There is a common misconception that charities don’t pay tax of any kind – that’s not true!
If your organisation is a charity, it may qualify for a number of tax exemptions and reliefs; to claim these you’ll need to apply to Her Majesty’s Revenue & Customs (HMRC) for recognition as a charity for tax purposes.
HMRC has key information and links to more detailed sources of tax and VAT knowledge that are particularly relevant to charities in Scotland.
The Charity Tax Group also have lots of information and guidance on all things charity and tax.
Unlike a commercial operation which generates income through the actual provision and sale of goods or services, a voluntary organisation or charity has a complex variety of income sources.
If your organisation has business activities, the VAT rules apply just as they do for any other business. You may, however, qualify for certain VAT reliefs and exemptions so it’s important to consider your VAT position and if it’s either necessary or beneficial (or both), to register for VAT purposes. Visit the HMRC website for more information.
UK charities pay hundreds of millions a year in VAT, much of which can be legitimately reclaimed, but the rules on what can and cannot be recovered are numerous and complex.
Limited companies and unincorporated organisations are liable for Corporation Tax on their profits. This includes all charities, with the exception of charitable trusts, which are liable for Income Tax. However, there are a number of tax exemptions available to charities which mean that they usually do not pay Corporation Tax.
Capital Gains Tax
Charitable status allows for exemption from payment of capital gains tax. Voluntary organisations without charitable status are not exempt from capital gains tax.
Business rates are charges made by local authorities to support the provision of local services and are calculated with reference to the rateable value of the property as determined by the local Assessor.
The rateable value itself is based on the notional rental income obtainable for the property.
Business premises occupied by a registered charity or registered community amateur sports club and used wholly and mainly for charitable purposes (e.g. an office or workshop) can apply to the local authority for relief from the unified business rate.
Charities qualify for mandatory business rates relief of 80%. The remaining 20% may be (and often is) granted by the local authority; so it is possible for a charity to attain 100% relief from rates.
A charity shop is eligible for mandatory rates relief of 80% provided it wholly or mainly sells donated goods, and the proceeds are reapplied for the charitable purposes of the charity. If the charity shop carries out trading in other ways (e.g. a purely for-profit café whose profits will eventually be donated to the charity) the position is likely to be different.
Visit the Charity Retail Association for more information.
Local authorities have discretion to give rates relief to non-charitable groups, including voluntary organisations, as they see fit.
Council tax is a domestic property tax levied on property used exclusively for the purpose of living accommodation.
There is no specific relief for charities.
The occupier or owner of the property must rely on the general rules to take advantage of any exemption. Charities may therefore be able to get relief for a domestic property they own or rent depending on the number and nature of the people that live there.
Employment Related Taxes
Voluntary organisations must ensure that proper payment of tax and other contributions are made with respect to employees and others. They should contact HMRC to obtain full information and assistance.
As with any other employer, voluntary organisations with staff with contracts of employment of any kind are required to apply the normal rules for Pay As You Earn (PAYE) and National Insurance Contributions (NIC) by making deductions on behalf of HMRC (which deals with both tax and national insurance). Failure to do so may result in the employers being personally liable for uncollected tax.
Sessional workers who are employed to do a set amount of work during certain time periods over the year, with some form of unpaid gap in-between each one, are still liable to pay tax and national insurance as it is calculated on the amount of money they earn.
It is also important to establish whether a worker is employed by the organisation or is working for the organisation in a self-employed capacity. This is because self-employed people are themselves responsible for paying tax and NICs.
In most cases it will be pretty obvious, but if there is any doubt, check the criteria published by HMRC. This can be a complicated area of law and if an organisation has any doubts about a worker’s status they should seek professional advice.
Volunteers are just that, and should receive no payment at all for work done. They can receive reimbursement of legitimate expenses incurred on behalf of the organisation, provided they do not exceed the actual cost expended.
A committee member of a voluntary sector organisation is not liable for tax on expenses or benefits. However charity law in Scotland places restrictions on the payments and ‘benefits’ that can be given to ‘charity trustees’ (a term which would include directors of a charitable company) and charities should refer to these restrictions before making any payments or conferring any benefit. Visit the OSCR website for more information on payment of trustees.
Gift Aid is a way for charities and Community Amateur Sports Clubs (CASCs) to increase the value of monetary gifts from UK taxpayers by claiming back the basic rate tax paid by the donor on the donation. It can increase the value of donations by a quarter at no extra cost to the donor. Gift Aid is worth nearly £1 billion a year to charities and their donors. Visit the Institute of Fundraising website for more information.