What Are Tax Reliefs for Charities?
Charities enjoy significant tax reliefs, meaning they don’t have to pay tax on most of their income or gains if these are used for charitable purposes. This is often referred to as charitable expenditure.
Here’s what your charity could save on:
- Donations: No tax is payable on funds received from donors.
- Trading profits: Provided the trading activity is directly linked to your charity’s goals.
- Rental or investment income: This includes income from property rentals or bank interest.
- Profits from asset sales: If your charity sells or disposes of property, shares, or other assets, the profits are usually exempt from tax.
- Property purchases: Certain conditions apply, but charities can benefit from tax relief when buying property.
To access these reliefs, your charity must be formally recognised by HM Revenue and Customs (HMRC).
Special Note: Community Amateur Sports Clubs (CASCs) have a separate set of tax relief rules that differ from those for charities.
When Does a Charity Need to Pay Tax?
While the tax exemptions for charities are generous, there are circumstances where taxes still apply:
- Dividends: Tax is payable on dividends received from UK companies before 6 April 2016.
- Land or property development: Profits made from developing land or property are taxable.
- Purchases: Although VAT rules for charities may reduce costs, VAT is still payable on some transactions.
In addition, charities are required to pay business rates for non-domestic properties, but they benefit from an 80% discount.
Non-Charitable Expenditure
If any part of your charity’s income or gains is not used for charitable purposes, it becomes subject to tax. This is referred to as non-charitable expenditure.
Filing Tax Returns
Even with these reliefs, there are times when your charity must file a tax return:
- If it has tax to pay on any of its activities.
- If HMRC specifically requests a tax return, even if no tax is due.
Reclaiming Tax for Charities
Your charity can also reclaim tax in certain cases, helping stretch every pound further:
- Gift Aid: A scheme that allows charities to reclaim tax on eligible donations from UK taxpayers. For every £1 donated, your charity can claim an additional 25p from HMRC.
- Bank interest: If tax has been deducted from interest earned, your charity can claim it back.
Tips for Managing Tax Reliefs
To make the most of available tax reliefs and avoid unnecessary tax liabilities:
- Ensure all income is used for charitable purposes.
- Keep detailed records of all financial transactions and expenditures.
- Stay informed about tax rules and reliefs specific to your organisation’s activities.
- Seek professional advice or consult HMRC guidance if you’re unsure about your obligations or opportunities.
Final Thoughts
Tax reliefs are a valuable tool for charities, enabling them to allocate more resources to their mission. By understanding when reliefs apply, when taxes are payable, and how to reclaim deductions, your charity can maximise its impact while staying compliant.
Whether you’re new to managing a charity or looking to refine your financial strategy, staying on top of your tax obligations is essential for long-term success.
Accelus helps you to maximise your tax benefits while adhering to taxation compliances!
