© Crown copyright 2021
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: firstname.lastname@example.org.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/charities-detailed-guidance-notes/annex-iv-trading-and-business-activities-basic-principles
Many charities trade, either as an integral part of their charitable activities or to raise funds.
The tax implications of trading are different for direct taxes (Income Tax and Corporation Tax) and VAT. The rules for direct taxes are based on trading and profits. The rules for VAT are based on supplies made and received in the course of carrying out business activities. Charities need to be familiar with both the direct tax and VAT rules when they’re deciding how to organise their trading activities.
The Charity Commission also produces guidance in leaflet CC35 -Trading by Charities which should be read by English and Welsh charities alongside this guidance. Other UK charities may also find CC35 helpful. The Office of the Scottish Charity Regulator is responsible for providing guidance for charities established in Scotland.
2. Direct tax: trading for tax purposes
Usually, trading involves the provision of goods or services to customers on a commercial basis. Simply because a venture is a one-off or occasional does not mean that it will not be trading for tax purposes.
Whether an activity is, or is not, trading depends on the facts in each case. When it is not clear it will be necessary for HMRC Charities to look at all the circumstances surrounding the activity. Further guidance can be found in the Business Income Manual at paragraph 20200.
When deciding whether an activity amounts to trading it is not relevant that the profits are intended to be used for charitable purposes.
3. VAT: business activity for VAT purposes
The VAT rules are based on the concept of making supplies in the course or furtherance of business. Generally, if goods or services are provided in return for a charge, there’s a business activity for VAT purposes. Guidance on the meaning of ‘business’ for VAT purposes is contained in VBNB: VAT business/non-business.
4. Direct tax and VAT: trading and business activities carried on by charities
Under general case law a charity can have only 1 trade. However, for tax purposes, in order to apply the exemptions from tax, it is necessary to divide trading undertaken by charities into 2 different statutory forms - charitable and non-charitable trading. These rules apply for chargeable periods beginning on or after 22 March 2006.
There are 2 forms of charitable trading, primary purpose trading and trading mainly carried out by beneficiaries.
(a) Primary purpose trading
Trading exercised in the course of carrying out a primary purpose of the charity such as a religious charity selling bibles, a charitable school charging pupils, or a charitable clinic charging patients or selling medicines.
(b) Trading mainly carried out by beneficiaries
Trading mainly carried out by a charity’s beneficiaries, for example, the manufacture and sale of items by disabled people working for a charity whose purpose is the relief of disabled persons. This is discussed further at paragraph 10 onwards.
The profits arising from charitable trading are exempt from tax provided they’re applied for charitable purposes.
Non-charitable trading is trading which does not fall within (a) or (b) above but which is undertaken to raise funds to be applied for charitable purposes, for example, the sale of promotional items such as pens, pencils, mugs, etc. The profit from non-charitable trading is taxable unless it’s exempt under the small trading exemption (paragraphs 13-14).
Where the trading is all charitable or all non-charitable the tax treatment is fairly straightforward.
Where an activity involves both charitable and non-charitable trading the tax position must be calculated as if there were 2 entirely separate trades. So the income and expenditure must be apportioned accordingly.
The legislation covering the tax exemptions for charitable trades is:
- corporate charities, sections 478 and 479 Corporation Tax Act 2010
- charitable trusts, sections 524 and 525 Income Tax Act 2007
For VAT purposes there’s no distinction between charitable and non-charitable trading. Even though an activity is carried out for the benefit of the community or in the furtherance of charitable objects, it can still be a business activity for VAT purposes and VAT may due on the income.
Guidance on the VAT implications of trading by charities is available. This includes guidance on what is a business activity for VAT purposes, when a charity is required to register for VAT and the VAT reliefs available for charities.
5. Statutory exemption from tax for charity’s trading profits
The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:
- trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries - paragraph 6) or is ancillary to carrying out a primary purpose of the charity (see paragraph 7)
- non-charitable trading turnover falls below the charity’s small trading turnover limit (see paragraph 14)
- trading activity is a VAT exempt fundraising event (paragraph 29)
If a trade does not satisfy 1 of the above conditions, the profits of the trade will not be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.
6. Primary purpose trading
Primary purpose trading’s trading carried out by a charity in the course of carrying out its primary purpos(s). A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).
Examples of such primary purpose trading include the:
- provision of educational services by a school or college in return for course fees
- holding of an exhibition by an art gallery or museum in return for admission fees
- sale of tickets for a theatrical production staged by a theatre
- provision of health-care services by a hospital in return for payment
- provision of serviced residential accommodation by a residential care home in return for payment
- sale of certain educational goods by an art gallery or museum
In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity. HMRC has endorsed guidance on the Corporation Tax Treatment of Universities issued by the British Universities Finance Directors Group. Other charities may also find this guidance helpful.
More information about the tax treatment of affordable home ownership can be found in Annex VII of the detailed guidance notes.
7. Trading which is ancillary to the carrying out of a primary purpose
Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:
- sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
- provision of a crèche for the children of students by a school or college in return for payment
- sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
- sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
- sale by able bodied staff of items produced by the disabled in a disabled workshop
- sale of confectionery, toiletries and flowers to patients and their visitors by a hospital
8. Trading which is not wholly charitable trading
Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:
- a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which are not (promotional pens, mugs, tea towels, stamps, all postcards, etc)
- the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
- the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity - ancillary) and the general public (non-beneficiaries - not ancillary)
- the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% are not charitable beneficiaries
In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades - sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption (see paragraph 13).
Any receipts or expenses relating to the overall trade should be apportioned to the separate trades on a reasonable basis.
These rules apply for chargeable periods, that is, tax years for charitable trusts and accounting periods for other charities, beginning on or after 22 March 2006. Charities should ensure they have accounting systems that permit the identification of charitable and non-charitable trading, and the proper allocation of receipts and expenses to each.
9. Chargeable periods beginning on or before 21 March 2006, where all the trade does not qualify as primary purpose
For chargeable periods beginning on or before 21 March 2006, where the whole trade might not qualify as a primary purpose trade because part of the trade was not related to a primary purpose, HMRC will, in practice, accept that all of the profits of the trade will be within the exemption from tax if:
- that part of the trade which is not within a primary purpose is not large in absolute terms
- the turnover of that part of the trade is less than 10% of the turnover of the whole trade
A turnover (for the part of the trade which is not primary purpose) of £80,000 per annum or less would be considered ‘not large’ for the purposes of the first part of this test. So, a mixed trade with a non-primary purpose turnover of less than £80,000 per annum and representing less than 10% of the total trade turnover would satisfy this test.
Where the profits of a trade cannot be exempted because part of the trade is not related to a primary purpose and:
- its turnover represents 10% or more of the turnover of the whole trade
- the non-primary purpose turnover is greater than £50,000 per annum
- the whole of the profits may be liable to tax, including that part which is related to a primary purpose
The following examples illustrate this.
Charity A carried on in the year ended 5 April 2005 a trade with an annual turnover of £60,000. Of this, £55,000 was primary purpose and £5,000 was not. Because the non-charitable purpose turnover (£5,000) was less than 10% of the total (£6,000) and less than £80,000, the whole trade is treated as charitable.
Charity B carried on a trade in the year ended 5 April 2005 with an annual turnover of £100,000. Of this, £85,000 was primary purpose and £15,000 was not. Because the non-charitable turnover exceeded 10% of the total (£10,000) the whole trade is treated as non-charitable.
10. Trading where the work is carried out by beneficiaries of the charity
Charities can claim exemption from tax on the profits of a trade where the work in connection with the trade is mainly carried out by beneficiaries of the charity and the profits from the trade are used for the purposes of the charity.
Examples of trades carried on by charities where the work is mainly carried out by beneficiaries are:
- a farm operated by students of an agricultural college
- a restaurant operated by students as part of a catering course at a further education college
- the sale of goods manufactured by disabled people who are beneficiaries of a disability charity
11. When not all work is carried out by beneficiaries
Some of the work of a trade may be carried out by employees, contractors or volunteer workers who will not rank as beneficiaries of the charity. In these circumstances tax exemption will still be available for the whole profit arising from the trade provided it can be shown that the greater part of the work in connection with the trade is carried out by beneficiaries of the charity.
However, where the work’s carried out partly but not mainly by beneficiaries only the profit arising from the part carried out by beneficiaries is deemed as arising from a charitable trade and is eligible for tax exemption. The profit from the other part of the trade remains taxable unless exempt under the small scale exemption. Receipts or expenses relating to the overall trade should be apportioned to the separate parts on a reasonable basis.
12. When beneficiaries are also paid employees
A charity may wish to pay salaries to beneficiaries who work in a trade carried on by the charity. This means that the beneficiaries are employees of the charity. PAYE must be operated on the earnings of beneficiaries who are employed by a charity in the same way as for other employees, and national minimum wage rules must be applied.
The payment of wages to a beneficiary does not affect the balance between charitable and non-charitable trading. For example, if a charity for the relief of disabled people pays disabled people for the manufacture of goods the trade will still be a charitable trade.
13. Exemption for small scale non-charitable trading
There’s a statutory exemption from Income Tax or Corporation Tax for the profits of small scale trading carried on by a charity that is not charitable trading.
14.Where small trading exemption applies
The small trading exemption applies to the profits of all trading activities that are not otherwise exempt from tax, provided the:
- total turnover from all of the activities does not exceed the small scale trading annual turnover limit
- total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
- profits are used solely for the purposes of the charity
15. Calculation of the annual turnover limit
The annual turnover limit is:
- if the turnover is greater than £8,000, 25% of the total income resources, subject to an overall upper limit of £80,000
For the purpose of this limit, ‘total income’ means the total receipts of the charity for the year from all monetary sources (grants, donations, investment income, all trading receipts, etc), calculated in accordance with normal charity accounting rules (whether the income is taxable or not). It does not include capital receipts (for example, from the sale of shares or a property).
This table illustrates the application of these rules:
|Total income of the charity||Maximum permitted turnover|
|£32,000 to £320,000||25% of charity’s total income|
A charity sells greetings cards to raise funds and applies all its income charitably. This is not charitable trading, but the sale of cards. The message on the cards does not alter this and so for example, a Christian church, selling cards with a religious message would still be carrying out a non-charitable trade.
- assume this is the only taxable trading activity
- the turnover from the cards amounts to £4,500 in the year
- any profits will be exempt from tax, because the turnover does not exceed £8,000 (the minimum small scale trading turnover limit)
- a charity has a turnover from non-charitable trading of £40,000 for the year
- its total incoming resources for the year are £160,000 (including the £40,000 turnover)
- the income from non-charitable trading (£40,000) is not more than 25% of total income (£160,000) and less than £80,000
- profits are exempt from tax because the turnover from the non-charitable trading does not exceed the small scale trading turnover limit
- a charity has turnover from non-charitable trading of £40,000 for the year
- its total incoming resources are £150,000 (including the £40,000 turnover)
- the £40,000 turnover exceeds the annual turnover limit (£150,000 @ 25%= £37,500) - so profit from the whole of the £40,000 is taxable
- however, the profits on sales may still be exempt from tax for this year if the charity could demonstrate that it had a reasonable expectation at the start of the year that the turnover would not exceed the small scale trading limit
16.The reasonable expectation test
If the total turnover of taxable trading exceeds the small scale trading limits, profits from a non-charitable trade may still be exempt if the charity can clearly demonstrate that, at the start of the relevant accounting period, it was reasonable for it to expect that the turnover would not exceed the limit. This might be because the charity expected:
- the turnover from the non-charitable trade to be lower than it turned out to be
- that its total incoming resources would be higher than they turned out to be
HMRC Charities will consider any evidence the charity may have to satisfy the reasonable expectation test, for example the:
- charity may have carried on the activity for a number of years and may therefore be able to show that the turnover increased unexpectedly compared with earlier years
- charity might have started carrying out the trading activity during the year in question and might be able to show that the turnover was higher than forecast
- charity’s total incoming resources might be lower than it forecast, for example, because the charity did not receive a grant for which it had budgeted
The type of evidence needed to demonstrate the levels of turnover and incoming resources which were expected might include:
- minutes of meetings at which such matters were discussed
- copies of cash flow forecasts
- business plans and previous years’ accounts
If the charity expects to be regularly trading at or around the small trading exemption limits, it might be better for the charity to consider using a trading subsidiary company - see the guidance at paragraphs 45-50 ‘using a trading company’.
Some particular activities
17. Direct tax: sale of donated goods
Many charities raise funds by selling donated goods (items gifted to a charity which the charity sells on its own behalf), such as clothes, books or bric-a-brac. This may be a regular activity carried on at a shop or it may be an occasional activity carried on at a jumble sale or auction. At first glance this may appear to be a trade similar to the retail sale of goods by other commercial businesses. But the way in which the goods are acquired makes it different from most retail trades.
Traders usually sell goods that they have manufactured, or have purchased for resale they do not usually receive goods by way of donation as charities do. For the charity the sale proceeds are simply a realisation of the value of a gift. For this reason the sale of donated goods is generally not regarded as a trade for tax purposes.
This is so even where the donated items are sorted, cleaned and given minor repairs. If the goods are subjected to significant refurbishment or to any process which brings them into a different condition for sale purposes than that in which they were donated, the sale proceeds may be regarded as trading income. For example, where donated cloth is made into garments for sale this will amount to a trade.
18. VAT: sale of donated goods
The sale of both donated and bought in goods by a charity is always a business activity for VAT purposes.
The sale of donated goods by a charity is zero rated provided all the qualifying conditions are met. The goods can be new or second hand but must have been ‘donated’ to the charity or its trading subsidiary. It follows that zero rating does not apply to goods that are sold on behalf of a supporter where the supporter has the option of donating the net proceeds of sale to charity under Gift Aid. The zero rating applies exclusively to the sale of goods and does not apply to donated services. Neither does zero rating apply to items deemed to be goods in other sections of the VAT law, for example, zero rating does not apply to any land or buildings donated to and sold by a charity.
Read about the conditions for zero rating the sale of donated goods in VAT Notice 701/1 Charities.
19. Direct tax: profits from lettings
All rental income received by a charity from land or buildings is exempt from tax provided the profits arising are applied for charitable purposes. See the guidance at paragraph 5 Direct tax exemptions However, if services are provided along with the use of the land or buildings, for example, provision of a caretaker, food or laundry these services in themselves might amount to trading. Letting activity will itself constitute a trade where the owner remains in occupation of the property and provides services over and above those usually provided by a landlord. Essentially the distinction lies between the hotelier (who is carrying on a trade) and the provider of furnished accommodation (who is not). An important difference is that in a hotel etc the occupier of the room does not acquire any legal interest in the property. Each case must be considered on its own facts.
20. VAT: property lettings
The letting of land or buildings for a fee is normally a business activity for VAT purposes. The supply is normally exempt from VAT. However, in some circumstances a landlord can ‘opt to tax’ if he wishes. Detailed guidance on the VAT liability of land and property is contained in VAT Notice 742 Land and Property. Guidance on ‘opting to tax’, and the circumstances in which the option does not apply, is contained in Notice 742A Opting to tax land and buildings.
The rules governing the VAT liability of property lettings are not straightforward. If, after reading the guidance, a charity is still unsure about a supply it is making or receiving, it can contact the Charities Helpline on Telephone: 0845 3020203.
21. Direct tax: business sponsorship
It’s common for charities to enter into sponsorship arrangements with businesses in order to raise funds. Business sponsors may fund the general work of the charity or a particular charitable project.
Sponsorship arrangements often link the name of the business with the charity or its project, creating in the minds of the public an affinity between the business and the charity. The affinity with charity created by sponsorship is a valuable marketing asset for businesses.
22. Direct tax: sponsorship and trading income
The direct tax treatment of payments received by charities under sponsorship arrangements will depend on the nature of the arrangement. Just because a sponsor derives good publicity or public relations benefits from payments to charity, does not automatically mean that payments by the sponsor are trading income in the hands of the charity.
If the charity does not provide goods or services in return for payment, sponsorship payments will normally have the character of charitable donations rather than trading income in the charity’s hands. The fact that the business sponsor itself takes steps to publicise or exploit the affinity with the charity will not change the treatment of the payments in the hands of the charity, unless the charity also publicises the affinity itself.
If, before payment is made by the business sponsor, a commercial participator agreement (required by the Charity Commission under Section 59 of the Charities Act 1992 or by the Office of the Scottish Charity Regulator under Section 81 Charities and Trustee Investment (Scotland) Act 2005) is in place, the tax treatment of the payment will be determined by the wording of the agreement. Otherwise, the tax treatment of the payments will be determined on the particular facts of the case.
HMRC has agreed the Charity Commission guidance on whether university research paid for by a sponsor is charitable. Other charities may also find this guidance helpful.
23. Direct tax: where a charity provides goods or services to the sponsor
If the charity provides some goods or services in return for the sponsorship payments they may be treated as trading income.
Most commonly a charity will play a part in publicising the business sponsor’s affinity with the charity by including references to the sponsor in publications, posters, etc and at events organised by the charity.
Provided that such references amount to no more than acknowledgements of the sponsor’s contributions they will not cause the payments to be regarded as trading income. However, references to a sponsor which amount to advertisements will mean the payments are trading income. HMRC Charities will regard a reference to a sponsor as an advertisement if it incorporates any of the following:
- large and prominent displays of the sponsor’s logo
- large and prominent displays of the sponsor’s corporate colours
- a description of the sponsor’s products or services
For example, if a project organised by a charity is sponsored by a well known company, and acknowledgement of the support of this company is in the form of its name and logo inserted in the corner of a project report, this would not be considered to be advertising. However, if the name and logo was substantially and widely displayed throughout the report, this might constitute advertising in return for the sponsorship payment.
There are other services that a charity might provide in return for sponsorship payments that will be factors in determining whether the payments are trading income. Examples of such services are:
- use of the charity’s mailing list
- use of the charity’s logo
- endorsement of the sponsor’s products or services
- links to the sponsor’s sales website from the charity’s own website
- exclusive rights to sell goods or services on the charity’s premises
24. Direct tax: when a sponsorship arrangement charitable trading
Once it’s been determined that sponsorship payments are trading income in the charity’s hands the next step is to consider whether the sponsorship arrangement falls into the charitable or non-charitable parts of the charity’s trade.
It’s recognised that where a sponsor’s funding is tied to a particular event or project, it may not be practical to confine the charity’s response to a mere acknowledgement. However, HMRC may challenge any arrangement in which the charity’s response is on such a scale that it appears to be a main purpose of the sponsor making the donation. In such a case, HMRC will want to consider the possibility of non-charitable trading by the charity and, where the donor has claimed tax relief on the payments, whether there has been a breach of the donor’s benefits limits.
A charitable theatre group’s production is sponsored by a local business ‘TaxCo’. TaxCo’s logo is placed discreetly within the event programme. An executive of TaxCo appears on stage on the final night and is thanked. One sign of moderate size is positioned prominently in the hall stating that the event is sponsored by TaxCo.
In this case it could not reasonably be argued that a main purpose of the production is advertising TaxCo, and there would be no loss of direct tax reliefs for the charity or the donor.
An arts organisation’s broadcast national awards ceremony is sponsored by a nationally well-known brand ‘CarCo’. The event is named ‘The CarCo Awards’, which brings CarCo’s name up on television frequently in trailers and program breaks.
CarCo’s logo features prominently in the program. An executive of CarCo appears on stage and thus on television and is thanked. There are many prominent signs advertising CarCo in the venue.
In this case it could reasonably be argued that a main purpose of the donation is advertising CarCo, and there’s the possibility of a loss of direct tax reliefs for charity and donor (although the donor may be able to claim all or part of their payment as a business advertising expense).
25. Direct tax: payments for use of a charity’s logo
Where a charity allows its logo to be used in return for payment by a business as an endorsement for 1 or more of the business’s products or services, and the charity likewise promotes the endorsement in its own literature, the payments are likely to be trading income of the charity.
Payments solely for the use of a charity’s logo may not be trading income in the charity’s hands. The position for charitable companies, where the logo came into existence prior to 1 April 2002 and for charitable trusts whenever the logo came into existence is:
- a one-off payment (received without any deduction of tax), the income is charged to tax as miscellaneous income and no exemption is available apart from the small scale trading exemption
- annual payments - the income is charged to tax as miscellaneous income - exemption is available under section 488(3)(b) Corporation Taxes Act (CTA) 2010 (for corporate charities) and section 536(3)(c) ITA 2007 (for charitable trusts), if Income Tax is deducted by the payer then repayment of the tax can be claimed, provided the income is applied solely for charitable purposes - however, where the payer is a UK company, the payment can be made without the deduction of Income Tax provided the payer reasonably believes that the recipient is a charity (sections 930 and 936(2)(d) Income Tax Act (ITA) 2007)
Whether payments for use of the logo are annual payments will depend on the precise terms of the agreement for the use of the logo. If they’re annual payments then the payments must be made under a legal obligation, recur each year and be a pure donation in the hands of the charity.
For charitable companies only, where the logo came into existence on or after 1 April 2002 the logo is an ‘intangible fixed asset’ within section 713 CTA 2009. Exemption from tax is available for related non-trading gains received by charitable companies from intangible fixed assets tax under section 488 CTA 2010.
26. VAT: the VAT treatment of business sponsorship and payments for the use of a charity’s logo
The VAT treatment is different from the direct tax treatment.
Generally, if a charity receives sponsorship or another form of support it will normally be making a taxable supply for VAT purposes if, in return, it’s obliged to provide the sponsor or supporter with a significant benefit.
In some cases the benefit may amount to no more than a simple acknowledgment of support and could not be considered to be a supply for VAT purposes. Guidance on what HMRC considers to be significant benefits and what HMRC recognises as insignificant acknowledgments can be found in VAT Notice 701/41 Sponsorship. Where the benefits are such that they’re not simple acknowledgments of thanks but are tangible benefits then the payment is consideration for those supplies and VAT will be due on the full payment received. You’ll also find guidance on this in VAT Notice 701/1 Charities.
If a charity grants the right to another party to use the charity’s name and logo in return for a payment the charity’s making a taxable supply for VAT purposes. It’s the granting of the right that’s the taxable supply, rather than any activity (or lack of it) undertaken by the charity or the size and/or prominence of the logo. The same principle applies when a charity grants the right for a sponsor’s logo to appear in the charity’s publication or on the charity’s website.
27. VAT: charity apportioning a payment in respect of donation elements for VAT purposes
VAT law only allows apportionment of single payments when they’re made in relation to different supplies of goods or services. Therefore a single payment covering both a right to use a logo and a donation cannot be apportioned because a donation is not a supply for VAT purposes. VAT will be due on the whole of the payment.
If a sponsor wants to make a voluntary donation in addition to a sponsorship payment, it must be clear from any agreement that the donation is entirely separate from the sponsorship payment (ie the payment made in return for a supply) and it’s freely given. If the donation is freely given but on condition that a further benefit is provided, it’s further consideration for a taxable supply for VAT purposes.
28. VAT and direct tax: affinity credit cards
A charity may receive payments from a bank, building society or other financial institution in return for the charity endorsing that institution’s credit card and recommending its use to the charity’s members or supporters. Such cards are normally referred to as ‘Affinity Credit Cards’.
This is a business supply of marketing services by the charity and VAT is due on any amounts they receive in respect of such supplies.
However, a charity may have an arrangement with the bank whereby it enters into separate agreements. One agreement could be for the supply of marketing services by the charity to the bank for an agreed consideration. This is a taxable supply on the part of the charity and VAT is due on such payments. The other, separate agreement provides for the bank to make voluntary contributions to the charity. The contributions may often be based on how often the card, usually associated by the bank with the charity’s name and logo, is used. In essence, the nature of the second agreement is that the payments are not made in return for a supply. These contributions are outside the scope of VAT.
Treatment for direct tax purposes is likely to be similar to that for VAT purposes. Any payment accepted as a genuine donation for VAT purposes would normally be accepted as a donation for tax purposes. Anything else paid to the charity in relation to the affinity card is likely to be taxable non-charitable trading income. It is recommended that separate payments are made under carefully drafted legal agreements, in order to make the position clear. The commercial payment should be at a market rate.
29. The direct tax exemption for fund raising events
For direct tax purposes, where a charity’s trading activities are not covered by one of the 3 main statutory exemptions for trading referred to previously (at paragraphs 6, 10 and 13), the profits are taxable.
However, if the profits arise from the holding of a fund-raising event, exemption from tax will be available provided the conditions at section 483 CTA 2010 or section 529 ITA 2007 are satisfied.
The exemption applies where the trading profits arise to a charity from certain fund raising events so far as the profits:
- arise from an event that is VAT exempt in relation to the charity
- are applied to charitable purposes or transferred to another charity
The direct tax exemption mirrors the VAT exemption for fund raising events. If an event meets the criteria for the VAT exemption (under Group 12 of Schedule 9 to the VAT Act 1994), then it will automatically qualify for the exemption from direct tax subject to the profit being applied for charitable purposes.
30. The VAT exemption for fund raising events
The statutory provision for the VAT exemption is Group 12, Schedule 9 of the VAT Act 1994. Under this provision, supplies of goods and services by charities and other qualifying bodies in connection with certain fundraising events are exempt from VAT.
Detailed guidance on the bodies that qualify for the exemption and all the conditions that must be met are contained in the tax and VAT Helpsheet Fund-raising events: Exemption for charities and other qualifying bodies.
If the conditions for the exemption are met, the supplies made in connection with the event are exempt from VAT. This means that no VAT is due on the supplies and, if not already VAT registered, this income should not be taken into account when considering liability to register.
There’s no entitlement to recover VAT incurred in making the exempt supplies or organising the event. However, if, within a VAT-exempt fundraising event, sales of goods or service are made to which the zero rate normally applies (eg printed matter or children’s clothing) then those zero-rated sales can remain taxable at the zero rate despite the fact they’re sold in the course of a VAT exempt fundraising event. As these are taxable supplies, any VAT incurred in the making of the zero-rated supplies will be recoverable, subject to normal rules if VAT registered. If VAT’s incurred on expenses relating to both exempt and taxable supplies a portion of the VAT may be recoverable subject to partial exemption calculations.
For more information on partial exemption see VAT Notice 706 Partial exemption.
31. Direct tax and VAT: when an event is not covered by the exemptions
If an event falls outside the terms of the exemption, VAT may be due on all or some of the supplies made in connection with the event. There will also be entitlement to recover VAT incurred, subject to normal input tax rules.
If not already VAT registered, the income from the event will need to be taken into account when considering liability to register.
If the event is not charitable putting on the event may amount to trading and so there may be a direct tax liability (subject to the small scale trading exemption). Deciding whether trading is taking place is not always straightforward. This is explored further in HMRC Business Income Manual BIM20200. Professional advice can be helpful in this area.
32. Direct tax and VAT benefits if the event does not qualify for the exemptions
If a charity believes that a particular event or series of events will not fall within the exemptions, it may be possible to organise the event so as to minimise the amount of tax payable.
For example, the charity might set a basic minimum charge and invite those attending the event to supplement the charge with a voluntary donation. This minimum charge will be standard rated for VAT (unless exempt under another provision) and for direct tax purposes will be taxable trading income. The additional contributions will not be taxable income for direct tax purposes and will also be outside the scope of VAT if all the following conditions are met:
- it’s clearly stated on all publicity material, including tickets, that anyone paying only the minimum charge will be admitted without further payment
- the additional payment does not secure any particular benefit - for example, admission to a better seat in the auditorium. (For direct tax purposes only, the payment may still be treated as non-taxable income if the benefit is within the limits specified in Gift Aid legislation)
- the extent of further contributions is ultimately left to ticket-holders to decide (even if the organiser indicates a desired level of donation) - these further contributions may be made under Gift Aid, subject to them meeting the requirements of the scheme
- for film or theatre performances, concerts, sporting fixtures and similar events the minimum charge is not less than the usual price for the particular seats at a normal commercial event of the same type
- for dances, dinners and similar functions the total sum of the taxable minimum charge is not less than the total costs incurred in arranging the event
If trustees are considering making no charge and relying on expected donations to more than cover costs, professional advice is recommended. Donations received in such circumstances may be eligible for Gift Aid. However, any trustees adopting this approach would have to be able to demonstrate that they had made a properly informed and considered decision that a better return on funds laid out could be achieved by not charging for tickets. Failure to do this could result in the costs being treated as non-charitable expenditure and the trustees being personally liable for any loss of funds.
33. VAT: competition issues and the fund-raising exemption
An event would not fall within the VAT exemption if it creates distortions of competition with other commercial providers of similar events which do not benefit from the exemption. HMRC would only use the distortion of competition clause where:
- this relief is likely to distort the market
- there’s significant and systematic evidence of commercial distortion
If a commercial organisation alleged competitive disadvantage HMRC would look carefully into the particular circumstances of the case.
34. VAT: subsidiary companies and fund raising activities
If a charity carries on a substantial, regular trading activity it may be required by charity law to set up a subsidiary company to carry on the trade, even if the profits are exempt for both tax and VAT purposes. A subsidiary company may be needed to protect charitable property from being used for non-charitable trading purposes (see the Charity Commission booklet CC35 Charities and Trading).
The statutory VAT exemption for fund raising events also covers fundraising events organised by a corporate body wholly owned by a charity and whose profits (from whatever source) are payable to a charity. This means that a charity’s own trading company can hold qualifying fundraising events on behalf of the charity, while still benefiting from the VAT exemption.
35. Direct tax and VAT: lotteries
Charities are exempt from tax on profits from lotteries run to raise funds for their charitable purposes. This applies so long as the lotteries are promoted and conducted in accordance with a lottery operating licence issued under section 98 of the Gambling Act 2005 or Article 133 or 135 of the Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985.
The profits of such lotteries, promoted by charities, are exempt from tax provided the lottery is conducted within the statutory requirements set out above and the lottery profits are applied solely to the purposes of the charity.
Where a subsidiary company, rather than the charity, is registered as the society under the Gambling Act 2005, or the Northern Ireland equivalent, the lottery profits will belong to the company and not to the charity for tax purposes. The exemption will not apply and the company will need to pass the profits to the charity under Gift Aid to obtain relief from tax.
Calculating the profits of the trade
36. The VAT purposes
This section does not apply in relation to VAT. VAT liability relates to taxable supplies and is not based on profit or loss.
37. Direct tax: profits that are taxable
Trading receipts should be allocated to the sources listed in paragraph 4 above on a reasonable basis. The profits of taxable non-charitable trading, including capital allowances if applicable, should be calculated in the same way as for any other trader. This may involve apportioning what was originally charitable trading expenditure to a non-charitable or deemed non-charitable trade. Any such apportionment will apply only for tax purposes.
For most charities the challenge will be to maintain adequate accounting systems to properly identify the separate charitable and non-charitable deemed trades, in order to allocate and, where necessary, apportion costs to each. Charities are strongly recommended to do this. The approach may vary. For example, there could be a ‘high level’ approach of identifying the trading activity of a particular department, division or building, etc as charitable or non-charitable. Alternatively, there might be a ‘middle level’ approach of, for example, identifying particular contracts or projects, or the work of individuals as charitable or non-charitable. At the most detailed level, charities might identify each individual piece of work done, flag it charitable or non-charitable in the accounting system, and allocate costs accordingly.
HMRC’s view is that a high or medium level approach may be justified on the facts - a department or a project may be identifiable as wholly charitable or wholly non-charitable. However, this approach would be inappropriate for mixed charitable/non-charitable activity. In HMRCs view, a detailed or ‘low level’ approach to accounting for charitable and non-charitable activity will be more appropriate. This will give the greatest accuracy and take the least risks with charity law, which places a responsibility on trustees to identify charitable trading carried on by the charity for which they bear responsibility.
There are further factors, discussed below, that may be particularly relevant when calculating the profits of a trade carried on by a charity.
38. Direct tax: allocation of indirect overheads and costs
For a non-charitable trade, section 479(4) CTA 2010 and section 525(4) ITA 2007 requires that there be a ‘reasonable apportionment of expenses and receipts’. This will involve taking into account direct expenditure and a reasonable proportion of indirect expenditure such as overheads, whether or not these were originally incurred for charitable purposes.
For example, if a non-charitable trading activity is the charity’s only trading activity, is carried on in the charity’s premises and takes 30% of the floor area, it might be proper to allocate to the non-charitable trade 30% of the costs of the premises such as:
- heat and light
- building repairs and maintenance
Apart from the use of premises, other indirect overheads that may be partly attributable to the trade are:
- employee salaries
- computer costs
- telephone charges
- postage costs
- accountancy and legal fees
- general administration
The proper basis of apportionment of indirect costs will depend on the facts. In the case of the use of premises, the apportionment might be based on:
- the size of floor space allocated to the trade
- where student accommodation is let to tourists out of term, the number of days in the year when the premises are allocated to the trade, and actively marketed
- in the case of employee salaries, the amount of employee time devoted to the trade compared to total employee time
39. Direct Tax: goods or services provided at undervalue
It’s common for charities to receive goods or services in their trades at no cost, or at less than their full market price. For example:
- a supplier might sell trading stock or equipment to a charity at cost price
- a professional adviser might provide services for no charge
- helpers and beneficiaries might do work on a voluntary basis
Where a charity (but not a charity subsidiary company) receives goods or services free, or at less than their full market price, the charity may deduct a notional cost/market price when computing the profits of the trade. Notional costs/market price should be calculated on a reasonable basis. For example, were a celebrity to act as a volunteer waiter at a gala dinner, the notional cost would need to be restricted to the going rate for the employment of a waiter, not that of the celebrity. Market price will be the wholesale or trade price at which the charity could reasonably have expected to buy the goods or services in, not the retail value of those goods or services.
There is guidance about charities and transfer pricing in the International Manual.
There can be adverse tax consequences for a charity if it has a transaction or transactions with a ‘substantial donor’. A ‘substantial donor’ is a person making gifts to a charity of at least £25,000 in a period of 12 months, or £150,000 in a period of 6 years.
40. Trading losses for VAT purposes
This section does not apply to VAT. VAT liability relates to taxable supplies and is not based on profit or loss.
Read about how VAT affects charities in the VAT guidance for charities.
41. Direct tax: how a charity treats its losses
Charities can make trading losses. If the trading is within the charitable objects of a charity (charitable trading), losses will be charitable expenditure. However, if the losses arise from non-charitable trading they will be non-charitable expenditure and tax exemption is not available on that amount of the charity’s income. For more information about charitable and non-charitable trading see the guidance starting at paragraph 6 of Tax exemptions guidance.
However, the fact that a loss arising from non-charitable trading is treated as non-charitable expenditure may not result in a net tax liability. The trading loss itself may be available for set-off against the amount that would otherwise be chargeable to tax resulting from the restriction on exemptions by section 492 CTA 2010 or section 539 ITA 2007. The effect can, therefore, be self-cancelling, as shown at B in the table below. The trading loss will only be unavailable for set off against the amount chargeable if the trading is not on a commercial basis and either there is no reasonable expectation of gain (Corporation Tax) or the trading is not carried out with a view to the realisation of profit (IT)*.
The table below gives an overview of the main possibilities, though each case depends on its own facts:
Quick guide to the treatment of taxable non-charitable trading by charities
|Tax profit/loss||Basis of trading||Is it charitable expenditure?||Tax position|
|Loss||Not on a commercial basis: No reasonable expectation of gain (Corporation Tax). Not with a view to the realisation of profit (IT)||No. Loss is Non-Charitable Expenditure (NCE).||NCE results in loss of tax exemption by reason of section 492 CTA 2010/section 539 ITA 2007. The resulting tax charge is not cancelled by loss relief*|
|Tax profit/loss||Basis of trading||Is it charitable expenditure?||Tax position|
|Loss||Reasonable expectation of gain (Corporation Tax). With a view to the realisation of profit (IT)||No. NCE.||NCE results in loss of tax exemption by reason of section 492 CTA 2010/section 539 ITA 2007. The resulting tax charge is typically cancelled by loss relief*.|
|Tax profit/loss||Basis of trading||Is it charitable expenditure?||Tax position|
|Profit||Reasonable expectation of gain (Corporation Tax). With a view to the realisation of profit (IT)||NCE results in loss of tax exemption by reason of section 492 CTA 2010/section 539 ITA 2007. The resulting tax charge is typically cancelled by loss relief*.||NA||Profits are taxable.|
*Restrictions on the use of losses that apply to other taxpayers also apply to charities.
42. Direct Tax: the commerciality test
Paragraph 41 above covers the need to ascertain whether trading is on a commercial basis, with a reasonable expectation of gain (Corporation Tax) or with a view to the realisation of profit (for charitable trusts liable to Income Tax). This ‘commerciality test’ should initially be applied to the taxable deemed trade (non-charitable trade), after the split created by section 479(2) and (3) CTA 2010 or section 525(2) and (3) ITA 2007.
If the taxable trade is, on the facts of the case, not commercial, it’s then necessary to consider whether the ‘larger undertaking’ of which it’s a part is both commercial and ‘with the intention of making a profit. Guidance on the meaning of ‘larger undertaking’ can be found in the Company Taxation Manual for Corporation Tax.
If the taxable trading source is part of a ‘larger undertaking’, then it may be that the commerciality test is applied before the split created by section 479(2) and (3) CTA 2010 or section 525(2) and (3) ITA 2007 so that the loss is allowable. Each case must, however, be decided on its own merits.
43. Direct tax: what a charity with trading losses should show in its tax return
In paragraph 41 Table C scenarios, the charity’s being taxed just like any other person or business which carried on the same trade and should fill in its tax return accordingly.
For Table B, assuming that an equivalent amount of tax-exempted income has been received, charities might show in their computations:
Income liable to assessment by virtue of S505(4) Income and Corporation Taxes Act (ICTA 88), X
Less relief for trading losses*, -X
Profit = Nil
- Restrictions on the use of losses that apply to other taxpayers also apply to charities.
This would be reflected in a charity’s tax return. The loss has been used and should therefore not be shown on the return as available to carry forward. This may cause difficulties if a charity’s loss making non-charitable trade later moves into profit. However, if a charity wishes to pursue such trading, this can be done using a subsidiary company, which can mitigate its tax liability by Gift Aiding its profits to its parent charity.
44. Direct tax: trading losses - further considerations
The paragraph 41 Table A scenario may present the most difficulty. The charity may find that its non-charitable trading creates a cash surplus over direct costs but there’s no realistic expectation of tax profit or gain. The loss cannot be set off against the section 492 CTA 2010 or section 539 ITA 2007 charge, because the trading is not carried on, on a commercial basis and with a reasonable expectation of gain/a view to the realisation of profits.
What constitutes non-charitable expenditure is, however, as much a matter of charity law as of tax law, and charities may wish to obtain professional advice if they find themselves in this situation. In general, non-charitable trading is better situated in a trading subsidiary.
In all cases, it should be noted that it’s up to the charity whether to claim capital allowances in relation to its non-charitable trade. In reviewing whether a commercial basis and a ‘view to the realisation of profits’/’reasonable expectation of gain’ exists, HMRC will take into account depreciation (apportioned on reasonable grounds) on assets purchased wholly or partly for the non-charitable trade. If an asset was originally bought wholly for use for a primary purpose, then it’s not taken into account.
For any given charity, the facts can change and as a result the tax treatment of the losses may also change. For example, scenario A in paragraph 41 table A may apply - a charity may have a non-charitable activity which yields a cash surplus over direct costs, but which, year after year, shows losses for tax purposes once overheads are allocated. In these circumstances, the loss could not be set off against the tax charge resulting from loss of exemption by reason of sections 492/539 but it could be carried forward and set off against later year profits of the deemed trade. However, from the date that a realistic approach to putting the activity on both a commercial and profitable basis is adopted, scenario B in paragraph 41 Table B would then apply and the loss could be set off against the section 492 or section 539 charge. It’s recommended that in such a case an explanation is provided with the return. Charities can pool unused non-charitable trading losses brought forward. These losses will be available to carry forward against profits from non-charitable trading. Computations and returns can be completed on this basis.
Using a trading company
45. Direct tax: charities paying tax on the profits of their trading companies
Charities carrying out trading to which the statutory tax exemptions do not apply may arrange for a trading activity to be carried on by a wholly owned subsidiary trading company. Using this approach it’s possible for some or all of the subsidiary company’s trading profits to be passed to the charity using the company Gift Aid Scheme.
Companies owned by charities are liable to pay tax on trading profits in the same way as other non-charitable companies. But, like other companies, they can get tax relief for charitable payments to a charity under the company Gift Aid scheme. Subject to certain restrictions outlined at section 191 CTA 2010 and subsequent sections, a company donating all of its taxable profits to charity will get a tax deduction equal to the amount of the profits, so that no Corporation Tax will be payable.
In the hands of the charity the donation is not trading income. The donation is taxable as income but is exempt from tax provided it is applied for charitable purposes (section 473(1) CTA 2010 and section 522 ITA 2007 refer).
As set out in a Technical Release issued by the Institute of Chartered Accountants in England and Wales (ICAEW) (TECH 16/14BL), donation payments by a subsidiary company to its parent charity are typically considered to be distributions and therefore subsidiary companies must not pay more to the charity than the level of profits available for distribution, even if the level of taxable profits is higher. Any part of a payment from a subsidiary company to a charity which exceeds the subsidiary company’s profits available for distribution is therefore unlawful under the Companies Act 2006. The company will not get a tax deduction for any unlawful distributions for accounting periods commencing on or after 1 April 2015.
If unlawful distributions have been paid by a subsidiary company to a charity in earlier accounting periods, TECH 16/14BL sets out that (subject to time limits) the parent charity has a liability to repay the unlawful distributions and the company has a right to receive the sums. The repayment of such prior unlawful distributions by the charity to the company will not be taxable income in the hands of the company.
46. The VAT position
It’s important to remember that a charity’s trading subsidiary company is not a charity. For VAT purposes a trading subsidiary is treated in the same way as a normal commercial enterprise. Most of the VAT reliefs for charities are not available to their trading subsidiaries. However, some VAT relief, such as zero rating the sale of donated goods and the VAT exemption for certain fund raising events, do extend to charities’ trading subsidiaries.
47. Direct tax: a charity’s trading company using corporate Gift Aid
A trading company can pass up its trading profits to the parent charity using company Gift Aid. Such payments reduce the trading company’s profits chargeable to Corporation Tax. For further guidance about corporate Gift Aid see guidance about Gift Aid for companies.
When deciding how much of its profits to give to its parent charity, a trading company will need to take account of the following:
- any limitations imposed by the Insolvency Act 1986 and the Companies Act 2006 on the amount it can pay out
- retention of sufficient profits to avoid a cash drain
- any restrictions imposed by the Memorandum and Articles of Association of the company and any other requirements that may be imposed upon the directors
48. Direct tax: trading company obtaining tax relief for payments under the company Gift Aid scheme
In general, a company can only deduct a company Gift Aid donation (a charitable deduction) from its profits for the accounting period in which the monetary donation is actually made. It’s not possible to carry back the deduction into an earlier period or to carry it forward into a later period.
However, where a company is wholly owned by 1 or more charities, it can make a claim to have the charitable deduction set against its profits of the earlier accounting period provided the:
- donation is made in the 9 month period after the end of the earlier accounting period
- claim is made within 2 years after the end of the accounting period in which the monetary donation is actually made, or such longer period as an officer of HMRC may allow
49. Direct tax: making tax relief claims for payments under the company Gift Aid scheme
A company gets tax relief for the Gift Aid payments it makes in the form of a charitable deduction from its profit in its Corporation Tax computation, by making appropriate entries on its Corporation Tax return. A company makes the donation gross to a charity (that is, unlike for individual gift Aid, without deducting basic rate Income Tax). It gets relief for the actual monetary payment it makes to a charity. There’s no certificate or declaration for the company to give to the charity but the company will need to retain normal accounting records and copies of any correspondence to support its claim for relief.
50. Direct tax: calculating profits to be passed to a charity
If a charity’s premises, staff and services are shared with its trading company an appropriate allocation of the costs should be included in the company’s accounts. The amount charged by the charity for the shared resources should generally not exceed the cost. However, where the charity is demonstrably trading in the services etc which it’s providing, then there should be an appropriate mark-up. Any profit in the hands of the charity may be taxable as non-exempt trading income, see the guidance at paragraphs 36-39.
Gift Aid payments must be made as a payment of money from the company to the charity. The company and charity should avoid sharing one bank account so that this transfer can be seen to have taken place.
Financing the trading company
51. Direct tax: charities investing in their trading companies
Charities which own companies set up to carry on non-exempt trading activities will usually need to consider investing funds in the company when the company is set up. The company may also need injections of money to fund expansion or development of its business after it has been established. There are special rules in the Taxes Acts that apply to investment of a charity’s funds in a trading company. If these rules are not followed the charity will risk losing some or all of its tax exemptions. To qualify for relief an investment must be made:
- for the benefit of the charity
- not for the avoidance of tax
Investments will be regarded as made for the benefit of the charity if they’re commercially sound and meet the requirements of English charity law. Usually, charities should ensure that investments are secure, carry a fair rate of return (actually paid) and, in the case of loans, provide for recovery of the amount invested.
All investment decisions, including a decision to invest in a subsidiary company, should be properly minuted, including the factors on which the decisions are based. Depending on the size of the proposed investment, the decision may be based on the following:
- business plans
- cashflow forecasts
- projections of future profits
There’s further information about charities making investments in guidance Qualifying investments and loans.
52. Direct tax: investing in a company which sheds its profits to the charity
Most commercial companies keep part of their profits to provide them with funds for day-to-day expenses, working capital and normal development of their business. However, companies which intend to donate all of their profits to charity every year may not be able to retain the funds they need to carry on in business. Charities may therefore want to ensure when a company is set up that it’s provided with enough capital to enable it to shed its profits every year and stay in business.
Although the 9 month rule (see paragraph 47) should assist with cash flow, the passing of profits up to the parent charity may result in a serious drain on the company’s cash. If so, care should be taken to avoid a pattern of frequent injections of funds by the charity in order to keep the company in business.
Such a practice might put at risk both the charity’s tax exemptions and the company’s deductions for its Gift Aid payments. In some cases where there’s a serious cash drain in the company, it will be necessary for the company to change its practice so that it keeps part of its profits. In these circumstances some tax will become payable by the company.
53. VAT: financial services
In general, financial services are exempt from VAT. However, many services that are associated with finance are not covered by the exemption. Guidance on the VAT liability of financial services can be found in VAT Notice 701/49: finance. The VAT liability of financial and associated services can be complex. If, after reading the guidance, a charity is still unsure of the VAT liability of financial services it’s making or receiving it can contact the HMRC Charities Helpline on Telephone: 0845 302 0203.
54. Direct tax and VAT: getting professional advice
Where a charity is considering making an investment in a trading company it should consider seeking professional accountancy and legal advice.