Charities and tax - what do you need to know?

It’s important to be aware of financial obligations that draw upon hard-earned income – but there are also benefits to be had. As a charity you can get certain tax reliefs but you must be registered with HM Revenue and Customs (HMRC) and your charity must be:

• based in the UK, EU, Iceland, Liechtenstein or Norway
• registered with the Charity Commission or another regulator
• run by ‘fit and proper persons’
• established for charitable purposes only – meaning you don’t have to pay tax on most of your income and gains if it’s ‘charitable expenditure’

This includes tax on:

• donations
• profits from trading
• rental or investment income, such as bank interest
• profits when selling or disposing of an asset, e.g. property or shares
• when buying property

Charities do have to pay tax on dividends from UK companies, profits from developing land or property. You have to pay tax on any money not used for charitable purposes – defined as ‘non-charitable expenditure’. And if your charity’s income is over £10,000 per annum you must submit an annual return to the Charity Commission, for more information please click here.  Comprehensive guidance can be found here.  

VAT

What qualifies for VAT relief?

Charities pay VAT on all standard-rated goods and services they buy from VAT-registered businesses. They pay VAT at a reduced rate (5%) or the ‘zero rate’ on some goods and services.

What qualifies for the reduced rate?

Your charity pays 5% VAT on fuel and power if they are for:

residential accommodation (for example, a children’s home or care home for the elderly)
charitable non-business activities (for example, free daycare for disabled people)
small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil)

If less than 60% of the fuel and power is for something that qualifies, you will pay the reduced rate of VAT on the qualifying part and the standard rate (20%) on the rest.

Click here for detailed clarification on what does and does not apply.

Zero rate VAT

There’s a wide range of goods and services which are VAT zero-rated for charities – everything from medical equipment to construction services. HMRC provides comprehensive information of exactly what charities need to know about VAT obligations here.  Again, guidance is available from HMRC here.

Reclaim Tax

Your charity, community amateur sports club (CASC), nominee, collection agency or authorised agent can use Charities Online to claim tax repayments for:

• Gift Aid
• other income e.g. bank interest
• top-up payments under the Gift Aid Small Donations Scheme (GASDS) 

Business rates

Charities and amateur community sports clubs can apply for charitable rate relief of up to 80% if a property is used for charitable purposes. Check with your local council to see if you’re eligible. Additional ‘discretionary relief’ up to 100% is sometimes offered.

 ‘The government needs to adopt a more strategic approach when it comes to investing in the charity sector and recognise that supporting our social sector is one of the best ways of achieving  social change.’ Charity Finance Group briefing on March 2016 budget