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 aided 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 creates property taskforce
HMRC is targeting VAT evasion on properties. Colin Laidlaw explains its intentions.
An independent investigation into alleged financial irregularities at Charity Business has revealed that the company raised no fixed-fee invoices for the period May to September 2011 until October, meaning it failed to declare around £50,000 of output VAT in the correct VAT period.
Cost-sharing exemption
The draft 2012 Finance Act's impact on cost-sharing groups is confirmed. Colin Laidlaw outlines some of HMRC's other plans for the Act.
Chris Lane analyses what impact the European Commission's consultation on the future of VAT may have on charities.
An apparently innocuous announcement late last week from the European Commission may lead to yet more VAT problems for charities planning to establish cost-sharing groups (CSGs).
The Cabinet Office will consult on how to make community investment tax
relief more effective, in response to a new report from NCVO on tax incentives for social investment.
The meaning of 'donation' for VAT purposes
When is a donation not a gift? When HMRC gets involved. Graham Elliott reports.
Charity shop tax benefits have come under fire from a Tory MP in a backbencher debate about the future of the British high street.
Production of a cheap educational computer by UK charity the Raspberry Pi Foundation is underway, but the first batch is to be produced in China to save money.
HMRC's new dispute resolution service would instil more confidence if the facilitators were independent, says Socrates Socratous.
The government should look again at reducing VAT on investment management fees for charities, says Diane Wilde.
HMRC is piloting a new method of resolving VAT and direct tax disputes with small and medium-sized enterprises, including charities, to try to settle conflicts before they reach a tribunal.
The Centre for Social Justice has said a scheme which gives companies tax relief for subsidising voluntary work carried out by their employees would boost donations to charities by around £1bn a year.
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.
Charity Tax Group has welcomed new recognition by the European Commission of the VAT burden on charities, but is disappointed that no new solutions have been proposed.
The Treasury estimates that the VAT cost-sharing exemption will cost the Exchequer £125m by 2016/17, and anticipates that efficiencies achieved by the sharing of services could save the sector a further £100m.
Charities affected by music licensing changes
Kenneth Mullin explains changes to the music licensing system which are due to come into force in January 2012.
How to get the most out of salary sacrifice
Ellie Gamble and Debbie Jennings explain how employers can use a salary sacrifice scheme to benefit both the employee and the employer.
Community Infrastructure Levy explained
Jane Ferguson outlines how the Community Infrastructure Levy will affect future building work.
Accountancy firm PKF has warned that a comment from the government yesterday in a guidance note regarding the cost-sharing VAT exemption may leave room for the Treasury to water down the proposals in the original consultation document.
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.
The government has confirmed it will introduce the long-awaited VAT exemption for civil society organisations that wish to share back-office services.
The House of Lords has voted for an amendment to the Health and Social Care Bill requiring government to report to Parliament on the VAT treatment of supplies used by charities providing healthcare services on behalf of the NHS.
The Booksellers Association has called for an end to tax and business-rate concessions for charity bookshops, saying they give an "unjust competitive advantage" over other retailers.
VAT reclaims for CIFs?
Debbie Jennings discusses a case that has been referred to the European Court of Justice which could result in VAT savings for common investment funds.
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.
The Charity Retail Association has hit out at suggestions by retail celebrity Mary Portas that the number of charity shops on the high street should be limited by tax laws.
Four of the sector’s biggest umbrella bodies have clubbed together to tell HMRC that the proposed VAT cost-sharing exemption will be of no use to charities if implemented as it stands.
Taxation on overseas charity workers
The taxation of individuals who spend only part of their time in the UK, as well as foreign nationals based in this country, has proven to be a complex and politically sensitive issue., says Sarah Campbell.
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.
