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Supporting Scotland's vibrant voluntary sector

Scottish Council for Voluntary Organisations

The Scottish Council for Voluntary Organisations is the membership organisation for Scotland's charities, voluntary organisations and social enterprises. Charity registered in Scotland SC003558. Registered office Mansfield Traquair Centre, 15 Mansfield Place, Edinburgh EH3 6BB.

Trading is an important source of funding for the voluntary sector.

It can enable organisations to reduce their dependency on ever decreasing traditional funding sources, and can provide an independent, unrestricted and sustainable source of income. In addition, trading is much more than just a source of funding. It can also be a fundamental way in which an organisation achieves its charitable objectives or social/environmental mission.

But trading can also expose your organisation to risk – financial and reputational. It requires trustees and employees to develop new skills, and can change the culture of your organisation. So before you decide to trade, you need to carefully consider a number of questions and take advice.

A business plan is essential, and you should ensure there is a market for your proposed services or goods.

Can a charity trade?

Yes, even though trading is a commercial activity, charities can and do trade. The sale of goods and services now brings in half of the voluntary sector’s income.

Trading activities can range from the sale of goods such as Christmas cards, to the operation of cafes and training programmes, to delivering contract services for public bodies, eg for elderly or disabled people through Service Level Agreements.

But beware. First of all you must check whether your constitution allows you to trade. This is most important!

What about social enterprise?

Social Enterprise is not an organisational structure or registered status – it’s an activity.

Social enterprises can be charities and can have a range of legal forms including SCIO, company limited by guarantee, community interest company and industrial and provident societies. They generate a significant proportion of their income by selling goods and services, and are generally less reliant on grants and donations. They reinvest the profits they make in support of their social mission.

Are there any restrictions on charity trading?

Many social enterprises, including community interest companies, are able to trade freely. But charity law imposes restrictions on the nature and level of trading activity charities can carry out, and some types of trading are subject to tax. There are different types of trading carried out by charities which have different legal and financial implications:

  • primary purpose trading
  • ancillary trading
  • non-primary purpose trading.

Primary purpose trading

This is trading which fulfils charitable objectives as set out in a charity’s constitution, e.g.

  • admission fees and tickets for theatre shows, museums and art galleries run by charities set up for these purposes
  • fees charged by an educational charity for training courses

Trading where the work is carried out mainly by the charity’s beneficiaries is also primary purpose trading; for example, the manufacture and sale of goods by a charity which supports adults with learning difficulties

Primary purpose trading can generally be carried out by a charity without falling foul of charity law, setting up a separate trading arm, or having to pay corporation tax on the profits, provided the surplus is used to support the charity’s aims.

But you should always seek professional legal and financial advice, particularly with regard to VAT.

SCVO has a Free Tax and VAT advice service provided by Azets

Ancillary trading

This is trading which is a bi-product of a charity’s main activities, and though it does not carry out a primary charitable purpose, it contributes to its success. For example:

  • a café run by a charity which provides a theatre, museum or art gallery
  • books sold by a research or educational charity.

Ancillary trading enjoys the same tax benefits as primary purpose trading.


If a charity run café provides refreshments to a member of the public not attending an event, then this is not considered to be ancillary trading, and would not be subject to tax exemption.

However, if the café was used to support people working and volunteering there to develop new skills, experience, confidence, etc, and this was one of the charitable objects, then in this case the trade would be primary purpose trading.

Remember, fundraising itself is not a charitable objective and fundraising alone cannot be considered as ancillary trading.

Non-primary purpose trading

This is trading which fulfils social objectives outside the charity’s main purpose and simply raises funds, e.g. a charity shop, when this is not linked to furthering charitable objects.

This is permissible providing it doesn’t involve any ‘significant’ risk to the resources of the charity, i.e. turnover should be sufficient to meet the costs of trading and not be financed out of the assets of the charity.

The profits from non-primary purpose trading are potentially subject to tax.

With non-primary purpose trading it is important to consider the scale of the risk to the charity. Whether this is ‘significant’, depends on a number of factors:

  • the size of the charity
  • the nature of the business
  • the expected cost
  • turnover projections.

If the trading activity could be considered ‘risky’ then the charity should establish a separate trading subsidiary in order to carry out the trade.

What is a trading subsidiary?

A trading subsidiary is a non-charitable trading company that can offer a solution to potential tax and charity law problems. Usually it is wholly owned by the charity. Because the trading subsidiary is not itself a charity, there are no limits on how it can trade and any commercial risks are restricted to a separate legal entity. Although the trading subsidiary’s profits will be liable to corporation tax, the trading subsidiary can usually donate all or most of its profits to the charity in a tax-efficient way.

Can the parent charity invest in the trading subsidiary?

Charities may invest funds in a trading subsidiary by making a loan or donation, or purchasing shares, but charity trustees must be able to justify any financial support. Charities need to be very careful that it is an appropriate use of charitable funds to loan, donate or invest money in a trading subsidiary. Trustees should look at the financial viability of both the subsidiary and its proposed trading activity, and consider how long the investment will be tied up for. Trustees should get independent financial and legal advice.

Other tax exemptions – Small Scale Trading

Other than primary purpose trading, there is also a useful exemption which applies to ‘small scale trading’. Non primary purpose ‘small-scale’ trading is trading which cannot be justified as primary purpose or ancillary, but if it poses no risk may avoid corporation tax, if it qualifies for ‘small scale exemption’. The details of this are complicated, and subject to annual turnover limits, so you should check with HMRC.

Sale of donated goods

Selling donated goods isn’t trading – it’s converting a donation into cash. HMRC does not normally regard the sale of donated goods by charities as trading so it can be carried out tax free, as long as the donations have been given to raise funds for the charity.

Watch a recording of our webinar on trading, with our partners Azets and Gillespie Macandrew

Bear in mind that certain aspects of charitable law may be different in Scotland.

Last modified on 19 September 2023
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