage arising from regulatory scrutiny.
Recent findings from the SCVO Third Sector Tracker indicate that while confidence in charity survival remains strong, uncertainty is at near-record levels. As charities look ahead to the new financial year, ensuring that trading decisions align with charitable purposes is more important than ever.
By taking the right precautions, organisations can continue to innovate while safeguarding their financial future.
Published 25 March 2025
