The tax treatment of charities can be very complex. As a first step any charity hoping to benefit from any beneficial treatment needs to be recognised as a charity for UK tax purposes by HMRC as well as meeting other criteria.
A recognised charity may qualify for a number of tax exemptions and reliefs on income and gains, and on profits for some activities. For example, charities don’t pay tax on most types of income as long as they use the money for charitable purposes.
This includes tax:
- on donations;
- on profits from trading;
- on rental or investment income, e.g. bank interest;
- on profits from the sale or disposal of an asset, like property or shares;
- on the purchase of a property.
Charities can also claim back some of the tax deducted on donations. Provided all the qualifying conditions are met charities can reclaim the basic rate tax on donations allowing for an extra 25p of tax relief on every pound donated to charity. Higher rate and additional rate taxpayers (not the charity) are eligible to claim tax relief on the difference between the basic rate and their highest rate of tax.
However, charities are sometimes required to pay tax if they receive income that doesn’t qualify for tax relief or spent any of their income on non-charitable purposes. Charities are also liable to pay tax on any business activities.
Planning note
It may be possible to establish a trading subsidiary to ring-fence a charities’ business activities. Please call if you would like advice in this area.
