Charities don’t pay tax, do they?

Charities in the UK enjoy several tax benefits, but they don’t have a general exemption from taxation. To help you understand which taxes do and do not apply to charities, we outline the various tax obligations and exemptions that apply to charities, describing some of the complexities.

Charity tax advantages
First, let’s cover the tax advantages for charities:

1. Charities do not pay income and corporation tax on many types of income, such as donations and grants, fundraising events, investment income and property income. For example, if a charity receives a donation of £10,000, it can use the entire amount for its charitable work without worrying about tax deductions.
2. Income from fundraising events may be exempt from income or corporation tax, provided the events are organised and managed by a charity or charities; the proceeds are to be used for charitable purposes; and the event is promoted as being primarily for the raising of money. This includes events like charity dinners, auctions, and fetes and fairs. The exemption will not apply if there are more than 15 events of the same type, in the same location, within any financial year.
3. A charity can make charges for selling goods and services provided to deliver its charitable purpose – this is primary purpose trading. This would include, for example, a theatre selling tickets to a show. Income from primary purpose trading and from closely aligned sales (ancillary to primary purpose) are exempt from income or corporation tax.
4. “Small trading” income in a charity, under certain thresholds, is exempt from income or corporation tax:
   Charities with total annual income under £32,000: They can earn up to £8,000 from non-primary purpose trading without incurring a tax liability.
   Charities with total annual income between £32,000 and £320,000: They can earn up to 25% of their total annual income from non-primary purpose trading.
   Charities with total annual income over £320,000: They can earn up to £80,000 from non-primary purpose trading without incurring a tax liability.
5. Through the Gift Aid scheme, charities can reclaim tax on donations received from UK taxpayers. This means that for every £1 donated, the charity can claim an additional 25p from HM Revenue and Customs (HMRC), boosting the value of donations. For instance, a £100 donation becomes £125 with Gift Aid, significantly enhancing the charity’s funding.
6. Charities receive an 80% mandatory relief on business rates for non-domestic buildings used for charitable purposes. Local councils have the discretion to grant further relief, potentially reducing the rates bill to zero. This relief can be a substantial financial benefit, especially for charities operating from large premises.
7. Charities do not pay capital gains tax on profits made from selling or disposing of assets, provided the proceeds are used for charitable purposes. This exemption allows charities to reinvest the full amount of any gains into their charitable activities. For example, if a charity sells a property and makes a profit of £50,000, it can use the entire profit for its charitable work without paying capital gains tax.
8. When charities buy property for charitable purposes, they are exempt from paying Stamp Duty Land Tax. This exemption can result in significant savings when acquiring new premises, allowing more funds to be directed towards the charity’s mission.

Taxes charities do pay
Now, let’s look at the taxes that charities do pay:

1. Charities are not generally exempt from VAT, and often have a complex mix of VAT treatments on their income, including the standard rate, reduced rate, zero rate, exempt and out of scope. Recovery of VAT on costs will depend on the nature of associated income. Determining the correct VAT accounting in charities is often highly technical and specialist, and errors can be very costly with back payment of liabilities and penalties.
   There are a few specific charity VAT exemptions. For example, charities may be able to claim VAT relief of advertising costs and certain medical supplies.
2. Charities must comply with payroll tax obligations just like any other employer. This includes:
   Income tax and National Insurance contributions (NICs): Charities must deduct income tax and NICs from their employees’ wages through the Pay As You Earn (PAYE) system. This makes sure that employees’ tax obligations are met.
   Employer National Insurance contributions: In addition to deducting NICs from employees’ wages, charities must also pay employer NICs. This is a cost that charities need to budget for, just like any other employer.

Managing trading income
Charities often need to trade, selling goods or services to fund their activity for the public benefit. Non-primary purpose trading which does not directly further the charity’s objectives and other miscellaneous income may be subject to tax if it exceeds the small trading thresholds.

In most circumstances, charities can manage their trading income so there is no taxable income or corporation tax liability by means that can include setting up a trading subsidiary.

Need help?
While charities benefit from several tax exemptions and reliefs, they are not entirely free from tax obligations, and if they don’t manage their activities properly, they can incur significant additional liabilities
The notes above summarise the picture and of course they don’t fully describe the complexities.

Whether you’re setting up a new charity or managing an established one, if you’re unsure about how to best manage tax exposure, speak to one of our charity specialist tax advisors. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk

Emma Hayward