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The gift shop question: when charity trading is tax-free, and when it needs a subsidiary

By Buzz Accounting · 2026-08-13

Somewhere in most charities there is a trustee who wants the organisation to earn more of its own money, and a finance person who is quietly worried about the tax. Both are right. Earned income is the most useful money a charity has, because nobody has ring-fenced it — and non-primary-purpose trading really can create a corporation tax bill in an organisation that has never filed a return.

The good news is that most of what charities actually sell is already exempt. The trap is narrower and sharper than most boards realise, and it has a cliff edge in it. This is where the lines fall in 2026/27.

Four kinds of trading that are already tax-free

Before the small trading exemption is worth thinking about, check whether you need it at all.

Primary purpose trading. Trading that is itself carrying out your charitable objects. Admission charges at a museum, fees at a charitable school, a care charity charging a local authority for the care it provides. Exempt, without limit.
Ancillary trading. Activity that supports the primary purpose rather than being it — the museum café serving visitors, the school selling textbooks to its own pupils, a crèche for students' children. Exempt, provided sales are genuinely to beneficiaries rather than to the general public.
Trading carried out by beneficiaries. Where the work is largely done by the people the charity exists to help, the profits are exempt. A disability charity manufacturing goods through disabled workers is the standard example. If only part of the work is done by beneficiaries, only that proportion is exempt.
Fundraising events and lotteries. Profits from a qualifying fundraising event are exempt, as are lottery profits where the lottery is properly licensed and the proceeds are applied charitably.

The fundraising events exemption has a limit that catches organisations running a regular programme: you can hold up to 15 events of the same kind in the same location in your financial year. Hold 16 and every event in the programme becomes taxable, not just the sixteenth. Events in a week where aggregate gross takings from that kind of event at that location are £1,000 or less are disregarded, which is what keeps a small weekly coffee morning out of the count.

The small trading exemption, and the cliff edge inside it

What is left after those four is non-primary-purpose trading: the gift shop selling bought-in souvenirs, the Christmas card range, letting the hall to a commercial user, selling advertising in your magazine. Profits from that are chargeable — unless the turnover stays under the small trading exemption.

Two features of that table do the damage. It is measured on turnover, not profit, so a shop with thin margins uses up the allowance far faster than its contribution suggests. And it is a cliff, not a taper: exceed the limit and the exemption is lost on the whole trade, so a charity that goes £6,000 over pays tax on all of its shop profit, not on the profit attributable to £6,000 of sales.

There is one rescue. If turnover exceeds the limit, the exemption can still apply where the charity can show it reasonably expected at the start of the year that turnover would stay within it. Budgets, prior-year accounts and trustee minutes recording the expectation are the evidence. It is a genuine relief for the year a shop unexpectedly takes off. It is not a plan you can run twice.

A worked example

The figures below are illustrative, but the thresholds and rates are the real ones.

A heritage charity, incorporated as a charitable company, has total income of £280,000 — £150,000 of admissions, £90,000 of grants and £40,000 of donations. Admissions are primary purpose trading and exempt without limit. It also runs a gift shop selling bought-in souvenirs to the general public, turning over £52,000 with a profit of £11,000.

Its small trading limit is 25% of £280,000 = £70,000. Shop turnover of £52,000 is inside it, so the £11,000 profit is exempt. No corporation tax, nothing to do.

The following year

A £120,000 legacy lifts total income to £400,000. Because that is over £320,000, the limit is now the £80,000 cap rather than 25%. Meanwhile a new online shop takes turnover to £86,000, with a profit of £18,000.

Turnover is £6,000 over the cap, so the exemption is lost on the entire trade. Corporation tax at the 19% small profits rate on £18,000 is £3,420 — and the charity now has a corporation tax return to file, having never filed one before.

The same year, run through a subsidiary

Suppose instead the shop had been moved into a wholly-owned trading company at the start of the year. The subsidiary makes the same £18,000, and donates its profit to the parent charity. A qualifying charitable donation is deductible against the subsidiary's profits, so the corporation tax falls to nil and the whole £18,000 reaches the charity as unrestricted income.

With one condition, and it is the one that goes wrong. Suppose the subsidiary carried forward a loss of £5,600 from its first year. Its distributable reserves are therefore £12,400, not £18,000. Donating the full £18,000 would be an unlawful distribution under company law, and the amount above reserves has to be repaid. Donate £12,400 and the subsidiary pays 19% on the remaining £5,600 — £1,064 — which is still a great deal better than £3,420, but it is not the nil bill the board was promised.

How the subsidiary donation actually works

Three mechanics decide whether a trading subsidiary delivers what it is supposed to.

The nine-month window. A company wholly owned by one or more charities can make its donation up to nine months after the end of an accounting period and still have it deducted against that period's profits. That flexibility exists so the final figure can be set once the accounts are done — it is not a licence to leave the payment indefinitely.
Distributable profits cap the donation. The payment is a distribution in company law terms, so it cannot exceed distributable reserves. Accounting profit and distributable reserves are not the same figure once brought-forward losses, depreciation on assets gifted by the charity, or an unpaid tax charge are in the picture. This has been the settled position for accounting periods beginning on or after 1 April 2015 and it is still the most common error we see.
The charity's funding of the subsidiary is an investment decision. Trustees cannot simply pour charity money into a subsidiary that loses money. Any loan or share capital has to be justified as a proper application of charitable funds, on terms a trustee could defend, and reviewed as an investment. A subsidiary that never covers its costs is a charitable asset being spent on non-charitable trading.

Two more things that catch boards out

VAT does not follow the corporation tax answer. Charity trading exemptions are direct-tax reliefs and have no effect on VAT. Shop sales, room hire in some circumstances and sponsorship are taxable supplies, and once taxable turnover passes £90,000 in any rolling 12 months registration is compulsory whether or not the profit is exempt. Registration is not automatically bad — it can release input tax you are currently absorbing — but it should be a decision rather than a discovery. Our VAT guide covers where the reliefs sit.

CICs do not get any of this. A community interest company is not a charity, has no charitable tax exemptions, and pays corporation tax on its trading profits in the ordinary way, whatever its social purpose. The small trading exemption, primary purpose exemption and the trading subsidiary structure described here are charity reliefs and do not apply. We set this out in full in our post on whether CICs pay corporation tax.

What to do this quarter

List every income stream and label each one: primary purpose, ancillary, beneficiary-delivered, fundraising event, lottery, or non-primary-purpose trading. Most boards have never done this on one page.
Add up the turnover in that last category and compare it with your limit — £8,000, 25% of total income, or £80,000, depending on which income band you are in.
If you are within about 20% of your limit, put your expectation for the year in the minutes now. That record is what the reasonable expectation rule runs on, and it is worthless written after the event.
Count your fundraising events by kind and by location against the 15-event limit, disregarding weeks where takings of that kind at that location were £1,000 or less.
If you already have a trading subsidiary, check the last donation against the subsidiary's distributable reserves rather than its accounting profit, and check it was paid within nine months of the year end.
Check your rolling 12-month taxable turnover against the £90,000 VAT registration threshold separately from all of the above.

Where we help

We map a charity's income against the exemptions properly, so trustees know which trade is exempt and which is running towards a limit, and we set up and run trading subsidiaries where they are genuinely needed rather than because someone said charities always have one. That includes calculating the donation off distributable reserves rather than accounting profit, filing the subsidiary's corporation tax return, and consolidating it into SORP accounts — see our SORP guide for how that reporting works. If you are weighing earned income against grant income more broadly, our comparison of the two is the place to start. Fixed fees from £39 + VAT a month. Get started.

Quick answers

About this post

How much can a charity trade before it pays tax?

It depends on your total income, and the test is on turnover rather than profit. If total charity income is under £32,000, non-primary-purpose trading turnover of up to £8,000 is exempt. Between £32,000 and £320,000 of total income, the limit is 25% of total income. Above £320,000 of total income, the limit is capped at £80,000. Total income means all receipts from every source — grants, donations, investment income and all trading receipts. Primary purpose trading, ancillary trading, trading carried out by beneficiaries, qualifying fundraising events and licensed lotteries all sit outside these limits and are exempt without any turnover cap.

What happens if we go over the small trading limit?

The exemption is lost on the whole trade, not just on the excess. A charity whose limit is £80,000 and whose shop turns over £86,000 pays corporation tax on all of that shop's profit, not on the profit attributable to the £6,000 of extra sales. That cliff edge is why the limit needs watching in-year rather than at the audit. There is one relief: if you can show you reasonably expected at the start of the year that turnover would stay within the limit, evidenced by budgets, prior-year figures or trustee minutes, the exemption can still apply. It rescues a surprise year, not a pattern.

What is primary purpose trading?

Trading that is itself the carrying out of your charitable objects, rather than a way of raising money to fund them. Admission charges at a museum whose purpose is public access to heritage, fees charged by a charitable school, and a care charity charging a local authority for care are all primary purpose. Profits are exempt from tax without any turnover limit. Ancillary trading, which supports the primary purpose without being it — the museum café serving visitors, or textbooks sold to a school's own pupils — is treated the same way, provided sales are genuinely to beneficiaries rather than to the general public.

When does a charity need a trading subsidiary?

When non-primary-purpose trading is either large enough to exceed the small trading exemption or carries commercial risk the charity should not be holding. A subsidiary keeps that risk off the charity's balance sheet and lets profits reach the charity free of corporation tax, because a qualifying charitable donation is deductible against the subsidiary's profits. It is not free of effort: the subsidiary needs its own accounts, its own corporation tax return, real governance separate from the charity, and consolidation into the charity's SORP accounts. Below the exemption limits, a subsidiary usually adds cost without adding anything else.

How long does a trading subsidiary have to pay its profits to the charity?

A company wholly owned by one or more charities can make the payment up to nine months after the end of the accounting period and still have it deducted against that period's profits. That window exists so the amount can be fixed once the accounts are prepared, rather than guessed before the year end. It is not open-ended, and a payment made later than nine months after the year end is deducted against the following period instead. Diarise the date, because a subsidiary that misses it pays corporation tax on profits everybody had already treated as belonging to the charity.

Can a trading subsidiary donate more than its accounting profit?

No. The payment is a distribution in company law terms, so it cannot exceed the subsidiary's distributable reserves, and anything paid above that has to be repaid. Accounting profit and distributable reserves diverge more often than boards expect — brought-forward losses, depreciation on assets the charity transferred in, and an unpaid corporation tax charge all reduce reserves without appearing in the headline profit figure. This has been the settled position for accounting periods beginning on or after 1 April 2015, and it is still the most common mistake we find when we take over an existing subsidiary.

How many fundraising events can we hold before they become taxable?

Up to 15 events of the same kind in the same location in your financial year. Hold 16 and every event in that programme becomes taxable at the standard rate, not just the sixteenth — the exemption is lost across the series. Events held in a week where aggregate gross takings from that kind of event at that location are £1,000 or less are disregarded when counting, which keeps a small regular coffee morning out of the calculation. The count is by kind and by location, so ten quiz nights at your hall and ten at a village hall elsewhere are two separate counts.

Do the charity trading exemptions apply to a CIC?

No. A community interest company is not a charity and has no charitable tax exemptions, so it pays corporation tax on its trading profits in the ordinary way regardless of how social its purpose is. The small trading exemption, primary purpose exemption, ancillary trading exemption and the trading subsidiary structure described here are all charity reliefs. A CIC can reduce its taxable profit by making qualifying charitable donations to a charity, and it deducts genuine business expenses like any other company, but there is no equivalent of the exemptions a charity gets on its own trade.

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