What tax reliefs do charities get?
Julian Lomas
Charities don’t pay tax, right?
Wrong! Charities get certain tax reliefs but they definitely have to pay taxes.
There are many myths about charities and tax reliefs, of which the above is by far the most common.
This article, while not providing tax advice, aims to provide some helpful pointers around charities and tax reliefs.
The main issues around charities and tax tend to centre on the following:
Corporation Tax - basically charities recognised by HMRC do not pay tax on most types of income, provided the money is used for charitable purposes (i.e. to further the charity’s objects). this includes what is known as primary purpose trading income. If income derives from non-charitable purposes then tax will need to be paid (above a certain threshold known as the small scale exemption). More guidance is available from HMRC and the Charity Commission. This is one of the main differences between a charity and a community interest company; CICs generally have to pay corporation tax on profits.
VAT - in most cases charities pay VAT in the same way as any other organisation. It is a common myth that charities are exempt from VAT. There are some reliefs for purchases of some goods and services and some exemptions related to cultural, educational and social services activities in specified circumstances, but the rules are complicated and you should get advice before claiming reliefs. Further guidance is available from HMRC.
Business Rates - charities usually qualify for 80% relief from business rates (and can apply for discretionary relief from the remaining 20%). This is another important difference between charities and community interest companies; the latter get no automatic reliefs but can apply for some relief in certain circumstances.
Gift Aid - charities can claim Gift Aid on eligible donations from individuals. This means they can get an extra 25% on the donation refunded from HMRC. The rules are fairly simple for most charities but there are complications (particularly for small cash donations) and the right processes must be followed. Donations to a charity from a company do not qualify for Gift Aid in the same way. Instead the company making the donation can usually get relief from Corporation Tax on the sum donated but the charity cannot claim any further funds back from HMRC. Further guidance is available from HMRC. CICs cannot claim Gift Aid on donations.
Payroll taxes - charities must pay all payroll taxes, including Employers’ National Insurance contributions, just like any other employer. They are also subject to the same rules on pension auto-enrolment.
As you can see, the landscape is fairly complicated and it is a good idea to get professional advice from a tax accountant to make sure you get it right and avoid nasty shocks in the future.