Taxation of Charities: Obligations and Reliefs
The taxation of charities differs from that of other types of organisation. In addition to being subject to specific tax obligations, charities are also eligible for a number of tax reliefs. This blog will offer an insight into the obligations that exist, the reliefs that are available, and how to make a claim.
What is a charity for tax purposes?
According to HMRC, in order to be able to claim for tax relief a charity must be:
- Based in the UK, EU, Iceland, Liechtenstein, or Norway;
- Established solely for charitable purposes. HMRC defines this as being for the public benefit and relevant activities include education, saving lives, and relieving poverty;
- Registered with the Charity Commission or another regulator; and
- Run by ‘fit and proper persons’.
If the above conditions are met, a charity can apply to be recognised by HMRC. Registration for this can be completed online.
Charities are not required to pay tax on most of their income and gains, provided that these are used for charitable purposes. Typical sources of income for charities include:
- Rental income from land and buildings
- Investment income, e.g. bank interest, dividends
- Fundraising events
- Profits when an asset is sold or disposed of (e.g. property or shares)
Profits from trading are exempt from tax if the money is being made in order to help the aims and objectives of the charity. This is known as ‘primary purpose trading.’ The primary purpose of each charity is stated in its governing document.
Income derived from trading activities that do not relate to the charity’s primary purpose are normally charged to tax unless it falls below the small trading tax exemption limits. The details of this are below:
|Charity’s gross annual income||Maximum permitted small trading turnover|
|£20,001 to £200,000||25% of your charity’s total annual turnover|
Please note that from April 2019 these limits will be changing – please read our Budget 2018 – Spotlight on Charity Tax blog to find out more.
Charities are not exempt from paying VAT when they are trading. When charities buy from VAT-registered businesses, they must pay VAT on all standard-rated goods and services.
However, charities pay VAT at a reduced rate of 5% or the ‘zero rate’ on some specific goods and services.
Services eligible for these reduced rates include fuel, power, accommodation (5% rate) and construction services and goods for disabled people (zero rate).
The VAT taxation of charities is a complex area, therefore you should contact a professional advisor if you have any queries.
If a charity receives income where tax has already been deducted, for example Gift Aid, it can be claimed back either using the Charities Online service or by post.
Charities can also arrange to receive interest without tax deducted by showing the bank the charity’s letter of recognition from HMRC. Deductions for previous years can be claimed from HMRC directly.
Charities can reclaim VAT through a VAT Return. This should normally be submitted to HMRC every three months.
Trust and Estate Self Assessment Tax Return
If a charity is a trust, it must complete a Trust and Estate Self Assessment tax return. The deadline for submission is 31 January following the end of the tax year.
Company Tax Return
If a charity is a limited company or an unincorporated association, it must complete a company tax return within 12 months after the accounting period for Corporation Tax ends.
If you are a charity looking for advice regarding your tax obligations and the reliefs available, please contact a member of our team.
Budget 2018 – Spotlight on Charity Tax (16 November 2018)