Charities register with the HM Revenue & Customs (HMRC) for recognition as a charity for tax purposes.
The recognition means UK charities can claim tax relief on income and gains, and on profits from some activities, as well as claiming tax back on income received on which tax has already been paid, for example on bank interest and gift aid donations.
Tax reliefs available to charities include relief from income tax or corporation tax and capital gains tax.
A charity can only claim these specific tax exemptions and reliefs, if it uses or spends the money it receives on charitable purposes, named charitable expenditure.
This applies to:
- Gift aid donations
- Rental income
- Interest and other investment income
- Capital gains
- Profits from your charity’s ‘primary purpose’ trading. This means a trading activity that is carried out as part of your charitable purpose or aim, for example a theatre charity could sell tickets for a theatrical production it puts on.
If a charity uses any of the money it receives for a purpose that isn’t charitable, this is called ‘non-charitable expenditure’ and may mean a charity will lose tax exemption and have to pay tax on all or part of its income or gains. The amount that is taxable is the same as the amount of the non-charitable expenditure.
This applies to:
- Expenditure on things that aren’t for the charitable purposes set out in a charity’s governing document
- Payments to an overseas body if a charity has not taken reasonable steps to ensure the money will be applied for charitable purposes
- Any investments and loans that your charity makes that aren’t ‘qualifying’ investments and loans. For example, bank or building society deposits are qualifying investments, and loans to another charity for charitable purposes only, are qualifying loans
- The cost to your charity of certain transactions with someone who is a ‘substantial donor’ – a person who makes a significant donation or donations – but who also gets something of value from the charity in return. For example, a person might donate a large amount to your charity but in return you sell them a property at less than market value.
If your charity does spend any of its income and gains on non-charitable purposes you’ll need to send a completed tax return to HMRC to show the amount of any non-charitable expenditure. The charity will need to calculate and pay the tax that’s due.