“But charities don’t pay tax!” is an oft heard phrase. Unfortunately, it is not entirely true.
Charity trustees need to be aware of basic tax rules to ensure that they are fulfilling their duties as a trustee and that the charity takes tax advice, when required.
Charities do not benefit from a general exemption from taxes on income and gains. There is, however, an exemption from certain sources of income, including rent received from land, investment income and royalty income, provided that the assets are held, and the income is applied, for charitable purposes.
Trading profits arising in the course of carrying on the primary purpose charitable activity of a charity, or as a consequence of a trade that is mainly carried on by the beneficiaries of a charity, will normally be exempt from tax. There is also an exemption for small-scale trading profits that are not related to the charity’s primary charitable purpose. The level of small-scale trading allowed depends on the total turnover of the charity.
If a charity carries on a trade that is not a primary purpose charitable activity and would not benefit from the small trading tax exemption, the charity may wish to set up a wholly-owned subsidiary to carry on that trade. The subsidiary would donate all its profits to the charity. Provided that all the profits are donated, the subsidiary will not have a tax liability in respect of its trading profit. The charity would not be subject to tax on the donation received. There may also be other non-tax related reasons why a charity may wish to consider setting up a subsidiary.
Charities do not benefit from an exemption to pay or charge VAT. Whether a charity is required to register for VAT depends on whether the activity that the charity is carrying on as a business for VAT purposes and if the turnover generated by those activities is in excess of the VAT registration threshold (currently £85,000). If a charity is VAT registered, it may be able to reclaim the VAT incurred on goods and services which it receives.
Charities benefit from VAT zero-rating on certain acquisitions of property and construction services. This applies irrespective of whether the charity is VAT registered. Special VAT rules also apply to advertising services provided to a charity.
Both the SDLT and LBTT regimes provide exemption from SDLT/LBTT where property is purchased, or leasehold interests acquired, for charitable purposes. Each relief contains a claw-back that applies if charitable use ceases within three years of the acquisition of the interest in the property.
The above summary shows that the tax and VAT position for charities is not the most straightforward. Although there is often an exemption or relief that applies, it is safer to start with the assumption that tax may be payable than to assume that it is not applicable.
How can we help?
If you have any queries about your charity's tax structure or obligations, please get in touch with our Corporate Tax Partner, Ainsley MacLaren.
