Do Charities Pay Corporation Tax?

Charities do not pay any corporation tax, Charities can benefit from various tax reliefs, provided they are recognized by HM Revenue and Customs (HMRC). Here’s an overview of the key tax reliefs available to charities and the conditions under which they apply.

Recognition by HMRC                                                       

To benefit from tax reliefs, a charity must be officially recognized by HMRC. This involves registering the charity and complying with relevant regulations to maintain its status.

Tax-Exempt Income

Charities do not pay tax on most types of income, provided the funds are used for charitable purposes. Here are some key areas where tax relief applies:

1. Donations:

• Charities do not pay tax on donations received from individuals or corporations, as long as the money is used for charitable activities.

2. Fundraising Income:

• Income from fundraising events and activities is generally exempt from tax, provided the events are conducted to raise funds for the charity.

3. Investment Income:

• Income from investments, such as interest on bank accounts or dividends from shares, is tax-exempt when used for charitable purposes.

4. Trading Income:

• Charities can engage in trading activities, and profits from these activities are exempt from tax if they are used to support the charity’s primary objectives.

Gift Aid

Gift Aid is a significant relief for charities, allowing them to claim back tax on donations made by UK taxpayers. Here’s how it works:

1. Donor Declaration:

• Donors must make a Gift Aid declaration, confirming they are UK taxpayers and that the charity can reclaim the tax on their donation.

2. Tax Reclamation:

• Charities can reclaim 25p for every £1 donated. This means a £100 donation from a taxpayer is worth £125 to the charity.

3. Higher Rate Taxpayers:

• Donors who pay higher rate tax can claim the difference between the higher rate of tax and the basic rate on the donation. They can keep this relief or choose to pass it on to the charity.

VAT Reliefs

Charities can also benefit from specific VAT reliefs:

1. Zero-Rated Supplies:

• Certain goods and services provided by charities are zero-rated for VAT. This includes the sale of donated goods and advertising services.

2. Reduced Rate Supplies:

• Some supplies, such as fuel and power used in charitable buildings, may be subject to a reduced VAT rate.

3. VAT Refunds:

• Charities can claim refunds on VAT paid on certain goods and services, particularly those used for non-business activities.

Business Rates Relief

Charities are eligible for relief on business rates:

1. Mandatory Relief:

• Charities receive 80% mandatory relief on their business rates. This applies to properties used wholly or mainly for charitable purposes.

2. Discretionary Relief:

• Local authorities can grant up to 20% additional relief, potentially reducing the business rates bill to zero.

Corporation Tax Relief

Charities are generally exempt from Corporation Tax on:

1. Profits from Trading:

• Profits from primary purpose trading or trading undertaken by beneficiaries are exempt if the profits are used for charitable purposes.

2. Property Income:

• Rental income from properties owned by the charity is exempt if used for charitable purposes.

3. Capital Gains:

• Charities do not pay tax on capital gains if the proceeds are used for charitable purposes.

Summary

1. Recognition by HMRC: Essential for accessing tax reliefs.

2. Tax-Exempt Income: Includes donations, fundraising, investment income, and trading profits used for charitable purposes.

3. Gift Aid: Allows charities to reclaim tax on donations, boosting the value of contributions.

4. VAT Reliefs: Includes zero-rated supplies, reduced rates, and VAT refunds.

5. Business Rates Relief: 80% mandatory relief, with potential for full relief through discretionary support.

6. Corporation Tax Relief: Exemptions on trading profits, property income, and capital gains used for charitable purposes.

By taking advantage of these tax reliefs, charities can maximize their resources and focus more effectively on their charitable missions.

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