do charities pay tax
Do Charities Pay Tax? A Guide for UK Charities
If you’re involved with a charity in the UK, you might wonder: Do charities pay tax? While charities are established to benefit the public, their tax obligations can be complex. In this guide, we’ll explore when charities pay tax, the available tax reliefs, and how to ensure compliance with UK tax laws.
First, a quick housekeeping note… While this article has been written to help you understand UK charity tax, it is a specialist area that requires tailored, expert advice to ensure your charity is fully compliant.
Right, with that now out of the way, let’s dive in!
Tax Exemptions for Charities
Registered charities in the UK enjoy several tax exemptions, provided they adhere to specific conditions set by HM Revenue & Customs (HMRC). These exemptions include:
Capital Gains Tax Relief: Charities are generally exempt from Capital Gains Tax when selling assets like property or shares, provided the proceeds are used for charitable purposes.gov.uk
Corporation Tax on Charitable Activities: Income derived from donations, grants, or fundraising activities directly related to a charity’s objectives is typically exempt from Corporation Tax. gov.uk
Gift Aid: Through the Gift Aid scheme, charities can claim an extra 25p for every £1 donated by UK taxpayers, enhancing the value of donations. gov.uk
VAT Reliefs: Charities may be eligible for VAT exemptions or reduced rates on certain goods and services. gov.uk
Business Rates Relief: Charities can receive up to 80% mandatory relief on business rates, with some local councils offering additional discretionary relief. gov.uk
Stamp Duty Land Tax (SDLT) Relief: When purchasing property for charitable purposes, charities may qualify for full relief from SDLT. gov.uk
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When Do Charities Pay Tax?
Despite these exemptions, there are circumstances where charities may be liable for tax:
1. Corporation Tax for Charities: Understanding Taxable Activities
While UK charities benefit from various tax exemptions, they may still be liable for Corporation Tax under certain conditions. It’s essential to understand which activities might generate taxable income to ensure compliance with HM Revenue & Customs (HMRC) regulations.
Primary Purpose Trading vs. Non-Primary Purpose Trading
Charities can engage in trading activities, but the tax implications depend on the nature of the trade:
- Primary Purpose Trading: This involves activities directly related to the charity’s objectives. For example, a charity established to advance education might sell educational materials. Income from such activities is generally exempt from Corporation Tax, provided the profits are used for charitable purposes.
- Non-Primary Purpose Trading: These are activities not directly related to the charity’s main objectives. For instance, if the same educational charity operates a café open to the public, this may be considered non-primary purpose trading. Income from these activities may be subject to Corporation Tax unless specific exemptions apply.
Small Trading Exemption
To accommodate minor trading activities, HMRC provides a small trading exemption. The thresholds are:
- If a charity’s total income is under £32,000, it can earn up to £8,000 from non-primary purpose trading without incurring a tax liability.
- For charities with total income exceeding £320,000, the exemption allows up to £80,000 of non-primary purpose trading income to be tax-free.
These thresholds help charities engage in limited non-primary purpose trading without facing Corporation Tax, as long as the profits are applied to charitable purposes.
Non-Charitable Expenditure
Charities must ensure that all income and gains are applied solely for charitable purposes. If funds are used for non-charitable activities, the charity may lose its tax exemptions and become liable for Corporation Tax on the misapplied amounts.
Investment Income
Income from investments, such as dividends or rental income, is generally exempt from Corporation Tax, provided the investments are made in line with the charity’s objectives and the income is used for charitable purposes. However, if investments are deemed speculative or not aligned with charitable aims, tax exemptions may not apply.
Use of Trading Subsidiaries
To manage non-primary purpose trading activities and mitigate tax liabilities, many charities establish trading subsidiaries. These are separate legal entities that conduct the taxable trading activities, with profits typically donated back to the parent charity under Gift Aid, thereby reducing the subsidiary’s taxable profit.
2. VAT on Purchases and Sales
While certain VAT reliefs are available, charities are not wholly exempt from VAT. If a charity’s taxable turnover exceeds the VAT registration threshold (currently £90,000), it must register for VAT and charge VAT on applicable sales.
3. Business Rates on Non-Charitable Use of Property
If a charity uses part of its property for non-charitable purposes, it may be liable for business rates on that portion.
4. Employment Taxes
Charities with employees must adhere to PAYE (Pay As You Earn) regulations, deducting Income Tax and National Insurance contributions from salaries, similar to other employers.
5. Irrecoverable VAT
Even when eligible for VAT reliefs, charities may incur VAT costs that cannot be reclaimed, affecting their finances.
Maximising Tax Reliefs for Charities
To optimise tax reliefs, charities should:
1. Register with HMRC
Recognition by HMRC is essential to access tax reliefs.
2. Maintain Accurate Financial Records
Keeping detailed financial records ensures compliance and facilitates tax relief claims. Charity Accounting Partners help charities ensure their bookkeeping and financial record keeping are fully compliant.
3. Structure Trading Activities Appropriately
For non-primary purpose trading, consider establishing a trading subsidiary to manage these activities and mitigate tax liabilities.
4. Leverage Gift Aid
Encourage donors to complete Gift Aid declarations to enhance donation value.
5. Assess VAT Obligations
Consult with tax professionals to determine VAT liabilities and opportunities for relief.
6. Apply for Business Rates Relief
Engage with local authorities to secure available business rates reliefs.
Common Tax Mistakes to Avoid
Charities should be vigilant to prevent common tax errors, such as:
- Misclassifying Trading Activities: Ensure a clear distinction between primary and non-primary purpose trading to apply appropriate tax treatments. gov.uk
- Overlooking Gift Aid Opportunities: Regularly claim Gift Aid and maintain accurate donor records. gov.uk
- Neglecting VAT Registration: Monitor taxable turnover to determine if VAT registration is required. gov.uk
- Inadequate Record-Keeping: Maintain comprehensive financial records to support tax relief claims and ensure compliance. gov.uk
Common Myths About Charity Taxation
Understanding the tax obligations of UK charities is essential, yet several misconceptions persist. Let’s address some common myths:
Myth 1: Charities Don’t Pay Any Taxes
While registered charities benefit from various tax exemptions, they are not entirely tax-free. For instance, charities must pay taxes such as VAT and business rates on non-charitable activities. Additionally, they are responsible for employment taxes like PAYE and National Insurance contributions for their staff.
Myth 2: All Charity Income Is Tax-Exempt
Not all income received by charities is exempt from tax. Income from non-primary purpose trading activities may be subject to Corporation Tax if it exceeds HMRC’s small trading exemption limit. It’s crucial for charities to distinguish between primary and non-primary purpose trading to determine their tax liabilities.
Myth 3: Gift Aid Automatically Applies to All Donations
Gift Aid is a valuable scheme that enhances the value of donations, but it doesn’t apply automatically. Donors must complete a Gift Aid declaration, confirming they are UK taxpayers, for charities to claim the additional 25%. Without this declaration, charities cannot benefit from Gift Aid on those donations.
Myth 4: Charities Don’t Need Professional Tax Advice
Given the complexities of tax laws, it’s a misconception that charities can navigate tax obligations without professional guidance. Engaging with tax professionals ensures that charities remain compliant, maximise available reliefs, and avoid potential pitfalls.
Understanding the tax landscape is crucial for UK charities to maximise available reliefs and ensure compliance. While many tax exemptions exist, it’s essential to be aware of situations where tax liabilities may arise. By staying informed and seeking professional advice when necessary, charities can focus on their primary mission of serving the public good.
Take the Next Step with Charity Accounting Partners
Hopefully, this article has helped answer your question, do charities pay tax?
Navigating the complexities of charity taxation and accounting can be challenging. At Charity Accounting Partners, we’re dedicated to providing tailored support to help your organisation thrive. Whether you need assistance with tax compliance, financial reporting, or strategic financial planning, our team is here to guide you every step of the way.
Contact Us Today
Reach out to us for more information on our services or with any general questions. You can contact us through our website’s contact form
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or via email at support@charityaccountingpartners.co.uk.
Author Spotlight
Carl Wakeford, ACA
Carl began his career within the Big Four where he spent four years auditing many public and private sector organisations, and qualifying as a chartered accountant. Carl specialised in risk consultancy, helping organisations strengthen financial processes and controls. Since then, Carl has worked within multinational commercial finance teams, fast paced start-ups, the charity sector, and is now the CEO of Charity Accounting Partners.
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