Can a Charity Trade or Run a Business To Raise Funds

This guide explains whether UK charities can trade or run businesses, the rules for primary and non primary purpose trading, and when a trading subsidiary is required.

Many charities in the UK look for ways to diversify their income. Grants can be irregular, public fundraising can fluctuate, and running costs can rise quickly. At some point most charities ask the same question. Can a charity trade or run a business to raise funds

The short answer is yes. Charities can trade and many do so quite successfully. However there are rules about what type of trading is allowed, when trading becomes risky, and when a charity must set up a trading subsidiary to stay compliant with charity law and tax rules. Understanding these rules is essential for trustees and managers who want to raise funds safely without jeopardising charitable status.

This guide explains the different types of trading a charity can undertake, how HMRC views charity trading, when a trading subsidiary becomes necessary, and the financial and governance considerations that every charity should think about before launching any commercial activity.

Can a Charity Legally Trade in the UK

Charities in the UK are allowed to trade as long as the trading activity does not undermine or contradict the charity’s purpose. UK law recognises several categories of trading and each has its own rules, tax treatment, and risk levels.

The crucial point is that trading is permitted but must either directly further the charitable purpose or remain small scale enough that it does not expose the charity to unnecessary financial risk. Where trading becomes substantial or is carried out purely to raise money, a trading subsidiary is often required.

In my opinion most charities benefit from some level of trading especially as the voluntary sector becomes more competitive.

The Three Main Types of Trading a Charity Can Carry Out

Charities can legally trade in three distinct ways. Understanding the difference between them is the key to knowing what is allowed and what requires further action.

1. Primary Purpose Trading

Primary purpose trading is trading that directly supports the charity’s main objectives. Because it furthers the charitable purpose it is completely allowed and usually exempt from tax.

Examples include:

  • A museum selling tickets for entry

  • A theatre charity selling performance tickets

  • An educational charity charging fees for courses

  • A care charity charging for residential care

  • A wildlife charity charging for guided walks

All these activities are considered charitable trading because they directly deliver the charity’s mission.

Key points

  • Completely permitted

  • Profits are usually tax exempt

  • The charity can carry out this trading in its own name

  • No trading subsidiary needed

  • No income limits

This type of trading is safe, low risk, and typical for many charities.

2. Ancillary Trading

Ancillary trading supports primary purpose trading and is allowed because it is considered closely connected.

Examples include:

  • A museum selling guidebooks

  • A theatre selling interval drinks or programmes

  • A school selling educational materials

  • A charity charging for parking connected with access to its services

Although these activities generate income they help support the main charitable activity so they are treated as permitted trading.

Key points

  • Allowed

  • Usually tax exempt

  • May be carried out directly by the charity

  • No trading subsidiary required

Ancillary trading is common and rarely causes issues.

3. Non Primary Purpose Trading (Commercial Trading)

This is trading that does not further the charity’s purpose. It is done purely to raise funds.

Examples include:

  • Running a café that is open to the public but not linked to the charitable purpose

  • Operating a commercial gift shop not connected to services

  • Selling non related merchandise

  • Providing paid services unrelated to the charity’s mission

  • Running events for the general public that are not connected to charitable aims

This type of trading is allowed but comes with restrictions.

Key points

  • Allowed but only up to a certain limit

  • Profits may be subject to Corporation Tax

  • Can expose the charity to financial risk

  • Often requires a trading subsidiary if substantial

This is the area where most trustees need careful guidance.

What Are the Income Limits for Non Primary Purpose Trading

Non primary purpose trading is permitted but only up to modest levels. HMRC sets small scale exemptions which allow charities to trade on a limited basis without creating a separate trading company.

The limits are:

  • If trading turnover is under £5,000: always allowed

  • If turnover is more than £5,000: allowed up to the higher of £5,000 or 25 percent of the charity’s total annual income

  • Maximum exemption cap: £50,000

This means if a charity has income of:

  • £20,000: trading limit is £5,000

  • £100,000: trading limit is £25,000

  • £300,000: trading limit is £50,000

  • £1 million: trading limit remains £50,000

If non primary purpose trading goes beyond these limits a trading subsidiary becomes necessary.

In my view it is wiser to set up a trading subsidiary earlier rather than waiting until the charity becomes exposed to tax or risk.

When a Charity Must Set Up a Trading Subsidiary

A trading subsidiary is a separate limited company owned by the charity which carries out commercial trading on behalf of the charity. It protects the charity from financial and legal risk and keeps non charitable trading separate.

A charity must set up a trading subsidiary if:

  • Trading does not further or support the charity’s purposes

  • Trading is expected to exceed HMRC’s small scale trading limits

  • Trading involves commercial risk

  • The charity wants to shield its assets from business liabilities

  • The charity wishes to run a sizeable business enterprise

Examples include:

  • Running a café or shop that is open to the public

  • Selling branded goods unrelated to the charity’s aims

  • Offering consultancy or training unrelated to the main purpose

  • Selling goods imported from wholesalers for profit

The subsidiary trades normally then donates profits to the charity using Gift Aid which allows profits to be passed to the charity tax free.

Why Charities Use Trading Subsidiaries

Trading subsidiaries offer several advantages:

1. Risk protection
If the commercial venture loses money the liability sits with the subsidiary not the charity.

2. Tax efficiency
Profits can be donated to the charity using Gift Aid which eliminates Corporation Tax on the subsidiary’s profits.

3. Clear separation
It avoids any confusion between charitable activity and commercial activity.

4. Better governance
The subsidiary has its own board which can include trustees and external advisers.

5. Professionalism
Commercial activity can be run in a more business focused way without blurring charitable boundaries.

Not every charity needs a trading subsidiary but many benefit from one once trading becomes substantial.

What Types of Trading Create Risk for Charities

Some trading activities can expose charities to financial or reputational risk.

Financial risk

Occurs when trading activities require:

  • Borrowing

  • Buying large amounts of stock

  • Leasing premises

  • Hiring staff

  • Delivering high volume services

Reputational risk

Occurs when trading activities:

  • Do not align with the charity’s purpose

  • Could be seen as unethical

  • Create conflicts of interest

  • Look overly commercial for a charity

Tax risk

Occurs when:

  • A charity exceeds trading limits

  • Non primary purpose trading is treated incorrectly

  • VAT registration becomes triggered unintentionally

  • Profit is generated in the wrong entity

A trading subsidiary mitigates these risks.

Real UK Examples

Example 1: A Wildlife Charity Running a Café

The charity runs a café at its visitor centre. The café supports the charitable purpose because it services visitors engaging with the charity’s work. This is ancillary trading and can be done directly.

Example 2: A Homelessness Charity Selling Christmas Cards

The charity sells branded Christmas cards. This is fundraising trading and allowed up to HMRC limits. If sales become substantial a trading subsidiary is needed.

Example 3: A Heritage Charity Running a Gift Shop

The shop sells books, ornaments, and souvenirs. Some items relate to the site but others are purely commercial. The charity sets up a trading subsidiary to run the gift shop safely.

Example 4: A Charity Offering Corporate Training

The training does not further the charity’s purpose but brings income. The charity uses a trading subsidiary to deliver this service.

Example 5: A Community Charity Renting Out a Hall

Hiring out space for community use is often primary or ancillary trading. If hall hire expands to weddings or commercial events it may become non primary purpose trading and require a subsidiary.

Tax Implications of Charity Trading

Charities benefit from significant tax exemptions but they must stay within the rules.

For primary purpose and ancillary trading:

  • Profits are usually exempt from Corporation Tax

  • No trading subsidiary required

  • VAT rules still apply depending on turnover

For non primary purpose trading:

  • Profits may be taxable

  • A trading subsidiary avoids this

  • Gift Aid donations can eliminate tax on profits

VAT considerations:

  • A charity must register for VAT if taxable turnover exceeds the threshold

  • Many fundraising events are VAT exempt

  • Trading subsidiaries usually have separate VAT registrations

VAT is often the most confusing area so charities should seek professional guidance.

Charity Commission Rules on Trading

The Charity Commission expects trustees to:

  • Act in the best interests of the charity

  • Consider risk before entering commercial activity

  • Ensure trading operates legally

  • Avoid exposing charitable assets to unnecessary risk

  • Use trading subsidiaries where appropriate

  • Keep clear financial separation between charity and trading

Trustees can be challenged if trading is mismanaged or if funds are put at risk.

Governance Considerations

When a charity trades trustees must think about:

1. Whether the trading is aligned with the charitable purpose

If not it may become non primary purpose trading.

2. Whether the charity has the expertise to trade

Commercial skills may be required.

3. Whether trading puts the charity’s assets at risk

If so a subsidiary is safer.

4. Whether the activity is financially viable

A charity should not run loss making trading without a clear purpose.

5. Whether trading requires Charity Commission consent

Some transactions require additional approval.

Practical Tips for Charities Considering Trading

1. Start small
Test the activity before committing significant funds.

2. Separate trading activities early
Even if small, using a separate bank account helps track performance.

3. Understand HMRC’s trading limits
This avoids penalties and unnecessary tax exposure.

4. Set up a trading subsidiary once income becomes substantial
This protects the charity from risk and keeps tax efficient.

5. Keep clear documentation
Board minutes, costings, and trading plans show good governance.

6. Seek expert advice
Trading rules can be complex, especially around tax and VAT.

7. Review trading annually
Make sure the activity remains viable and appropriate.

Final Thoughts

Charities can absolutely trade and many rely on trading income to support their work. The key is understanding which type of trading is charitable, which is ancillary, and which is commercial fundraising. When done properly trading strengthens a charity’s financial stability and reduces reliance on grants and donations.

In my opinion every charity should consider trading opportunities but only with proper governance, risk management, and clear separation between charitable and commercial activities. A trading subsidiary is often the simplest and safest way to grow income while keeping the charity fully compliant.