Charity Tax Exemptions and Reliefs

If your organisation is recognised as a charity it may qualify for a number of tax exemptions and reliefs on income and gains, and on profits for some activities.  This doesn't mean that charities never pay tax. If your charity receives taxable (non-exempt) income or gains you need to let HMRC know and complete a tax return - either Self Assessment or Company Tax Return depending on whether you're set up as a charitable trust or company.

If your charity has business activities the VAT rules will apply to you just as they do for any other business. You may, however, qualify for certain VAT reliefs and exemptions.

Please see below for a brief outline of each type of tax and the potential reliefs available:-

Income Tax and Corporation Tax exemptions and Reliefs for Charities

Most of the income and gains received by charities are exempt from Income Tax and Corporation Tax provided that the money is used for charitable purposes only. The main types of exemption and relief are summarised below with links to more detail.

Tax relief on donations received through the Gift Aid scheme

Your charity can claim exemption from tax, and claim basic rate tax back from HMRC on income received from individuals through Gift Aid donations, as long as the income is used for charitable purposes only.

Your charity can claim exemption from tax on donations received from companies, as long as the income is used for charitable purposes only. Donations from companies don't have tax deducted from them so there is nothing to claim back from HMRC.  Find out more about how Gift Aid works and how to claim tax back

Tax relief on investment income

Your charity is exempt from UK tax on most types of investment income, including income from investments made overseas, as long as the income is used for charitable purposes only.

Tax relief on regular sources of income

You can arrange to receive bank or building society interest without tax deducted ('gross'). 

If you've already received interest with tax deducted in the current tax year you should let your bank or building society know. As long as no Income Tax deduction certificates have been issued they will correct their mistake by re-crediting your account with any tax deducted in error.  If you've received interest with Income Tax deducted for an earlier tax year, when you were a charity for tax purposes, you can reclaim the tax back by making a tax repayment claim to HMRC.

You can make a claim to HMRC to have tax paid back if you've received other income with tax already deducted from one of the following sources:

  • stocks
  • wayleaves
  • legacy income
  • royalties
  • Discretionary Trust income

Please note charities cannot claim back the tax on dividends from UK companies.

Tax relief on trading profits

Any profits that your charity makes from trading activities - selling goods and services to customers - may be taxable. However, there are some exemptions, depending on the nature of your trading activities.

If your profits from trading activities aren't exempt from tax you'll need to tell HMRC Charities about them and pay any tax that's due through a tax return. If your trading activities aren't covered by tax exemption, your charity may want to consider conducting all or part of these activities through a subsidiary trading company and transferring some or all of the profits of that company back to your charity as a donation.

Tax relief on income from land and property

Your charity is exempt from tax on income received from renting out land or property (whether in the UK or overseas) that it holds for charitable purposes, as long as the income is used for charitable purposes only. This includes profits from letting out furnished property.

There is no exemption from tax for any profits made from developing land or property, for example if your charity converts an office building into flats for sale, or enters into a contract for a builder to develop and sell charity property.

Capital Gains Tax relief for charities

Your charity is exempt from tax on capital gains providing the proceeds of the disposal are used for charitable purposes only.

Charity business rates relief

Your charity is also entitled to relief from business rates - you pay no more than 20 per cent on any non-domestic property which is used for charitable purposes. For more information contact your local authority.

Charity Stamp Duty Land Tax relief

When buying a property, your charity won't have to pay Stamp Duty Land Tax. This also applies when buying a lease where Stamp Duty Land Tax would normally be due.

Charities and VAT

VAT affects your charity in a number of different ways:

  • if you provide goods or services in return for a charge you may be liable to register for VAT even if your activities are in the furtherance of your charitable aims
  • if your charity is VAT registered, you may be able to claim some of the VAT you are charged back from HMRC in line with the normal VAT rules
  • many of the goods and services your charity buys will be subject to VAT, but you may be entitled to VAT relief on some of your purchases - whether or not you are VAT registered.

For more specialist advice on this area please contact Steve Smith, Client Manager on 01323 431200 or email him on steve.smith@plummer-parsons.co.uk