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If your organisation is recognised as a charity for UK tax purposes, it may qualify for a number of tax exemptions and reliefs on income and gains, and on profits for some activities. In order to claim these you'll need to apply on form ChA1 to HM Revenue & Customs (HMRC) Charities for recognition as a charity for tax purposes.
This doesn't mean that charities never pay tax. If your charity receives taxable (non-exempt) income or gains you need to let HMRC know and complete a tax return - either Self Assessment or Company Tax Return depending on whether you're set up as a charitable trust or company.
If your charity has business activities the VAT rules will apply to you just as they do for any other business. You may, however, qualify for certain VAT reliefs and exemptions.
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In order for your charity to benefit from the tax reliefs available to charities, for example relief from Income Tax, Corporation Tax, or to claim tax repayments, you must be recognised by HMRC as a charity for tax purposes.
Read our guide below to find out how to apply to HMRC.
Most of the income and gains received by charities are exempt from Income Tax and Corporation Tax provided that the money is used for charitable purposes only. The main types of exemption and relief are summarised below with links to more detail.
Your charity can claim exemption from tax, and claim basic rate tax back from HMRC on income received from individuals through Gift Aid donations, as long as the income is used for charitable purposes only.
Your charity can claim exemption from tax on donations received from companies, as long as the income is used for charitable purposes only. Donations from companies don't have tax deducted from them so there is nothing to claim back from HMRC.
Your charity is exempt from UK tax on most types of investment income, including income from investments made overseas, as long as the income is used for charitable purposes only.
You can arrange to receive bank or building society interest without tax deducted ('gross').
To do this, it should be sufficient to show your bank or building society a copy of HMRC Charities' letter recognising your organisation as a charity for tax purposes.
If you've already received interest with tax deducted in the current tax year you should let your bank or building society know. As long as no Income Tax deduction certificates have been issued they will correct the position by re-crediting your account with any tax deducted in error.
If you've received interest with Income Tax deducted for an earlier tax year, when you were a charity for tax purposes, you can reclaim the tax back by making a tax repayment claim to HMRC Charities.
You can make a claim to HMRC to have tax paid back if you've received other income with tax already deducted from one of the following sources:
Charities can't claim back the tax on dividends from UK companies.
Any profits that your charity makes from trading activities - selling goods and services to customers - may be taxable. However, there are some exemptions, depending on the nature of your trading activities.
If your profits from trading activities aren't exempt from tax you'll need to tell HMRC Charities about them and pay any tax that's due through a tax return. See the section below 'Restrictions on tax relief - completing a tax return'.
However, if your trading activities aren't covered by a tax exemption, your charity may want to consider conducting all or part of these activities through a subsidiary trading company and transferring some or all of the profits of that company back to your charity as a donation.
Your charity is exempt from tax on income received from renting out land or property (whether in the UK or overseas) that it holds for charitable purposes, as long as the income is used for charitable purposes only. This includes profits from letting out furnished property.
There is no exemption from tax for any profits made from developing land or property, for example if your charity converts an office building into flats for sale, or enters into a contract for a builder to develop and sell charity property.
Your charity is exempt from tax on capital gains providing the proceeds of the disposal are used for charitable purposes only.
Your charity is also entitled to relief from business rates - you pay no more than 20 per cent on any non-domestic property which is used for charitable purposes. For more information contact your local authority.
When buying a property, your charity won't have to pay Stamp Duty Land Tax as long as the property is used for charitable purposes or held as an investment. This also applies when buying a lease where Stamp Duty Land Tax would normally be due.
If your charity receives income or capital gains that are not exempt from tax, you must tell HMRC Charities.
You must also tell HMRC when you use income for any non-charitable purposes - known as non-charitable expenditure - as the usual tax relief or exemptions may be subject to restrictions and this may result in a tax bill.
In either case you will need to complete a tax return.
Most charities don't need to make a tax return every year, but if you are issued with a tax return or a notice to file a tax return then the law requires you file the return by the statutory filing date to avoid any penalty action.
It is important that you file the tax return within the time limits even if there is no tax to pay. Failure to submit a completed tax return on time will incur penalties even if no tax is due and payable to HMRC. There is no defence against a penalty for late filing of a tax return on the grounds that you did not expect to be required to make a tax return or that you did not that a tax return would be necessary.
Note also that HMRC's online filing system will issue a 'successful acknowledgement' stencil when you file your tax return electronically. This stencil is issued even if you have not correctly or completely filed your tax return. You must therefore make sure that all of the relevant information and supplementary pages are completed otherwise the tax return will be returned to you as 'incomplete'
The type of tax return your charity will need to complete - Corporation Tax or Self Assessment - will depend on whether it's set up as a company or a trust.
Most charities will be treated as companies for tax purposes. They are liable to pay Corporation Tax. Charities will only be treated as a trust if they were set up by a trust deed or a will. They pay Income Tax and/or Capital Gains Tax under Self Assessment.
If the charity does have a tax liability you must pay any tax due on time.
If your charity doesn't tell HMRC about non-exempt income or expenditure on time, it may have to pay penalties and/or interest. If it fails to complete a tax return on time it will have to pay penalties even if no tax is due.
VAT affects your charity in a number of different ways:
For more help you can contact the Charities Helpline.