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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 ChA1to 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 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
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. 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
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 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, when you were a charity for tax purposes, you can reclaim the tax back by making a tax repayment claim to HMRC Charities on form R68.
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.
Find out how to reclaim tax on savings income that has been taxed
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 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.
Find out more about tax and tax relief on charity trading activities
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.
Read more about income from land or property
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
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)
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.
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
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.
VAT affects your charity in a number of different ways:
Find out more about how VAT affects charities
and the VAT reliefs available
For more help you can contact the Charities Helpline.
Contact the Charities Helpline
Read more about tax exemptions for charities in the detailed guidance notes
