Tax guidance for Charities
There are three key direct tax issues which charities need to consider:
– Charitable status
– Tax status of income / gains
– Tax compliance
In order for your charity to benefit from the tax reliefs available to charities, for example relief from Income Tax, Corporation Tax, or to claim tax repayments, you must be recognised by HMRC as a charity for UK tax purposes. Charitable status is available to entities other than registered charities if they are established for charitable purposes only. Charities already registered with the Charity Commission for England and Wales will meet the charitable purposes condition automatically.
Tax status of income / gains
Most of the income and gains received by charities are exempt from Income Tax and Corporation Tax provided that the money is then used for charitable purposes only. The main exemptions are summarised below:
– Tax relief on donations received through the Gift Aid scheme
A charity can claim exemption from tax and claim basic rate tax back from HMRC on income received from individuals through Gift Aid donations. It can also claim exemption from tax on donations received from companies. However, because donations from companies don’t have tax deducted from them there is nothing to claim back from HMRC. A charity can give donors modest ‘benefits’ in order to acknowledge a gift – but there are limits on their value.
For donations between £0 and £100, the maximum value of benefits is 25% of the donation. (For donations between £100 and £1,000 the limit is £25, and for donations > £1,000 the limit is 5% of the donation, up to a maximum of £2,500.)
– Tax relief on investment income
A charity is exempt from UK tax on most types of investment income (and can arrange to receive bank or building society interest gross).
– Tax relief on trading profits
Any profits that a charity makes from trading activities – selling goods and services to customers – may be taxable. However, there are some exemptions which may apply depending on the nature of the trading activities. These include:
‘Primary purpose’ trading exemption – the trading activities are directly related to the charitable aims and objectives
Exemption for trading activities mainly carried out by the charity’s beneficiaries
The ‘small trading’ exemption and
Exemptions from profits on fundraising events and charity lotteries
If these exemptions are not met a charity can conduct all or part of any of its taxable trading activities through a subsidiary trading company, then transfer some or all of the profits of that company back to the charity as a donation.
– Tax relief on income from land and property
A charity is exempt from tax on income received from renting out land or property that it holds for charitable purposes (but there is no exemption from tax for any profits made from developing land or property).
– Capital Gains Tax relief for charities
A charity is exempt from tax on capital gains providing the proceeds of the disposal are used for charitable purposes only.
If a charity receives taxable (non-exempt) income or gains, it will need to complete a tax return, either Self Assessment or Company Tax Return, depending on whether it is set up as a charitable trust or company. Most charities will be treated as companies (liable to pay Corporation Tax) for tax purposes (charities will only be treated as a trust if they were set up by a trust deed or a will.)
Your charity will also need to complete a tax return when it uses income for any non-charitable purposes, known as non-charitable expenditure. This has a wide definition and includes not just expenditure outside the charitable objects but also loans and investments which are not charitable, payments made to overseas bodies where the trustees have not taken reasonable steps to ensure that the money will be spent on its charitable purposes and costs to your charity which are not wholly charitable.
There are clearly a number of issues which charities need to consider, on an ongoing basis, to ensure that they pay no direct tax on their income and gains. In particular, not only must it have been established for charitable purposes, but the charity must continue to use the money it receives for charitable purposes only. It must also ensure that it can identify any potentially taxable trading activities and structure them so as not to taint its overall charitable status.