Updated: 22nd October 2020
Charities aren’t completely exempt from tax, but in general they do pay reduced tax compared with other types of organisation. Charity tax is a complex area, but in certain circumstances charities can benefit from a number of tax reliefs and exemptions in the UK.
So how do charities become eligible for tax exemptions and reliefs?
Initially, it’s important for a charity to be officially recognised by HM Revenue and Customs. The charity needs to be formally registered as a charitable organisation with the Charity Commission in England and Wales, the Charity Commission for Northern Ireland, or the Scottish Charity Regulator.
To be eligible for beneficial tax treatment the charity must also be based in the UK, Norway, Iceland, or Liechtenstein, be managed by ‘fit and proper persons,’ and operate only for charitable purposes.
These include but are not limited to:
If the above prerequisites are met, a charity may be able to access various tax reliefs, including:
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.
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.
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:
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