Charities do pay tax but there is information available on many different avenues you can take as a charity to ensure as much money as possible flows in the direction of the cause you are supporting, rather than on tax and bills.
If it received taxable income or gains you will still have to fill out a Self Assessment or Company Tax Return to provide the HMRC with accurate information about your business.
How Do I Ease My Tax Burden?
In order to benefit from income tax relief, corporation tax relief and other means of relief available to certain organisation, your company has to be recognised by the HMRC as a charity. This will in turn inform their decisions regarding the tax you have to pay.
In order to apply for these exemptions you have to contact the HM Revenue & Customs (HMRC) Charities and apply through the form ChA1.
Income Tax, Corporation Tax Exemptions and Reliefs
As long as the money is used for charitable purposes alone, the majority of income and gains that charities received are exempt from paying both income tax and corporation tax.
Making the Most of Gift Aid
If you have received income from individuals who have donated to you through a Gift Aid donation, you can claim tax exemption on it and also claim back basic rate tax from HMRC.
For donations received from companies a charity can also claim exemption from tax. Donations from companies will not have any tax deducted so there is nothing to claim back from HMRC.
Investment Income Relief
The same applies with investment income, including any investment that you receive from outside of the UK. As a charity you will not have to pay tax on received investment.
Regular Sources of Income – Tax Information
If you are receiving a regular source of income into your bank or building society and have been gaining interest with tax deducted you can inform your bank to change this. Once you have received a letter from the HMRC Charities’ outlining that your company is in fact legally recognised as a charity, send a copy to your bank or building society. If you have not had any income tax deduction certificates issued, they will re-credit your account. For an earlier tax year you can reclaim the tax through the HMRC.
Depending on the type of trading activities you pursue there are possible exemptions to tax on profits made from selling goods and services to your customers. Find out more information from the HMRC regarding what types of trading activities come under tax relief and if yours do not there are two ways to look at it:
- Tell HMRC Charities about your trading activities and pay all tax due
- Consider conducting activities through a subsidiary and transferring back to your charity as a donation
Land and Property Tax
A charity does not have to pay tax on any income it has received as a result of renting out land or property that is used for charitable purposes. This accounts for both within the UK and abroad.
Other Types of Tax Relief
There are a number of other tax exemptions that charities are entitled to, including:
- Capital gains tax
- Business rates relief – charities pay no more than 20% on non-domestic property
- Stamp duty land tax
Restrictions to Tax Relief for Charities
Whether you are exempt from tax, are entitled to receive relief from certain types of tax or are not exempt from tax you must inform the HMRC Charities and fill out a tax return.
A charity will have to fill out a tax return in one of two forms depending on how it was originally set up:
- Set up as a company: If your charity is recognised as a company you will be liable to pay Corporation Tax
- A Trust: for charities that have been set up by a trust deed or a will Income Tax and/or Capital Gains Tax must be paid by filling out a Self Assessment
For the majority of charities there is no need to fill out a tax return every financial year. However, if you are asked to complete one you must do so. This applies even to charities which are exempt from tax on all income and gains. Any tax that is due must be paid on time, much like any other company, or penalties will be issued.
VAT could have a number of effects on your charity and you have to consider them when starting your business. You may be liable to register for VAT if you provide goods or services in return for payment. This applies even to charities who are aiming to raise money for a charitable cause.
If your charity is VAT-registers you could be entitled to claim back some of the VAT you are in line to pay under normal VAT rules. You can do this through HMRC. Whether you are VAT registered or not you could be entitled to VAT relief on some purchases you have made for use by the charity.
Stay Aware of Charity Exemptions
As the owner of a charity, especially a new business, you have to make sure you know about all tax initiatives open to you. There is relief and exemption available on a number of required taxes in the UK if you are a charity and support for new business start-ups can point you in the right direction.
You can also join our Google+ Community “Startup in Britain” which is packed with help, resources and articles to get you started. Use it to get tips, advice and start building your network!