In this section:

Charities and tax: the basics
Applying to HMRC for recognition as a charity for tax purposes
How to reclaim tax on Gift Aid and other income
Understanding and promoting types of tax-efficient giving
Tax and charitable or non-charitable expenditure
Charity trading profits: tax obligations and reliefs
Tax returns for charities and Community Amateur Sports Clubs

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Tax and charitable or non-charitable expenditure

Tax and charitable or non-charitable expenditure

If your organisation has charitable status in the UK, you’ll qualify for a number of tax exemptions and reliefs on income and gains, and on profits for some activities.

Your charity can only claim these specific tax exemptions and reliefs, if it uses or spends the money it receives on charitable purposes - aims that are for the public benefit that your charity was set up for. Money your charity spends when carrying out activities in support of such aims is called 'charitable expenditure'.

If your charity uses any of the money it receives for a purpose that isn't charitable, for example political activity, this is called 'non-charitable expenditure'. It may mean that your charity won't get tax relief on all its income - and may have to pay some tax.

On this page:

What is charitable expenditure?
Tax and charitable expenditure
What is non-charitable expenditure?
Tax liability as a result of non-charitable expenditure
How HMRC monitors charitable expenditure
Contact the HMRC Charities Helpline
More useful links

What is charitable expenditure?

Charity law says that all charities must have charitable purposes, or objectives, that are for the public benefit. These are set out in a charity's governing document. For example, a charity's purpose might be the advancement of education.

Income that your charity uses specifically for its charitable purposes is called ‘charitable expenditure’.

Charitable expenditure might include things like:

charitable grants that your charity makes
the cost of running and managing your charity

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Tax and charitable expenditure

Charities in the UK are exempt from tax on most income and gains, as long as they use the money for charitable purposes only. This applies to:

Gift Aid donations.
Rental income.
Interest and other investment income.
Capital gains.
Profits from your charity's 'primary purpose' trading. This means a trading activity that's carried out as part of your charitable purpose or aim, for example a theatre charity could sell tickets for a theatrical production they put on.

Find out how to reclaim tax on Gift Aid and other income

Find out more about tax exemptions on charity trading profits

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What is non-charitable expenditure?

Any income or gains that your charity spends on non-charitable purposes is called 'non-charitable expenditure'.

Non-charitable expenditure includes:

Expenditure on things that aren't for the charitable purposes set out in your charity's governing document.
Payments to an overseas body if your charity has not taken reasonable steps to ensure the money will be applied for charitable purposes. Your charity is responsible for ensuring that its charitable objects are met by the overseas body otherwise the expenditure may be treated as non-charitable.
Any investments and loans that your charity makes that aren't 'qualifying' investments and loans. For example, bank or building society deposits are qualifying investments, and loans to another charity for charitable purposes only, are qualifying loans. For more information see link at end of this section.
The cost to your charity of certain transactions with someone who's a 'substantial donor' - a person who makes a significant donation or donations - but who also gets something of value from the charity in return. For example, a person might donate a large amount to your charity but in return you sell them a property at less than market value.

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Tax liability as a result of non-charitable expenditure

If your charity spends any of its money on non-charitable purposes (non-charitable expenditure), it may lose tax exemption and have to pay tax on all or part of its income or gains. The amount that is taxable is the same as the amount of the non-charitable expenditure.

Example

In a 'chargeable period' a charity receives:

gross Gift Aid income of £28,000
gross bank interest of £3,000

It's normally entitled to tax relief on its total income - £31,000.

A chargeable period is:

the tax year ending 5 April for a charitable trust
the accounting period for a charity that's treated as a company for tax purposes

The charity spends £10,000 in charitable grants and administration. It makes a non-charitable loan of £7,000 and invests the balance in a bank savings account.

Because the loan is non-charitable expenditure, the charity loses tax relief on the same amount as the loan. So the income on which the charity gets tax relief goes down to £24,000 (£31,000 minus £7,000) and the charity has to pay tax on £7,000.

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How HMRC monitors charitable expenditure

If your charity does spend any of its income and gains on non-charitable purposes you'll need to send a completed tax return to HMRC to show the amount of any non-charitable expenditure. The charity will need to calculate and pay the tax that’s due.

Which tax return you’ll need to complete depends on whether your charity is set up as a trust or company for tax purposes.
Most charities are treated as companies and complete a Company Tax Return along with the supplementary page CT600E.
Charities are treated as trusts if they were set up by a trust deed or a will and complete a Self Assessment tax return, together with the supplementary page SA907.

HMRC sends some charities a tax return every year, but most get one only occasionally. If you think your charity may have to pay tax - because of non-charitable expenditure or for any other reason - you should complete a tax return and the appropriate supplementary pages and send them to HMRC Charities.

If your charity doesn't declare correctly and on time that there's tax to pay, it may have to pay interest and a penalty.

Find out more about completing a tax return

Tax return deadlines

If HMRC sends your charity a tax return, you must complete it and send it back on time. Your charity may have to pay a penalty if you:

don't complete the tax return
send it back late

All tax returns have notes with them that give details about penalties for sending a tax return in late.

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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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