To discuss issues raised by this article or any other charity-related matter, please contact Anthony Epton, charities partner at Goldwins Chartered Accountants on 020 7372 6494 or firstname.lastname@example.org
The process for registering an entity as a charity should not be underestimated. The Charity Commission will only register an entity if that entity can demonstrate that its activities are for the ‘public’ and its ‘benefit’. It is beyond the scope of this article to discuss the meaning of these two words but I would like to summarise the main tax advantages of being a registered charity.
Unlike a profit-making entity, a charity will not pay tax on its income and gains provided that they are used for charitable purposes. The main reliefs are:
1. Profits from trading
A charity is exempt from tax on the profits of any trade which is:
(a) carried out in the course of a primary purpose of the charity (eg: an independent school charging tuition fees to students for their education) or;
(b) mainly carried out by beneficiaries of the charity; or
(c) where the turnover of a non-primary purpose trade falls below certain limits.
If the level of trade that is not primary purpose falls below the charity’s small trading tax exemption limits, then the charity will also not pay tax on that trade as shown below:
|Gross annual income||Maximum permitted small trading turnover:|
|£20,001 to £200,000||25% of the charity’s total annual turnover|
The 2018 Budget announced that from April 2019 the upper limit for trading that charities can carry out without incurring a tax liability will increase from £5,000 to £8,000 where turnover is under £20,000 and from £50,000 to £80,000 where turnover exceeds £200,000.
There are also provisions for ancillary trades to be exempt and HMRC also regards fundraising events to be exempt from tax.
2. Rental or investment income
Rental income and investment income are exempt from tax, provided that they are applied for charitable purposes.
3. Selling property or shares
There is an exemption from tax on capital gains, provided that the gains are applied for charitable purposes.
4. Buying property
Charities receive exemption from Stamp Duty Land Tax on the acquisition of a property, provided that the acquisition is used for charitable purposes.
The gentleman who introduced me to the world of charity accounting, the late Professor Adrian Randall, called VAT a ‘veritable nightmare’.
There is no universal VAT relief for charities. However, there is no VAT payable on most advertising and VAT is charged at 5% on fuel and power.
Normally, standard rate 20% VAT will be charged on the construction of ‘new’ buildings. Unfortunately, as charities are likely to engage primarily in non-business activities, a large amount of irrecoverable VAT arises. In fact it is estimated that charities suffer approximately £1.5 billion irrecoverable VAT per year.
In order to assist charities, the legislation allows charities to zero-rate construction services, provided that the building is used for a non-business purpose. HMRC is prepared to accept that a building can be treated as being used for a non-business activity if the building is used solely for non-business activity for 95% or more of the time.
6. Business rates
Charities are entitled to a mandatory 80% relief from non-domestic (business) rates. This relief extends to charity shops. A further 20% relief is discretionary as decided by the local authority.
7. Inheritance tax
If you make a legacy to a charity in your Will it will not count towards the total taxable value of your estate. You can also cut the Inheritance Tax rate on the rest of your estate from 40% to 36% if you leave at least 10% of your ‘net estate’ to a charity.
The above article merely provides a brief outline of the main points and further guidance should be sought as appropriate.