11th October 2017
It is important for the Trustees of charities to make the most of their income to allow them to fully meet their charitable objectives. The charity sector has suffered in recent years due to reductions in government and local authority funding, falling voluntary giving and reduced investment returns. So it is more important than ever to ensure that all available tax relief is claimed.
Before a charity can claim any tax relief, it needs to be registered with HMRC and with the Charity Commission or another recognised body. It must be only engaged in activities that have a charitable purpose – HMRC defines this as charities that work for the public benefit.
As long as the charity is using its income for charitable purposes, it will not have to pay tax on it. HMRC defines this as ‘charitable income’ and it includes donations and grants, income from investments, rental income and asset sales. The charity may have to pay tax on any gains it makes from developing and selling land and buildings. An annual tax return will need to be completed for any income that does not qualify for tax relief, and this is something that our charity tax specialists at Wise & Co can help with.
HMRC and the Charity Commission each have specific rules governing whether a charity can have trading income and the allowable levels of income for this. Many charities set up subsidiary companies for any trading activities they have to keep them separate from the charity’s activities. The subsidiary company is then able to pass its profits up to the charity each year so that corporation tax is not payable by the company.
Contrary to popular belief, there is no general VAT relief for charities. It is an unwelcome surprise to many charities that activities which they consider to be charitable do come with a VAT cost – either because VAT must be charged on income or because VAT cannot be recovered on costs. That said, there are some reliefs which charities can take advantage of. Among others there are reliefs for fundraising activities, construction work, advertising and welfare activities. All of the reliefs come with conditions which must be fulfilled.
VAT can be costly for charities and burdensome for the Trustees who steward charity resources. Wise & Co has the necessary knowledge and experience to ensure that VAT costs are mitigated, savings maximised and that Trustees are confident that transactions have been properly dealt with.
The Gift Aid scheme is extremely valuable to registered charities. If a donor is a UK taxpayer, and gives the charity their details, the government will increase the amount of the donation by 25%. This can be a substantial additional income for a charity. Statistics released by HMRC, reveal that charities claimed £1.27bn of Gift Aid during the 2016/17 tax year. Most donations will qualify for Gift Aid.
The charity needs to collect a Gift Aid declaration from each separate donor and keep a record for six years after the most recent donation Gift Aid has been claimed on. Gift Aid can be claimed through Charities Online and Wise & Co make these claims on behalf of many of our charity clients.
Talk to our charity specialists – Mark Dickinson or Treena Turner, to make the most of the tax relief your charity is entitled to. We’ll help to remove some of the burden of recording, reporting and claiming tax relief, and guide you on how to make the most of charitable income.