When Does a Charity Have to Pay Tax?
As a rule, registered charities can get certain types of tax reliefs on most types of income and gains.
But, to benefit and not have to pay taxation, the charity would need to:
- Have recognition for tax purposes by HM Revenue and Customs.
- Use the money (charitable expenditure) for charitable purposes.
You should be able to claim back any deducted taxes (e.g. such as on bank interest or on donations made through ‘Gift Aid’). But, there are also some situations where a charity may need to pay tax, such as if it:
- Receives income that does not meet the qualification criteria to get the tax relief.
- Spends any of the income or gain on anything other than charitable expenditure (non-charitable purposes).
You would need to complete a tax return for any charitable income that does not qualify for charity tax relief (see below).
Note: The treatment of tax relief for community amateur sports clubs (CASCs) differs to the standard rules on charities taxation.
Tax Reliefs for Charities
A charity does not pay tax on ‘charitable expenditure’ if it is recognised for tax purposes by HMRC. This means it is using income and gains for ‘charitable purposes‘ and no tax is due on:
- Income from rentals or investments (e.g. bank interest)
- Profits made from trading
- Profits after selling or ‘disposing of‘ an asset (e.g. property or shares)
- The purchase of a property
Charities need to pay tax on:
- Dividends received from United Kingdom companies before the 6th of April 2016.
- Profits realised from the development of land or property.
- Purchases (check the special rules that relate to VAT for charities).
Note: Charities taxation would be due on ‘non-charitable expenditure’ (money not used for charitable purposes).
Paying Charity Tax
You will need to complete a tax return if your charity gets income that does not qualify for charity tax relief. HM Revenue and Customs can still ask you to complete a tax return even if there is no tax to pay.
Note: Having an income over £10,000 means you would need to send a charity’s annual return to the Charity Commission.
Company Tax Returns
Charities that are a limited company or an unincorporated association must complete a Company Tax Return. You should include the supplementary pages for charities and community amateur sports clubs (CASCs).
As a rule, your charity is a limited company if it was first set up by a:
- Memorandum and articles of association of a company
- Royal charter or Act of Parliament
Note: Read more on how to send accounts and tax returns for private limited companies to Companies House.
A charity set up by a trust deed or a will is a trust. If this is the case, you must complete a Trust and Estate Self Assessment tax return.
Deadlines and Penalties
There are different deadlines for Company Tax Returns and Self Assessment tax returns. You must also complete a tax return if you get asked by HM Revenue and Customs to send one, even if there is no tax to pay.
Note: Sending a late tax return, or not completing one when you should, can result in having to pay a penalty.
Reclaiming Charities Taxes
You would be able to claim back the taxation already deducted on certain types of income or gain, including:
- Bank interest
- Donations (read more on the process of claiming Gift Aid as a charity or CASC)
There are several ways to claim back charity tax on income received with tax already deducted (e.g. donations that qualify for Gift Aid). Charities can reclaim tax:
- Online (use the same process to claim Gift Aid online).
- Using one of the software suppliers for Charities Online.
- By postal methods using form ChR1 (contact HMRC Charities helpline to order the form).
Receiving Bank Interest
Some charities can also arrange to receive the interest without the tax deducted. You would need to show the letter of recognition from HM Revenue and Customs to the bank. If they already deducted tax from the interest, you would be able to:
- Claim it back for the current tax year by making the request at the bank.
- Get it back for previous tax years by claiming it from HM Revenue and Customs (HMRC)
Charity Recognition for Tax Purposes
To qualify for charity taxation relief it must be:
- Based in the United Kingdom, the EU, Iceland, Liechtenstein, or in Norway.
- Established and run for charitable purposes only (for public benefit).
- Registered with the Charity Commission or other regulator (where applicable).
- Run by ‘fit and proper persons’ (e.g. someone who can run your charity’s finances).
- Recognised by HM Revenue and Customs (HMRC).