If a non-primary-purpose trade is profitable, the charity will have a corporation tax charge on the taxable profits (as adjusted for any tax disallowable expenditure and relief available under the capital allowances regime).

If a non-primary-purpose trade is loss-making, the loss will be regarded as being non-charitable expenditure. This would normally mean that tax exemption is not available on that amount of the charity’s income. However, if the non-primary-purpose trade has been carried out on a commercial basis with a view to the realisation of a profit but has realised a loss in a particular period as a result of adverse trading conditions, the trading loss can be set off against the income that is brought into charge by the operation of the rules on non-charitable expenditure.

If, however, the charity cannot demonstrate that the non-primary-purpose trade was conducted on a commercial basis, the tax loss cannot be used to offset the income that has lost its exemption – thereby leaving the charity with income on which corporation tax is chargeable.

Chapter 3.8 of HMRC’s trustees’ guidance gives more detail on non-primary purpose trading.