Does a charity have to pay tax?

• Reducing poverty and hardship
• Human rights
• Education
• Animal welfare
• Health
• Religion

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What tax reliefs are available for charities?

If the above prerequisites are met, a charity may be able to access various tax reliefs, including:

Trading profits

When a charity sells goods or services, they may be deemed as trading profits depending on such issues as the regularity of sales and the type of goods and services provided. If the charity is making this profit with the aim of achieving the charity’s main objectives – known as primary purpose trading – it may not be subject to taxation.

The charity’s ‘governing document’ sets out its primary purpose, so if profits are derived from other trading activities unconnected to the charity’s primary reason for being, they may be subject to tax if they exceed the small trading tax exemption limit.

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Other tax reliefs

Tax exemptions and reliefs can also apply to charitable donations, investment income, and rentals, any profits generated from the sale or disposal of an asset, and the purchase of a property. The Gift Aid scheme enables charities to recover the tax on donations if they’re made by an individual taxpayer rather than a business.

It’s advisable for those in charge of running a charity to seek professional accountancy advice on tax – preferably an accountant who specialises in charity taxation - to make sure the charity is complying with charitable tax laws and isn’t at risk of incurring penalties by HMRC.

What about charities and VAT?

Charities can obtain VAT relief in some instances, but must prove their charitable status to the supplier and provide them with a written declaration of their eligibility. When charities register with the Charity Commission, they’re provided with a registration number, which can be used as proof of status.

Some purchases are zero rated for VAT, including but not limited to: