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.
HMRC's new dispute resolution service would instil more confidence if the facilitators were independent, says Socrates Socratous.
Law firm Kingsley Napley has said clients are already expressing interest in the proposed new tax incentive on charitable legacies which will provide a lower rate of inheritance tax when leaving ten per cent of an estate to charity.
HMRC has published a consultation on applying a single definition of “charity”, “charitable company” and “charitable trust” to all UK charity tax reliefs and exemptions.
Will you be in time for Real Time?
It is a little like digital television – you know the switchover will take place, you just don’t know when, how, or what you need to do! Anne-Marie Boden advises charities to prepare now for Real Time Information.
HMRC zeroes in on overseas payments
Charities funding international operations need to be aware that HMRC is focusing on the area of overseas payments and will deny tax relief of the qualifying conditions are not met, says Sarah Campbell.
HMRC will no longer require large charities to comply with its onerous senior accounting officer rules, after discussions with accounting firm BDO and charities Barnardo’s and Cancer Research UK.
HMRC compromises on senior accounting officer rules
Paul Knight reveals how BDO and a group of major national charities agreed an analysis with HM Revenue & Customs that will take nearly all charities out of the Senior Accounting Officer rules.
An NCVO working group has called on the Charity Commission and HMRC to improve information sharing, and to consult with the sector on proposed regulatory changes which aim to reduce fraud in the sector, in a new report on managing risk.
New figures published by HMRC this week show that revenue to charities from both gift aid and payroll giving grew during 2010, despite claims and donors falling.
Maximising VAT reliefs on electronic communication
Charities seeking to save money by using electronic communications are still subject to standard-rate VAT, warns Russell Moore.
HM Revenue and Customs has revealed that it has had no complaints about the fit and proper persons test since it was introduced a year ago.
The total value of charitable tax reliefs provided by HMRC rose to £3.34bn in 2010-11, according to latest figures.
New guidance from HMRC relating to overseas workers could have significant impacts on aid agencies and other charities that send employees abroad to work, accountancy firm PKF has warned.
Fit and proper persons: update
The Finance Act 2010 (the Act) introduced a new definition of ‘charity’ for tax purposes, which includes a test that the charity’s ‘managers’ must be ‘fit and proper persons’. Chris Priestly advises.
Any tax changes announced in Wednesday’s Budget will be accompanied by impact assessments which will, for the first time, include an appraisal of the effect of the changes on civil society organisations.
Peter Lennard recounts the horror of an HMRC gift aid inspection and offers some tips on how not to get caught out.
The spectre of an “administrative nightmare” for the sector that has already been seen off once by Charity Tax Group has resurfaced in a new report from the Office of Tax Simplification (OTS).
Non-monetary consideration and barter transactions
Socrates Socratous outlines the VAT implications of transactions where no money changes hands.
A new approach to tax policy-making
Moves are afoot to ensure charities have a greater input into government policies on tax, as Megan McInally explains.
Fit and proper?
Simon Steeden offers some advice on how to ensure your charity is complying with HMRC'c fit and proper person test.
Charities, iXBRL and HMRC
Paul Booth explains the ins and outs of the new system of electronic accounts reporting required by the taxman from April 2011.
CFDG has asked HMRC to extend the small charities exemption from iXBRL to trading subsidiaries of these groups.
Life for a small charity - jack and master of all trades
Think you've got it tough out there? Try being a charity with less than £1m income, says Cath Lee.
Captive asset leasing is not VAT 'abuse'
A European Court ruling has confirmed that leasing captive assets will not be considered a VAT abuse despite HMRC policy.
Graham Elliott summarises a selection of VAT changes that occurred in the year and examines their implications for other charities.
NCVO has set up a new group to review whether fraud prevention measures are fair and effective for charities.
The Charity Finance Directors' Group has called on the government to review tax policies which often burden the charity sector, such as tax avoidance and tax relief, in its response to a government consultation on tax policy.
The 'fit and proper persons' test
Alana Lowe-Petraske details everything you need to know about HMRC's controversial 'fit and proper persons' test as it currently stands.
Partial exemption surprise
Graham Elliott outlines a recent decision which would appear to have wider implications.
Socrates Socratous and Linda Skilbeck report on the result of the first UK VAT case since the ECJ’s decision in VNLTO cast doubt on the Lennartz principle.
