A UK charity qualifies for a number of tax exemptions on income and gains and on profits from some activities. The charity can only claim these tax exemptions if, in broad terms, in some cases the charity uses the money that it receives for its own charitable purposes or in other cases for general charitable purposes. There is no requirement to apply the income/gains/profits to specific projects, nor is there a time limit by which the funds must be spent, and it is quite permissible to use the funds for the general administrative purposes of the charity.

The above tax exemptions and reliefs are, however, reduced to the extent that the charity incurs non-charitable expenditure. ‘Non-charitable expenditure’ is expenditure incurred by a charity which is not incurred for charitable purposes exclusively. If non-charitable expenditure is incurred there will be a potential tax liability for the charity.

Losses incurred in relation to non-primary purpose trading are also treated as non-charitable expenditure. However, losses arising from the small trade, fundraising or lotteries exemptions are not treated in this way.

Non-charitable expenditure also includes:

• payments to an overseas body where the charity trustees have not taken reasonable steps to ensure that the payments will be applied for charitable purposes and
• investments or loans that are not regarded as qualifying investments and loans.

Access HMRC’s full guidance on non-charitable expenditure here.