Understanding tax obligations for charities

Knowing your charity’s obligations to HM Revenue & Customs (HMRC) is important, as you will have different requirements to standard businesses.

Whilst charities are not exempt from tax entirely, they do have certain reliefs that charities can benefit from.

Claiming tax relief

For your charity to be eligible for tax relief, it must be:

• Based in the UK
• Established for charitable purposes only
• Registered with the Charity Commission or another regulator
• Recognised by HMRC.

To be officially registered as a charity with HMRC, you will need the charity’s bank account details, registration number, objectives, officials’ details, governing documents, and the Government Gateway user ID.

Paying tax

If your charity has income that does not apply for tax relief, then you must complete a Company Tax Return form.

If you have no tax to pay at all, then you will only need to complete a tax return if HMRC asks you to do.

It should be noted though that if your charity’s income is over £10,000 per year, then you will need to submit an annual return to the Charity Commission.

What’s included in charity tax relief?

Charities will be exempt from paying tax on a number of goods and services so long as they are using the money for charitable purposes.

Examples of qualifying income for tax relief include:

• Donations
• Profits from trading (such as a charity bookshop or charity café)
• Rental or investment income (bank interest)
• Profits when you dispose of an asset
• When buying property

However, charities must still pay tax on dividends received from UK companies before 6 April 2016, profits from developing land or property, and purchases.

It should be noted that when charities dispose of land (including selling or leasing land), they must abide by the regulations in the Charities Act 2022.

Types of VAT relief

VAT relief is available for charities on fuel and power for things such as residential accommodation (children’s home or care home), charitable non-business activities such as free daycare for disabled people, and small-scale use (up to 1,000 kilowatt hours of electricity a month or up to 2,300 litres of gas oil).

Here, VAT will only be at five per cent instead of the usual 20 per cent.

There is also a zero rate VAT relief for charities, which includes a wider array of items and services including advertising and items for collecting donations, drugs, chemicals and medicines, and construction services to name a few. A full list of what is included in the zero rate VAT relief can be found here.

Charities also don’t have to pay VAT on goods shipped from overseas as long as they are providing bare necessities, equipment to run the charity, or goods to be used or sold at charity events.

If your charity needs advice about tax and VAT relief, please contact us today.