The tax treatment of charities is complex. Many charities trade either as part of their charitable interests or to raise funds. As a first step, any charity hoping to claim from beneficial tax 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 certain 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.
The VAT rules for charities deemed to be carrying on business activities can be complex. However, certain VAT reliefs and exemptions may be available. Charities are sometimes required to pay tax if they receive income that doesn’t qualify for tax relief or have spent any of their income on non-charitable purposes. Charities are also liable to pay tax on any business activities in which case the same rules apply as to any other business. Charities should pay careful consideration when organising their trading activities. In some circumstances it can be advantageous to establish a trading subsidiary for the charities business activities.
Charities can also claim back part 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.
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.
Planning note
The Charity Tax Commission has recently launched a consultation to examine the effectiveness of current tax reliefs and to see what improvements could be made. The consultation is open for comment until 6 July 2018.
