Does my Charity need to Pay VAT & Tax?

‘Does my Charity need to Pay VAT & Tax?’ is a question we get asked a lot.

Charities and not-for-profit organisations do so much for our community. A lot of hard work, time (often voluntary) and money is put in for the cause. Given this, it’s a plausible assumption that they would be exempt from the burden of tax.

Unfortunately they’re not!

However, charities may qualify for a number of tax exemptions and reliefs.

VAT

Unlike a commercial operation which will normally only generate income through the actual provision and sale of goods or services, a voluntary organisation or charity usually has a complex variety of income sources.

Therefore, when it comes to VAT for not-for-profit organisations, it is not always a straightforward case of working out whether what your organisation does counts as a ‘sale’ in VAT terms, for example, ‘grants’ are usually a grey area.

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. This makes it important to consider your VAT position and if it’s either necessary or beneficial (or both), to register for VAT purposes.

UK charities pay hundreds of millions a year in VAT, some of which may be recoverable, but the rules on what can and cannot be recovered are complex.

It is therefore essential to seek professional advice.

This ensures all applicable exemptions are utilised and VAT recovery is maximised through appropriate structuring of an organisation’s activities.

Corporation tax and income tax

Limited companies and unincorporated organisations are liable for corporation tax on their profits and this includes all charities, with the exception of charitable trusts which are liable to income tax. However, most of the income and gains received by charities are exempt from income tax and corporation tax provided that the money is then used for charitable purposes only. Where a charity is trading, it is key to obtain advice regarding how this is taxed and the best structure to use.

Capital gains tax

Charitable status allows for exemption from capital gains tax, but this does not apply to profits from developing land or property. Voluntary organisations without charitable status are not exempt from capital gains tax.

Gift Aid

Gift Aid is an area of tax specifically relating to charities and Community Amateur Sports Clubs (CASCs). The scheme increases 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 – without costing the donor an extra penny.

However, it is important that organisations understand the rules surrounding the scheme which can be complex. We have a large number of clients benefiting from the regime and can help ensure the correct procedures are followed and tax relief maximised.

Talk to the experts

Our specialist Not-for-Profit team includes members from our nationally recognised and award winning tax team. They will be able to help you make fully informed decisions, considering the tax and VAT implications for your organisation in advance.

Resources

How VAT affects charities
VAT for charities
The voice of charities on tax