In this section:

Charities and tax: the basics

If your organisation has charitable status in the UK, you 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 to HM Revenue & Customs (HMRC) for recognition as a charity for tax purposes - this is a separate process from registering as a charity with the Charity Commission, or the Office of the Scottish Charity Regulator (OSCR).

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.

On this page:

Qualifying for charitable status
Applying for recognition as charity for tax purposes
Income Tax and Corporation Tax exemptions and reliefs for charities
Capital Gains Tax relief for charities
Charity business rates relief
Charity Stamp Duty Land Tax relief
Restrictions on relief - completing a tax return
Charities and VAT
Contacting the HMRC Charities Helpline
More useful links

Qualifying for charitable status

To qualify for charitable status a body must be established in UK law for charitable purposes only and these purposes must be for the public benefit. If a body has a purpose that is non-charitable - for example, political activity - it will not qualify for charitable status, even if it is for public benefit.

To find out more about which sorts of activity qualify and how to register as a charity, see the Charity Commission or OSCR websites below.

Find out about registering as a charity in England and Wales on the Charity Commission website (Opens new window)

Find out about registering as a charity in Scotland on the OSCR website (Opens new window)

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Applying for recognition as a charity for tax purposes

In order for your charity to benefit from the tax reliefs available to charities, for example relief from Income Tax or Corporation Tax, or to claim tax repayments or VAT reliefs, you must be recognised by HMRC as a charity for tax purposes.

Read our guide below to find out how to apply to HMRC.

Apply to HMRC for recognition as a charity for tax purposes

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Income Tax and Corporation Tax exemptions and reliefs for charities

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.

Tax relief on donations received through the Gift Aid scheme

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. You will also get extra relief until 2011 to take account of the reduction in the basic tax rate from 22 per cent to 20 per cent in 2008.

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.

Find out more about how Gift Aid works and how to claim tax back

Tax relief on investment income

Your charity is exempt from tax on most types of investment income, including income from investments made overseas, as long as the income is used for charitable purposes only.

Tax relief on regular sources of income

You can arrange to receive bank or building society interest without tax deducted ('gross').

To do this, you should:

make sure that your bank or building society is aware that you are a UK charity
let your bank or building society see evidence that you have been accepted as a UK charity, for example your charity registration number from the Charity Commission or the OSCR, or a letter from HMRC Charities confirming that you are 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 their mistake 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, 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:

stocks
wayleaves
legacy income
royalties
Discretionary Trust income

Charities can't claim back the tax on dividends from UK companies.

Find out how to reclaim tax on savings income that has been taxed

Tax relief on trading profits

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 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 tax exemptions, 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 back to your charity as a donation.

Find out more about tax and tax relief on charity trading activities

Tax relief on income from land and property

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.

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Capital Gains Tax relief for charities

Your charity is exempt from tax on capital gains providing the proceeds of the disposal are used for charitable purposes only.

Find out more about Capital Gains Tax and charities

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Charity business rates relief

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.

Get your local authority contact details from the Directgov website (Opens new window)

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Charity Stamp Duty Land Tax relief

When buying a property, your charity won't have to pay Stamp Duty Land Tax. This also applies when buying a lease where Stamp Duty Land Tax would normally be due.

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Restrictions on tax relief - completing a tax return

If your charity receives income or capital gains that are not exempt from tax, you must tell HMRC Charities.

You should 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.

Find out what counts as non-charitable expenditure

Types of tax return

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 and pay Corporation Tax. Charities will only be treated as a trust if they were set up by a trust deed or a will, and they will pay Income Tax and/or Capital Gains Tax under Self Assessment.

Most charities don't automatically receive a tax return every year, but if you're sent one you must complete it (even if you're claiming exemption from tax on all of your income and gains). If you do 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, or fails to complete a tax return on time, it may have to pay penalties and/or interest due.

Completing your tax return

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Charities and VAT

VAT affects your charity in a number of different ways:

your income - from a variety of sources - may be liable to VAT if your charity is (or is required to be) VAT registered
if your charity is VAT registered, you may be able to claim some of the VAT you are charged back from HMRC in line with the normal VAT rules
many of the goods and services your charity buys will be subject to VAT, but you may be entitled to VAT relief on some purchases - whether or not you are VAT registered

Find out more about VAT relief for charities

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Contacting the HMRC Charities Helpline

For more help you can contact the Charities Helpline on Tel 0845 302 0203 (open from 8.00 am to 5.00 pm, Monday to Friday).

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