Funding challenges are not new to charities, although their scale and complexity have undoubtedly intensified. Local authority contracts that fail to cover core costs, reductions in long‑term grant funding and a cooling in public donations all place mounting pressure on organisations already stretched thin. In response, many boards are understandably looking for new income streams to bolster financial resilience.

However, diversification often brings a familiar question to the surface: at what point does generating extra income become trading, and when does that trading create a corporation tax liability?

To answer that, it helps to step back and consider what trading actually means for a charity.

What counts as trading?

In the simplest terms, trading is the exchange of goods or services for payment or some form of benefit. Viewed through this lens, many charities may feel they are trading every day because they issue invoices, deliver contracts, or sell products and services.

By contrast, donations are gifts freely given without any expectation of return. Because there is no benefit provided, donations do not fall within the definition of trading and remain non‑taxable.

So yes, many charities do trade. The more important question is whether that trading is aligned with the charity’s purposes.

When trading supports your charitable objectives

A charity is not penalised for generating income through activities that directly further its charitable aims. This type of income is known as primary purpose trading, and it is exempt from corporation tax.

For example:

• A theatre selling tickets for performances
• A care home charging residents for accommodation and support
• A professional body collecting membership fees

These activities are commercial in nature, but they directly deliver the charity’s mission, so they remain exempt.

Ancillary trading: connected activity that remains exempt

Some income may not be primary purpose trading but still qualifies for exemption because it supports or naturally accompanies the charitable activity. This is known as ancillary trading.

Examples include:

• Selling refreshments to theatre audiences
• Sales of confectionary, toiletries and flowers to hospice patients and visitors
• Providing insurance to participants in a research study

These activities exist only because the core charitable work is taking place, so they are treated as connected to the primary purpose and also qualify for exemption.

Charities may also receive other forms of income that have their own separate exemptions, including:

• Income from qualifying fundraising events
• Income generated from investments such as interest or dividends
• Rental income from property that the charity owns

When trading is not exempt: the small‑scale trading allowance

If a charity undertakes trading that is neither primary purpose nor ancillary, it may still be able to rely on the small‑scale trading exemption. This allows charities to carry out limited non‑charitable trading without triggering a corporation tax charge.

The thresholds are:

• Up to £80,000 of non‑exempt income per year for charities with total income of £320,000 or more
• Up to 25% of total income for charities with income between £32,000 and £320,000
• Up to £8,000 for charities with income under £32,000

The exemption applies only if the charity stays within its limit. If the threshold is exceeded, even by a small amount, the exemption is lost for the entire sum. For example, earning £81,000 of non‑exempt income when the limit is £80,000 would mean that all of the surplus generated on the £81,000 may become taxable.

So, are charities trading? More often than many assume

Trading is a routine and often essential part of many charities’ operating models. The tax rules provide several important exemptions that protect genuine charitable work. The area that requires the most attention is the smaller, seemingly incidental activities introduced to help plug funding gaps. Individually these may appear minor but taken together they can move a charity closer to the point where non‑charitable trading becomes taxable.

As the funding landscape continues to shift, it is increasingly important for charities to understand both the opportunities and the risks attached to different income streams.

Charities can and do trade, but clarity and careful structuring are key to ensuring compliance, because when you are counting every pound coming in, HMRC may be doing the same.

These decisions are rarely straightforward, and many charities are navigating similar questions. Sayer Vincent works alongside organisations across the sector to help them structure trading activity clearly, manage risk and stay compliant. If you would value a conversation about your charity’s position, our team is here to support you.