The financial landscape is challenging, and in financially tight times, there is a growing demand for the charity sector to become more “business-like” in its approach. For many, this means exploring trading, selling goods or services that generate income to support your core charitable mission.
Trading can be a powerful and potentially important contributor to achieving sustainable funding, helping you lock resources into pursuing your mission.
Measuring Value: Mission vs. Money
When moving toward trading, it is vital to remember that charities are unique. The traditional trading sector measures value in pounds generated. However, the non-profit sector measures value in terms of impact: moments of lives changed and travel toward better outcomes.
Charities are designed to tackle complex social problems where there is often no financial profit to be gained.
While this fundamental difference exists, embracing entrepreneurial thinking, thinking flexibly and designing innovative solutions that work, is crucial for success. When successful, trading provides opportunities for charities to pursue their mission while securing sustainability.
Setting Up for Success: Legal Pathways
As you consider selling services or products, you will need to determine the legal basis on which your charity can trade. The rules governing how charities trade depend entirely on how closely the activity relates to the organisation’s core mission. There are three distinct types of trade a charity can undertake:
Primary Purpose Trading
Directly furthers the charity’s objects.
For example, an educational charity selling textbooks or a charitable clinic selling medicines. This is a direct extension of the mission, there is no tax liability on the profits and no limit on how much can be earned.
Ancillary Trading
Enhances or complements the charity’s primary purpose.
For example, a theatre charity selling food and drink at its bar to audience members. This supports the main charitable work and is not subject to a tax threshold because it is reasonable for attendees to want refreshments and it “keeps people engaged and attending.”
Non-Primary Purpose Trading
Purely commercial trading conducted to raise funds, which does not directly further the charity’s purpose.
For example, selling branded merchandise like hats and mugs. This type of trading is allowed, but it is subject to strict tax rules.
Trading Subsidiaries
Under certain conditions it can be advantageous to set up a trading subsidiary.
A trading subsidiary is a separate, for-profit company owned by the charity. This structure helps ensure sustainability through trade while also protecting the main charity from the risk of mission drift.
The subsidiary is a separate legal entity and must be treated as such to protect the charity. This separation must be maintained rigorously in practice.
- They must have separate board meetings with separate letterhead, meetings, minutes and accounts.**
- Resources like staff time, branding (the charity’s name and logo), and use of premises must be paid for by the subsidiary through a formal “resource sharing agreement,” which includes a license for use of the brand.
- The subsidiary must reimburse the charity for all shared resources at a fair market rate, ensuring the charity does not subsidise its commercial activities.
** It is usual for some of the trustees of the charity to also sit on the board of the trading subsidiary but it is important to manage any potential conflicts of interest. It is worth considering having some trustees and some directors who do not overlap the two organisations to insure and to demonstrate their independence.
Charities Making Trading Work
Supports the wellbeing of LGBTQ+ young people. They cover all of Cambridgeshire, Peterborough and surrounding areas. Their ambition is to secure around 5% of their income from primary purpose trading.
A registered charity and company limited by guarantee, focused on overcoming disadvantage and social inclusion with young people, children, and families. Their budgeted expenditure for 2024 was £1.7 million and trading represented around 17% of their income, c.£300k.
In 2024, The Kite Trust trading activities had three strands:
In 2024, Romsey Mill‘s main trading activities included:
The Rainbow Flag Award
- A national programme run in partnership with other charities, focussing on positive LGBTQ+ inclusion and tackling LGBTQ+ phobic bullying in schools.
- Originally grant funded then partially funded by fees from schools. Project staff costs subsidised by The Kite Trust.
- The trustees took the decision to subsidise the project for core funding because they regarded the project to be clearly aligned with their charitable purpose.
Charity Shop
- Managed by a ‘Community Development Manager‘ rather than a ‘Charity Shop Manager’
- Helps ensure the trading activity is measured not just by sales, but by its success in “nurturing relationships,” which is the charity’s core mission.
Training Consultancy
- Delivered around LGBTQ+ inclusion and awareness.
- After a slow start in 2017, four years later, The Kite Trust Training Consultancy started to make a profit, and the trustees invested some of this profit into building capacity.
- The Kite Trust also secured a grant to help build this capacity, putting in place a training officer and manager to oversee the project, and creating a bank of associate trainers on freelance contracts to deliver the work.
- The flexible workforce made their expenditure more scalable to their income as well as providing benefits in terms of a wider pool of experience and expertise.
- The Trust planned further investment in systems, processes and marketing to scale up the project with the goal of building more unrestricted funding.
Coffee Shop
- Run as a social enterprise, providing work experience opportunities for young people
- The set up was secured by a capital grant which supported Romsey Mill to deliver a trading surplus relatively quickly that could be gift aided to the charity.
- The coffee shop building’s landlord has not charged rent.
- After 6 years the coffee shop was making a £9,000 surplus. Without the capital grant it’s estimated it would have taken an extra 3-5 years to make a surplus.
Merchandising
- Made a minimal contribution
Hall Hire and Training
- Income from three halls the charity manages
- Training and resources sold to other organisations
Top Tip: Look for capital funding to help launch any enterprise, rather than risking a charity’s own reserves
How to encourage more ‘not for profits’ to trade
Some local not for profit organisations were asked to share the challenges they faced with diversifying income, and to offer suggestions on how these challenges might be tackled:
Provide greater access to expert support and guidance
- Legal/Finance support around trading, legacy and payroll giving
- Financial guidance and training around budgeting and pricing strategies
- Fundraising expertise and help with fundraising event logistics
- Strategic development support
Develop networking and peer support learning and action groups
- Large scale events that bring in a wide range of potential, customers, partners, collaborators and experts to network and learn from
- Peer networks such as small charity CEO networks
Encourage the right kind of business support
- The smaller organisations highlighted building relationships with businesses via business networks and the Get Synergised platform to help broker relationships.
- The larger organisations had all experience of receiving support and income from businesses and want to improve the way voluntary organisations and business interact by:
- Promote the confidence of charity leaders in asking major donors and businesses for money without creating expectations that add additional demands on limited resources
- Persuade business to recognise the value of charity time and expertise and consider payroll giving
- Promote more opportunities for collaboration with key institutions including universities
Change the dynamic with grant funders
- Advocate for grant makers to adopt more flexible, long-term funding strategies that support capacity building and income generation
- Persuade funders to make their requirements proportionate
Creating a countywide ‘social value’ brand to support individual marketing
- Build a social value network in Cambridgeshire leveraging collective strength and raising the profile of their work within the county
Strategic Considerations for Moving Forward
If your organisation is considering adopting a trading approach:
- Review your current income mix.
- Be clear about your ideal income mix (and your organisation’s approach to risk).
- Learn from others and be prepared to innovate.
- Be realistic about timescales and results.
By focusing on flexible thinking and innovative solutions, and always ensuring your charitable obligation to your beneficiaries comes first, trading can become a powerful, stable element of your future funding mix.
A Tool, Not a Target
Trading can be a powerful and necessary tool for the modern charity, but it is not a simple pot of gold. It requires careful strategy, legal awareness, and an unwavering commitment to the mission that must guide every decision.
The most successful and sustainable charity trading ventures are not those that simply chase profit. They are the ones that see income generation as a means to fuel their core purpose, not as the purpose itself.
For your organisation, what if the first question you asked about a new trading idea wasn’t ‘How much money could this make?’, but ‘How could this deepen our impact?‘
Support Cambridgeshire is a partner in the wider Vision Project. This blog brings together key takeaways from a series of events they held in Summer 2024.
Watch: Let’s talk about trading income for charities with Pip Gardener, then CEO of The Kite Trust and Neil Perry, CEO, of Romsey Mill, recorded July 2024.
Further information: Charities & Trading (UK Government); Trading & Charities (NCVO)
Glossary:
- Sustainable Funding – the ability for your organisation to operate successfully in the long term
- Mission Drift – the danger of getting distracted from your core purpose by market opportunities
- Beneficiaries – the people you exist to help
- Capital Funding – money used specifically to set up an enterprise or cover initial costs
Notes on Tax and Business Rate Relief
For non-primary purpose trading, charities can benefit from the ‘small trading tax exemption’ to avoid paying tax on profits. However, if your charity’s small trading turnover is higher than the exemption limits then you’ll have to pay tax on ALL of your profits from that trade. Your charity’s gross annual income is the total turnover before deducting tax and expenses.
This table shows how the small trading tax exemption limits are applied:
| Charity’s gross annual income | Maximum permitted small trading turnover |
|---|---|
| Under £32,000 | £8,000 |
| £32,001 to £320,000 | 25% of your charity’s total annual turnover |
| Over £320,000 | £80,000 |
If you are a charity that benefits from business rate relief on your premises and the trading subsidiary occupies too much of the premises or too much trading subsidiary activity is taking place at the premises, it can have an impact on your business rate relief because it’s no longer being occupied primarily by a charity.
A Community Hall won’t count as trading provided it’s what is called ‘dry hire’ so if you are literally just providing the venue to someone and they’re paying for that will not typically count as charitable trading and so won’t contribute to your small trading tax exemption. The caveat to that is if you are providing any services along with the venue hire, for example catering, that is usually trade and so again you need to treat it in the same way as other commercial trading.
If the trading subsidiary gifts all its profits to the charity, it shouldn’t have any tax liability. Because the trading isn’t taking place within the charity it doesn’t impact on the charity’s small trading tax exemption.