What tax treatment does a charity get?
Charities don’t avoid all taxes, but they usually pay less tax than other groups. Charity tax is tricky, yet charities in the UK can get tax breaks and exemptions in specific situations.
How can charities qualify for tax exemptions and reliefs?
Does the charity need to be registered?
Firstly, it’s crucial for a charity to be officially acknowledged by HM Revenue and Customs.
The charity must be formally registered as a charitable organisation with either the Charity Commission in England and Wales, the Charity Commission for Northern Ireland, or the Scottish Charity Regulator.
For tax advantages, the charity must be located in the UK, Norway, Iceland, or Liechtenstein. It should be overseen by individuals considered ‘fit and proper,’ and it must operate solely for charitable aims.
These encompass, among others:
- Easing poverty and suffering
- Upholding human rights
- Promoting education
- Ensuring animal welfare
- Enhancing health
- Supporting religious causes
Exploring The Available Tax Reliefs for Charities
If the mentioned conditions are met, a charity might access different tax reliefs, such as:
Trading profits
When a charity sells goods or services, it might be seen as trading profits based on factors like how often sales occur and the nature of goods/services offered.
If the charity generates this profit to fulfil its main goals, termed primary purpose trading, it might not be taxed.
The charity’s ‘governing document’ outlines its primary purpose. Thus, profits from trading activities unrelated to the charity’s main mission might face taxation if they surpass the small trading tax exemption limit.
Other tax reliefs
Tax exemptions and reliefs can extend to charitable donations, investment income, rentals, profits from asset sales, and property purchases.
The Gift Aid scheme allows charities to reclaim tax on donations from individual taxpayers, not businesses.
It’s recommended that charity administrators seek professional accountancy advice on tax, preferably from an accountant specialised in charity taxation. This ensures compliance with charitable tax laws and minimises the risk of penalties from HMRC.
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VAT Relief for Charities: Understanding the Process
Charities may qualify for VAT relief in certain cases, but they need to demonstrate their charitable status to the supplier and furnish them with a written declaration of eligibility.
When charities register with the Charity Commission, they receive a registration number, which serves as proof of their status.
Certain purchases are zero-rated for VAT, which includes, among others:
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- Advertisements for donation collections
- Medical equipment and medications
- Adapted motor vehicles for disabled individuals
- Goods for disabled individuals
- Veterinary Equipment
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