Trading profit

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There are outstanding changes not yet made by the legislation. Those changes will be listed when you open the content using the Table of Contents below. Any changes that have already been made by the team appear in the content and are referenced with annotations. Revised legislation carried on this site may not be fully up to date. Where those effects have yet to be applied to the text of the legislation by the editorial team they are also listed alongside the affected provisions when you open the content using the Table trading profits defined Contents below.

Overview of priority rules. Overview of Part 2. Provisions which must be given trading profits defined over Part 2. Chapter 2 Income taxed as trading profits defined profits. Charge to tax on trade profits.

Territorial scope of charge to tax. Trades and trade profits. Farming and market gardening. Trading profits defined occupation of land other than woodlands. Commercial occupation of woodlands. Profits of mines, quarries and other concerns. Divers and diving supervisors. Oil extraction and related activities. Starting and ceasing to trade. Effect of becoming or ceasing to be trading profits defined UK resident.

Effect of company starting or ceasing to be within charge to income tax. Trading income and property income. Caravan sites where trade carried on. Rent-a-room and foster-care relief.

Chapter 3 Trade profits: Generally accepted accounting practice. Losses calculated on same basis as profits. Items treated under CAA as receipts and expenses. Animals kept for trade purposes.

Relationship between rules prohibiting and allowing deductions. Chapter 4 Trade profits: Wholly and exclusively and losses rules. Expenses not wholly and exclusively for trade and unconnected losses. Trading profits defined and doubtful debts. Provision of qualifying benefits. Timing and amount of certain qualifying benefits. Provision or payment out of employee benefit contributions.

Profits calculated before end of 9 month period. Trading profits defined of sections 38 to Business entertainment and gifts. Business entertainment and gifts: Car or motor cycle hire. Car or motor cycle hire: Hiring cars but not motor cycles with low carbon dioxide emissions. Exclusion of double relief for interest. Penalties, interest and VAT surcharges.

Expenditure on integral features. Chapter 5 Trade profits: Incidental costs of obtaining finance. Convertible loans and loan stock etc. Tenants under taxed leases. Tenants under taxed leases: Tenants occupying land for purposes of trade treated as incurring expenses. Limit on deductions if tenant entitled to mineral extraction allowance.

Tenants dealing with land as property employed for purposes of trade. Restrictions on section 61 expenses: Corporation tax receipts treated as taxed receipts. Replacement and alteration of trade tools. Payments for restrictive undertakings. Employees seconded to charities and educational establishments. Contributions to agents' expenses. Counselling and retraining expenses. Counselling and other outplacement services. Redundancy payments and approved contractual payments.

Payments in respect of employment wholly in employer's trade. Trading profits defined in respect of employment in more than one capacity. Payments made by the Government. Contributions to local enterprise organisations or urban regeneration companies. Approval of local enterprise agencies. Supplementary provisions with respect to approvals. Expenses of research and development. Payments to research associations, universities etc. Expenses connected with patents, designs and trade marks.

Expenses connected with patents. Expenses connected with designs or trade marks. Export Credits Guarantee Department. Payments to Export Credits Guarantee Department. Expenses connected with foreign trades. Chapter 6 Trade profits: Debts incurred and later released.

Amounts received following earlier cessation. Tax treatment of reverse premiums. Arrangements not at arm's length.

Connected persons and property arrangements. Assets of mutual concerns. Distribution of assets of mutual concerns. Proceeds of trading profits defined etc. Sums recovered under insurance policies etc. Chapter 7 Trade profits: Gifts of trading stock to charities etc.

Receipt by donor or connected person of benefit attributable to certain gifts. Chapter 8 Trade profits: Election for application of herd basis rules. The herd trading profits defined rules.

Initial cost of herd and value of herd. Addition of animals to herd. Replacement of animals in herd. Amount of receipt if old animal slaughtered under disease control order. Sale of animals from herd.

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UK uses cookies to make the site simpler. Find out more about cookies. This publication is licensed under the terms of the Open Government Licence v3.

To view this licence, visit nationalarchives. Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. This publication is available at https: Many charities trade, either as an integral part of their charitable activities or to raise funds. The rules for direct taxes are based on trading and profits. The rules for VAT are based on supplies made and received in the course of carrying out business activities.

The Charity Commission also produces guidance in leaflet CC35 -Trading by Charities which should be read by English and Welsh charities in conjunction with this guidance. Other UK charities may also find CC35 helpful. The Office of the Scottish Charity Regulator is responsible for providing guidance for charities established in Scotland.

Usually, trading involves the provision of goods or services to customers on a commercial basis. Further guidance can be found in the Business Income Manual at paragraph The VAT rules are based on the concept of making supplies in the course or furtherance of business. Under general case law a charity can have only 1 trade. These rules apply for chargeable periods beginning on or after 22 March There are 2 forms of charitable trading, primary purpose trading and trading mainly carried out by beneficiaries.

Trading exercised in the course of carrying out a primary purpose of the charity such as a religious charity selling bibles, a charitable school charging pupils, or a charitable clinic charging patients or selling medicines. This is discussed further at paragraph 10 onwards. Where the trading is all charitable or all non-charitable the tax treatment is fairly straightforward. Where an activity involves both charitable and non-charitable trading the tax position must be calculated as if there were 2 entirely separate trades.

So the income and expenditure must be apportioned accordingly. Even though an activity is carried out for the benefit of the community or in the furtherance of charitable objects, it can still be a business activity for VAT purposes and VAT may due on the income. Guidance on the VAT implications of trading by charities is available. The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities.

To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:. Other charities may also find this guidance helpful. More information about the tax treatment of affordable home ownership can be found in Annex VII of the detailed guidance notes.

Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade.

Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:. Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade primary purpose or carried out by beneficiaries and partly non-charitable trade non-primary purpose and not carried out by beneficiaries. For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose.

Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:.

In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades - sections 2 and 3 CTA for corporate charities and sections 2 and 3 ITA for charitable trusts apply. Any receipts or expenses relating to the overall trade should be apportioned to the separate trades on a reasonable basis.

These rules apply for chargeable periods, that is, tax years for charitable trusts and accounting periods for other charities, beginning on or after 22 March Charities should ensure they have accounting systems that permit the identification of charitable and non-charitable trading, and the proper allocation of receipts and expenses to each. Charities can claim exemption from tax on the profits of a trade where the work in connection with the trade is mainly carried out by beneficiaries of the charity and the profits from the trade are used for the purposes of the charity.

Examples of trades carried on by charities where the work is mainly carried out by beneficiaries are:. In these circumstances tax exemption will still be available for the whole profit arising from the trade provided it can be shown that the greater part of the work in connection with the trade is carried out by beneficiaries of the charity.

The profit from the other part of the trade remains taxable unless exempt under the small scale exemption. Receipts or expenses relating to the overall trade should be apportioned to the separate parts on a reasonable basis.

A charity may wish to pay salaries to beneficiaries who work in a trade carried on by the charity. This means that the beneficiaries are employees of the charity. PAYE must be operated on the earnings of beneficiaries who are employed by a charity in the same way as for other employees, and national minimum wage rules must be applied.

For example, if a charity for the relief of disabled people pays disabled people for the manufacture of goods the trade will still be a charitable trade. A charity sells greetings cards to raise funds and applies all its income charitably. This might be because the charity expected:. HMRC Charities will consider any evidence the charity may have to satisfy the reasonable expectation test, for example the:.

The type of evidence needed to demonstrate the levels of turnover and incoming resources which were expected might include:. Many charities raise funds by selling donated goods items gifted to a charity which the charity sells on its own behalf , such as clothes, books or bric-a-brac. This may be a regular activity carried on at a shop or it may be an occasional activity carried on at a jumble sale or auction. At first glance this may appear to be a trade similar to the retail sale of goods by other commercial businesses.

But the way in which the goods are acquired makes it different from most retail trades. For the charity the sale proceeds are simply a realisation of the value of a gift. For this reason the sale of donated goods is generally not regarded as a trade for tax purposes. This is so even where the donated items are sorted, cleaned and given minor repairs. If the goods are subjected to significant refurbishment or to any process which brings them into a different condition for sale purposes than that in which they were donated, the sale proceeds may be regarded as trading income.

For example, where donated cloth is made into garments for sale this will amount to a trade. The sale of both donated and bought in goods by a charity is always a business activity for VAT purposes. The sale of donated goods by a charity is zero rated provided all the qualifying conditions are met. All rental income received by a charity from land or buildings is exempt from tax provided the profits arising are applied for charitable purposes.

See the guidance at paragraph 5 Direct tax exemptions However, if services are provided along with the use of the land or buildings, for example, provision of a caretaker, food or laundry these services in themselves might amount to trading.

Letting activity will itself constitute a trade where the owner remains in occupation of the property and provides services over and above those usually provided by a landlord. Each case must be considered on its own facts. The letting of land or buildings for a fee is normally a business activity for VAT purposes. The supply is normally exempt from VAT. If, after reading the guidance, a charity is still unsure about a supply it is making or receiving, it can contact the Charities Helpline on Telephone: Business sponsors may fund the general work of the charity or a particular charitable project.

Sponsorship arrangements often link the name of the business with the charity or its project, creating in the minds of the public an affinity between the business and the charity. The affinity with charity created by sponsorship is a valuable marketing asset for businesses.

The direct tax treatment of payments received by charities under sponsorship arrangements will depend on the nature of the arrangement. If, before payment is made by the business sponsor, a commercial participator agreement required by the Charity Commission under Section 59 of the Charities Act or by the Office of the Scottish Charity Regulator under Section 81 Charities and Trustee Investment Scotland Act is in place, the tax treatment of the payment will be determined by the wording of the agreement.

Otherwise, the tax treatment of the payments will be determined on the particular facts of the case. HMRC has agreed the Charity Commission guidance on whether university research paid for by a sponsor is charitable.

If the charity provides some goods or services in return for the sponsorship payments they may be treated as trading income. However, references to a sponsor which amount to advertisements will mean the payments are trading income. HMRC Charities will regard a reference to a sponsor as an advertisement if it incorporates any of the following:. However, if the name and logo was substantially and widely displayed throughout the report, this might constitute advertising in return for the sponsorship payment.

There are other services that a charity might provide in return for sponsorship payments that will be factors in determining whether the payments are trading income. Examples of such services are:. An executive of TaxCo appears on stage on the final night and is thanked. One sign of moderate size is positioned prominently in the hall stating that the event is sponsored by TaxCo.

An executive of CarCo appears on stage and thus on television and is thanked. There are many prominent signs advertising CarCo in the venue. The position for charitable companies, where the logo came into existence prior to 1 April and for charitable trusts whenever the logo came into existence is:.

Whether payments for use of the logo are annual payments will depend on the precise terms of the agreement for the use of the logo. Exemption from tax is available for related non-trading gains received by charitable companies from intangible fixed assets tax under section CTA VAT will be due on the whole of the payment.

This is a business supply of marketing services by the charity and VAT is due on any amounts they receive in respect of such supplies. However, a charity may have an arrangement with the bank whereby it enters into separate agreements.

One agreement could be for the supply of marketing services by the charity to the bank for an agreed consideration. This is a taxable supply on the part of the charity and VAT is due on such payments. The other, separate agreement provides for the bank to make voluntary contributions to the charity.

In essence, the nature of the second agreement is that the payments are not made in return for a supply.