Taxman’s charity contribution

THE PROCESS for registering as a charity should not be underestimated. The Charity Commission will register an entity only if that entity can demonstrate its activities are for the “public” and its “benefit”. It is beyond the scope of this article to discuss the meaning of these two words but I would like to summarise the main tax advantages of being a registered charity.

Unlike a profit-making entity, a charity will not pay tax on its income and gains, provided they are used for charitable purposes. The main reliefs are:

1 PROFITS FROM TRADING

A charity is exempt from tax on the profits of any trade which is:

carried out in the course of a primary purpose of the charity (eg an independent school charging tuition fees to students for their education) or mainly carried out by beneficiaries of the charity or where turnover of a non-primarypurpose trade is below certain limits.

If the level of trade that is not primarypurpose falls below the charity’s smalltrading tax-exemption limits, then the charity will not pay tax on that trade, either.

For a gross annual income of less than £20,000, the maximum permited small trading turnover is £5,000. For gross annual income of £20,001 to £200,000, it is 25 per cent of the charity’s total annual turnover. Above £200,000, the limit is £50,000.

There are provisions for ancillary trades to be exempt and HMRC also regards fundraising events as exempt from tax.

2 RENTAL OR INVESTMENT INCOME

Rental income and investment income are exempt from tax, provided they are applied for charitable purposes.

3 SELLING PROPERTY OR SHARES

There is an exemption from tax on capital gains, provided the gains are applied for charitable purposes.

4. BUYING PROPERTY Charities receive exemption from stamp duty land tax on the acquisition of a property, provided the acquisition is used for charitable purposes.

5 VAT

The late Professor Adrian Randall, who introduced me to the world of charity accounting, called VAT a “veritable nightmare”.

There is no universal VAT relief for charities. However, there is no VAT payable on most advertising and VAT is charged at five per cent on fuel and power.

Normally, standard-rate 20 per cent VAT will be charged on the construction of “new” buildings.

Unfortunately, as charities are likely to engage primarily in non-business activities, a large amount of irrecoverable VAT arises. Charities suffer an estimated £1.5 billion of irrecoverable VAT per year.

To assist charities, the legislation allows charities to zero-rate construction services, provided the building is used for a non-business purpose.

HMRC is prepared to accept that a building can be treated as used for a non-business activity if the building is used solely for non-business for 90 per cent or more of the time.

6 BUSINESS RATES

Charities are entitled to a mandatory 80 per cent relief from non-domestic (business) rates. This relief extends to charity shops.

A further 20 per cent relief is discretionary, as decided by the local authority concerned.

Anthony Epton is charities partner at Goldwins Chartered Accountants 020 7372 6494 aepton@goldwins.co.uk

This article gives merely a brief outline of the main points and further guidance should be sought