Charities are not automatically exempt from tax. Confusion arises because registered charities qualify for some tax exemptions, which leads to a mistaken belief that charities do not pay tax.
Charities are exempt from income or corporation tax on most types of income as long as they use the money for charitable purposes. In addition, charities can claim tax reliefs on business rates, legacies and eligible donations.
According to government figures, tax relief of just under £4.3bn was awarded to charities in the tax year ending April 2023. However, charities are subject to payroll taxes and the VAT regime (with certain charity exemptions) and they pay business rates, albeit at reduced rates depending on the property’s usage.
Analysis from the Charity Tax Group shows that overall, tax contributions from charities outweigh the tax reliefs they claim.
Charities that choose to run their trading activities through a wholly owned trading subsidiary where the profits are given to the parent charity as a qualifying charitable donation will be able to claim tax relief on the amount donated. This relief is also available to other private sector entities that make donations to charities. Charities will be required to pay tax if they receive income that does not qualify for tax relief, such as profits from developing land or property, or if they have spent any of their income on non-charitable purposes.
The VAT rules for charities with trading activities are complex. Generally, charities are treated just like any other organisation. If they are engaged in relevant business activities that exceed HMRC's VAT registration threshold (currently £85,000 turnover over a 12-month period), they must register and charge VAT on their business supplies unless exemptions apply.
Some charities do not have to register for VAT because their funding either comes from grants and donations, and so falls outside the VAT system, or is exempt from VAT (for example, care or medical treatment provided by a hospice or nursing home). However, this impacts VAT recovery negatively as most charities are unable to reclaim all or some of the VAT incurred on their purchases.
Charities should explain their tax contributions and the relevant tax reliefs and exemptions they have been granted to dispel the myth that they are not paying taxes.
They should also review their tax strategy to ensure they are claiming relevant tax reliefs and exemptions so they can maximise the funds available for their work. This is a complex area and charities may need to seek professional tax advice to optimise their tax affairs.
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