Our specialists explain what you need to do with your taxes if you run a charity
At DSR Tax Claims Ltd, we know that running a charity is hard work, especially when you have to deal with taxes. That’s why our experts want to help make life as easy as possible for you by sharing our specialist knowledge with you. So, whether you are wanting more information about VAT or need to know about charitable tax relief, our handy guides are here to help. All our information is based on HMRC sources, so you can rest assured that these guides are filled with helpful and accurate information.
Charities and tax
If you run a charity, it might be eligible for certain tax reliefs. To be able to claim these tax reliefs, your charity must be recognised as such by HMRC. These tax reliefs mean that charities don’t have to pay tax on most kinds of income, as long as they are using those funds for charitable purposes. HMRC can give guidance on what counts as charitable purposes but examples are:
- Animal welfare
- Saving lives
- Providing education
- Protecting the environment
- Reducing poverty
- Helping with the efficiency of the emergency services and armed forces.
This list isn’t complete and there are other purposes which would count as charitable.
Charitable tax relief also allows you to claim back tax which has been automatically deducted, such as bank interest or on donations (by Gift Aid).
This doesn’t mean that charities don’t have to pay any tax though. If your charity has received any income which isn’t eligible for tax relief, or spent income on non-charitable purposes, then it might be liable to pay tax. Your charity will pay this tax by completing a tax return.
If you run a community amateur sports club (CASC), it will be eligible for different tax reliefs.
What are the tax reliefs for charities?
If you run a charity, you will want as much of the money you raise to go towards the charitable cause you support. Thankfully, there are a number of tax reliefs which will help to make your charity’s finances as efficient as possible.
As a result of these tax reliefs, as a charity you won’t pay tax on most of your incomes or your capital gains, as long as that income or gain is being used for charitable purposes. HMRC term this ‘charitable expenditure’.
This includes tax on profits (if you are a trading charity), donations, profits from disposing assets, on any rental or investment income (for example, if you receive bank interest) or when you buy property. However, to get these tax reliefs, you must be recognised as a charity by HMRC.
If you have had tax deducted on charitable expenditure, you can claim this back. When claiming back tax on donations, this is referred to as Gift Aid.
If you run a CASC (community amateur sport club) you are eligible for different tax reliefs.
What do charities have to pay tax on?
Charities are expected to pay tax on any dividends they received from UK companies before 6th April 2016.
They are also required to pay tax on any profits they might make from developing land or property and on purchases, although different VAT rules apply to charities.
If you run a charity, you are also expected to pay tax on any income you get which you don’t use on charitable purposes. HMRC call this ‘non-charitable expenditure’. Any investments your charity makes would be classed as non-charitable expenditure.
Charities are required pay business rates on any non-domestic building that they use but they are entitled to an 80% discount on those rates.
If your charity has tax to pay, it will have to provide a tax return. HMRC can request you to complete a tax return for your charity, even if you believe you have no tax to pay.
How do you get recognition as a charity?
To be able to claim any tax reliefs, you need to be recognised as a charity by HMRC.
In order to be recognised as a charity, your organisation must meet the following requirements:
- It must be based in the UK, EU, Iceland, Liechtenstein or Norway
- It must be registered with the Charity Commission (or another regulator if this is applicable)
- It must be established for charitable purposes only.
- It must be run by what is termed ‘fit and proper persons’ – this means that the person must be considered to be the sort of person that will ensure that all funds and tax reliefs are used for charitable purposes only. So, if the person has ever been involved in fraudulent activity, or has abused the taxation system in some way or has been disqualified from acting as a charity trustee in the past, it is highly unlikely they will be considered to be a ‘fit and proper person’ by HMRC.
- The charity must be recognised as such by HMRC.
You can register your charity’s details with HMRC using their online service. To do this you will need the following information:
- The charity’s bank account details and financial accounts
- The details, including date of birth and National Insurance number, for the officials running the charity.
- The charity’s registration number, if it has been registered with a regulator.
- The charity’s governing document, which should explain how it is to be run. This is sometimes known as the charity’s rulebook.
- The charity’s charitable objectives (or purposes) – what it intends to achieve as a charity.
- A Government Gateway ID and password, although you can create one of these when you register the charity.
How does a charity reclaim tax?
If you receive any income, which has had tax deducted, such as donations to your charity, you can reclaim the tax by using Gift Aid.
There are 3 ways to claim Gift Aid for your charity:
- Online, by using the Charities Online Service on the GOV.UK website
- By using your own accounting software that works with Charities Online. There are a number of commercial accounting software packages which are able to do this, if you are planning to use this type of software to prepare your tax return.
- By post, using form ChR1. You can order these forms by calling the Charities helpline on 0300 123 1073. The helpline is open between 08:30 and 17:00 on Mondays to Fridays.
If you wish to receive your bank interest without the tax already deducted by your bank, you will need to show your bank the letter of recognition for your charity. This will have been sent to you by HMRC. If tax has already been deducted for that tax year, you can ask your bank to refund it. For previous tax years, you will have to claim it back from HMRC.
How does a charity pay tax?
If your charity has some income which isn’t eligible for tax relief, you will have to pay tax on it. This means you will have to complete a tax return for your charity.
If your charity doesn’t have any tax to pay, it wouldn’t normally be expected to send a tax return unless HMRC specifically request one.
Even if you don’t have to provide a tax return to HMRC, if your charity has income of over £10,000 you will need to submit an annual return to the Charity Commission.
When would a charity have to submit a Company Tax Return?
Some charities are set up as limited companies or unincorporated associations. If this is the case with your charity, you will have to submit a Company Tax Return for your charity. You will need to include the supplementary pages which apply to charities and CASCs.
A charity would be classed as a limited company if it was set up by any of the following:
- A constitution
- A royal charter or Act of Parliament
- A memorandum and articles of association.
These types of charity are also required to file annual accounts with Companies House.
What about trusts?
If your charity is classed as a trust you will need to complete a Trust and Estate Self Assessment tax return instead. A charity would be classed as a trust if it was set up as a result of a trust deed or will.
What happens if you don’t send a tax return for your charity?
Just like for individual taxpayers and Self Assessment, if you fail to send a tax return when HMRC request one you face penalties. This will also apply if you miss the deadline for submitting the tax return. Even if you don’t have any tax to pay, you may still face a penalty if you fail to send a tax return if HMRC has requested one.
The date of the deadline will depend on whether you are completing a Company Tax Return or a Self Assessment Tax Return.
How can DSR Tax Claims Ltd help?
We know that setting up a new charity can be pretty complex – there’s so much to think about and that’s before you start thinking about tax. Our friendly team of tax specialists at DSR Tax Claims Ltd are on hand to help make life easier for you. We’re the experts at identifying your maximum allowable expenses so call us on 0330 122 9972 – we’re the tax experts you can trust.