Prior to the Finance Act 2006, if a charity carried on a mixed trading activity technically the whole profit, not just the non charitable element, was taxable. 

In practice HM Revenue & Customs (HMRC) rarely took the point, but this was an informal concession with no real legal basis.  The Finance Act 2006 changes were intended as a relieving provision, to overcome a problem for charities caused by a tax case unconnected with charities.  However, in practice they are beginning to cause, perhaps unintended, difficulties.

As you would expect, if this apportionment results in a profit for the non charitable element it is taxed.  However, if a loss results this is treated as non charitable expenditure and the charity suffers a pound for pound withdrawal of its tax exemption.  Prior to the changes if the non charitable element made a profit after direct costs but a loss after taking account of overheads that the charity was committed to incurring come what may, the loss was not treated as non charitable expenditure.

An unexpected consequence of these changes is how it affects a charity’s relationship with its subsidiaries.  Many charity subsidiaries do not have their own staff, premises or other resources and so depend on their charitable parent to provide these; for which a charge is made.  If this amounts to no more than a cost sharing arrangement under which the relevant costs (including overheads) are identified and each party bears its own share (with no mark up), HMRC's current view seems to be that this does not amount to trading by the charity so it will have neither a taxable profit nor non charitable expenditure as a result.  However, any other arrangement, for example a traditional service level agreement, will be a trading activity by the charity and in all but exceptional circumstances, it will result in a tax liability.