Contrary to popular belief, charities do not enjoy a general exemption from tax or VAT. Charity trustees should be aware of the areas where a tax liability could arise and ensure that the affairs of the charity are managed in the most tax efficient way. Failure to take account of tax consequences might at best be construed as a breach of the charity trustees duties under the Charities and Trustee Investment (Scotland) Act 2005 and at worst, in certain circumstances, could result in personal liability.

Tax exemptions

Most types of income and gains of charities are exempt from tax provided they are applied for charitable purposes, and this includes:-

  • investment income
  • rental income
  • capital gains and donations
  • primary purpose and small-scale trading profits

Where income is not applied for charitable purposes, the charity has to pay tax on an equivalent amount of income.

Trading profits can be taxable

Charities are exempt from tax on profits from a "primary purpose" trade, i.e.,

  • a trade which is exercised in the course of carrying out a primary purpose of the charity, such as a museum running a café for visitors; or
  • a trade which is mainly carried out by beneficiaries of the charity, for example the sale of goods manufactured by disabled people who are beneficiaries of a charity for the disabled.

Other trading profits are taxable unless they fall within the "small trading tax exemption", for example the sale of Christmas cards by an educational charity, profits from property development or sponsorship income. The small trading tax exemption is currently £8,000 where total turnover is under £32k, 25% of turnover between £32k and £320k and £80,000 where turnover is above £32k.

If non primary purpose trading profits exceed these levels, the total profits will be subject to tax.

Carrying on the trade through a trading subsidiary should be considered.

Setting up a trading subsidiary

A charity which has trading profits which are not linked to its primary purpose, and which are above the small trading limit should consider carrying on the trading activity through a trading subsidiary. Provided the trading subsidiary donates all of its profits to the parent charity by way of gift aid, the trading subsidiary has no tax to pay and the charity does not pay tax on gift aid donations received from the subsidiary. This means that no tax will be paid on the trading profits.

A trading subsidiary can also be used to protect the charity's assets from trading losses, or where it makes commercial sense to operate the trading activities through a separate organisation.


Charities may be required to register for VAT if their activities are business activities, ie they provide services in exchange for payment, and vatable turnover is above the VAT registration limit (currently £85,000). A charity which is VAT registered may be able to reclaim VAT on some purchases of goods or services.

Identifying whether VAT is chargeable can be complex:-

  • donations, where there is no significant benefit to the donor, are outside the scope of VAT whereas VAT is chargeable on sponsorship income
  • grant funding is non-business and outside the scope of VAT, whereas payments under service contracts are subject to VAT
  • admission to premises for a charge is vatable, but there are exemptions for fundraising and cultural events

Charities should review the VAT treatment of all their different sources of income to identify whether VAT is chargeable and whether VAT registration may be required.

VAT reliefs for charities

There is no general relief from VAT for charities, and charities generally pay VAT on goods and services in the same way as other consumers. There are some goods and services which are zero-rated for charities, whether they are VAT registered or not. These include advertising services, aids for the disabled, some construction services, medical and scientific equipment and some imported goods focused on the welfare of people in need. There is also a reduced rate of 5% on certain supplies of fuel.


Charities can apply for charitable rates relief of up to 80% with an additional 20% discretionary relief.


Charities enjoy an exemption from LBTT and SDLT on the purchase or lease of land and buildings to be used for qualifying charitable purposes. There is a clawback if the property ceases to be used for charitable purposes within three years.

Please get in touch if you would like to discuss tax issues relating to your charity.


Isobel d'Inverno

Director of Corporate Tax