While charities are usually exempt from paying Corporation Tax, you cannot assume that your charity is free from tax obligations.

There are some situations where you might need to pay tax.

Here’s what UK charities need to know about their tax obligations.

Tax reliefs and exemptions

As a general rule, charities do not pay tax on most types of income as long as they use the money for charitable purposes – known as “charitable expenditure.”

This includes tax on donations, trading profits, rental or investment income, gains on disposal of assets, and the purchase of property.

To claim tax relief on these forms of income, your charity must be recognised by HM Revenue & Customs (HMRC), be established for charitable purposes only, and be run by “fit and proper persons” as defined by HMRC.

If applicable, your organisation must also be registered with the Charity Commission or another regulator.

You can register your charity for tax relief using HMRC’s online service.

When is a charity liable for tax?

All charity employees’ salaries are subject to Income Tax.

Your charity may also be liable for tax if it receives income that does not qualify for tax relief – for example, dividends received from UK companies before 6 April 2016, or profits from developing land or property.

If any of the charity’s income is spent on non-charitable purposes, this is classed as non-charitable expenditure and is not eligible for tax relief.

For example, if you make a payment to an overseas body but have not taken reasonable steps to ensure the payment will be applied for charitable purpose, then you are liable to pay tax on this expenditure.

Charities pay business rates on non-domestic buildings, but they receive an 80 per cent discount.

If your charity has tax to pay, you must complete a tax return.

VAT and charities

When it comes to charging Value Added Tax (VAT) on the supply of goods or services, there are a range of different rules that govern how much VAT your charity will need to account for.

Firstly, a charity needs to determine which of its activities are carried out by way of business and which are non-business activities.

Put simply (from a VAT perspective), a business activity is one where goods or services are provided in return for payment.  This does not need to be a commercial transaction.

A non-business activity is one which a charity provides for free or if it receives grants for the activity and the donor does not actually receive any benefit in return for its payment.

By default, income received in respect of a business activity is VAT taxable.

However, some activities that charities undertake (such as vocational training, health and welfare services and the supply of an interest in land) are listed within the VAT legislation as potentially being VAT exempt. The rules as to when activities are VAT exempt or taxable can be complex.

While VAT is not charged in respect of a VAT exempt activity (and the income does not count towards VAT threshold), you are likely to have no right to recover input VAT incurred on related purchases.

If your income from taxable activities exceeds the VAT Registration Threshold, then you must register your charity for VAT and charge VAT on those supplies at the applicable rate.

Claiming back VAT on purchases

As a general rule, a charity must be registered for VAT to claim back VAT on purchases.  

A charity cannot reclaim VAT on purchases relating directly to its non-business activities. It is also likely that it will not be able to recover VAT relating to VAT exempt activities unless that VAT is below specific de minimis limits.

VAT incurred on overhead costs needs to be apportioned so that it is only the element relating to taxable activities which can be recovered (subject to the de minimis rules).

In most cases charities are required to pay VAT on purchases in the same way anyone else would be. However, there are some limited special reliefs and exemptions available.

Purchases such as disability aids, medicine, and advertising may be zero-rated for charities, while a reduced rate of five per cent VAT on fuel and power is available for qualifying activities, such as residential accommodation or charitable non-business activities.

There are also some reliefs in respect of the construction or conversion of some charitable buildings.

Trusted tax advice with Milsted Langdon

Many charities are unaware of their tax obligations and the complex rules surrounding VAT on goods and services.

At Milsted Langdon, our charity tax specialists are here to assist with fulfilling your tax obligations, minimising your liabilities, and making sure you don’t miss out on vital tax reliefs.

With our help, you’ll be able to focus more of your money on what really matters: providing your services to those in need.

For tailored advice and guidance on your tax obligations as a charity, contact our specialist charity accountants today.