The best tax tips for charities can help make the complex and somewhat confusing tax landscape easier to navigate. The rules for charities are not always straightforward and it’s important to take time to understand them in the context of your charity’s structure. If you are just starting, we advise you to look at our previous post on how to register as a charity. It will help you get started, with this post going deeper on how to manage your tax affairs. Here our focus is on the best tax tips to help your charity get through the tax season in style.
You need to register for tax purposes
It’s essential to register your charity for tax purposes and the blog post mentioned above will help you do that. If you aren’t officially recognised as a charity, you will not be able to enjoy tax relief.
Here’s a quick look at what’s required from your charity to claim tax relief on income:
- Your charity needs to be based in the UK, EU, Iceland, Liechtenstein or Norway.
- Established only for charitable purposes.
- You must register with the Charity Commission or another appropriate regulator.
- Be run by ‘fit and proper persons’.
- Have recognition from HM Revenue and Customs.
Charity details can be registered online using HMRC’s services.
You do have to pay tax on certain income
While charities don’t pay tax on most types of income, there are occasions when they might have to. You may be liable to pay tax if your charity:
- Receives income that doesn’t qualify for tax relief.
- Spent any of your income on non-charitable purposes.
- Undertakes certain business activities.
In essence, whenever a charity receives income that isn’t used for charitable purposes, it needs to pay tax on it. Here are examples of situations when your charity needs to pay taxes:
- You’ve received dividends from UK companies before 6 April 2016.
- You make a profit developing land or property.
- You make certain business purchases, although special VAT rules do apply.
If you are required to pay tax, you’ll need to complete a tax return.
You don’t pay tax on most income
As mentioned, you don’t need to pay tax on most income and gains, as long as the income is used for charitable purposes. This is called charitable expenditure and you get tax relief for it.
If you are using the income for charity, you don’t need to pay tax on:
- Profits from trading.
- Rental or investment income, e.g. bank income.
- Profits when you sell or dispose of an asset such as shares.
- Bought property.
You can reclaim tax back
There are also important tax tips for charities in regards to reclaiming tax. It is possible to claim back tax that has been deducted on things like:
- Bank interest.
The first example refers to a system called Gift Aid. This allows charities to claim back 25p every time an individual donates £1. The donor has to make a Gift Aid declaration to permit your charity to claim it. If they don’t, charities can still claim on cash donations of £30 or less.
There are special rules for claiming Gift Aid in specific situations, such as for charity events and church collections. HMRC’s guide is a great starting point to understand how the system works and what kind of donations are eligible for the scheme.
Claiming Gift Aid is simple and you can use Charities Online service. For claims of over 1,000 donations, you will need to use eligible software. The deadline depends slightly on how your charity is set up. For trusts, the deadline is the usual tax year and you can claim a donation within four years of the end of the financial period when you received the donation. If your charity is a community amateur sports club (CASC), a Charity Incorporated Organisation (CIO) or a limited company, then the deadline is the end of your accounting period.
Regarding tax reclaim on bank interest, your charity can arrange with the bank to receive interest without tax deductions. You need to show your bank the letter of recognition from HMRC and you’ll be able to enjoy this benefit. In cases where tax has been taken, you can claim it for the current year by asking your bank or for previous tax years by claiming with HMRC.
You should know when to file a tax return
As a charity, you don’t need to file a tax return if you don’t have any tax to pay. In certain circumstances, HMRC might still ask you to file, however, this is rather rare. Keep in mind that if your income is over £10,000, you will need to submit an annual return to the Charity Commission.
Filing a tax return depends on the way your charity was set up. Here’s what you need to do in specific circumstances:
- If your charity is a limited company or unincorporated association, you must complete a Company Tax return.
- If you operate as a trust, you need to complete a Trust and Estate Self Assessment tax return.
Find help with your charity’s taxation
Most of the tax tips for charities are situational and depend on your charity’s circumstances. This can make it difficult to stay on top of your taxation and seeking outside advice is a good idea. A professional tax advisor or accountant can help you understand your circumstances and help you with making claims and filing for taxes.
If you’d like to talk to professional and experienced accountants, contact us at Devonshire Green. We’ve worked with charities of all types and know just how to make the most out of your situation. Drop us a message and let’s get your charity’s taxes sorted!