Corporation Tax Exemptions for Charities

Charities benefit from significant Corporation Tax exemptions on most of their income, provided they use the money for charitable purposes and are recognised by HMRC. However, there are specific situations where charities must pay Corporation Tax, particularly on certain types of trading income and non-charitable expenditure.

Who qualifies for Corporation Tax exemption

To benefit from Corporation Tax exemptions, your charity must:

• Be based in the UK
• Be established for charitable purposes only
• Be registered with the Charity Commission or another regulator (where applicable)
• Be run by 'fit and proper persons'
• Be recognised by HMRC

You need to register your charity's details with HMRC using their online service to gain recognition and access tax reliefs.

Income that's exempt from Corporation Tax

Charities do not pay Corporation Tax on most types of income, as long as the money is used for charitable purposes. This includes:

• Donations
• Profits from trading (subject to conditions explained below)
• Rental or investment income, such as bank interest
• Profits when you sell or dispose of assets like property or shares
• Gains from property purchases

This exemption is known as being used for 'charitable expenditure'.

Primary purpose trading

Your charity will not pay Corporation Tax on profits from trading activities that are:

• Part of your charity's primary purpose (as stated in your governing document) — for example, an independent school charging tuition fees or a care home charging residents for accommodation
• Activities that help your charity's primary purpose — such as a college selling textbooks to students or a museum running a café for visitors

Trading carried out by beneficiaries

Your charity may also avoid Corporation Tax on trading profits when the trading activity is carried out mainly by beneficiaries of the charity, and profits are used for your charitable purposes. Examples include:

• Students helping to run a farm at an agricultural college
• Disabled staff working in a café run by a charity that supports people with disabilities

Not all workers need to be beneficiaries — you may need some supervisors or managers — but beneficiaries must do most of the work for all profits to remain tax-exempt.

Note: You must operate PAYE on the earnings of beneficiaries and pay them the National Minimum Wage, unless they are volunteers.

Fundraising and lotteries

Your charity will not pay Corporation Tax on profits from lotteries or fundraising events (such as jumble sales or barn dances), provided that:

• All profits go towards your charity's primary purpose
• Your fundraising event qualifies for VAT exemption under the VAT rules for fundraising events
• Your lottery has an operating licence from the Gambling Commission

Small trading tax exemption

When your charity undertakes trading that does not relate to your primary purpose, you may still be exempt from Corporation Tax if the turnover falls below the small trading tax exemption limit.

The limits are based on your charity's gross annual income (total turnover before deducting tax and expenses):

| Charity's gross annual income | Maximum permitted small trading turnover |

|-------------------------------|------------------------------------------|

| Under £32,000 | £8,000 |

| £32,001 to £320,000 | 25% of your charity's total annual turnover |

| Over £320,000 | £80,000 |

If your charity's small trading turnover exceeds these limits, you must pay Corporation Tax on all profits from that trade.

Using a subsidiary trading company

Some charities set up a subsidiary trading company to carry out trading activities on their behalf. This can be useful if your charity:

• Makes profits on trading not linked to its primary purpose
• Makes profits close to or exceeding the small trading tax exemption limit
• Wants to protect its assets from trading losses
• Wants to separate trading activities into a different organisation

When a trading company donates its profits to its parent charity's main purpose, there is no Corporation Tax due on these payments. The donation must be made within 9 months of the end of the accounting period in which the profits were made.

Your charity will not pay tax on amounts received from a trading subsidiary, as long as the money is used for charitable purposes.

When charities must pay Corporation Tax

Your charity must pay Corporation Tax on:

• Dividends received from UK companies before 6 April 2016
• Profits from developing land or property
• Any money not used for charitable purposes (known as 'non-charitable expenditure')
• Trading profits that do not qualify for primary purpose trading exemption or the small trading tax exemption

Completing a tax return

You must complete a tax return if your charity has Corporation Tax to pay, or if HMRC asks you to complete one.

For charities that are limited companies or unincorporated associations: Complete a Company Tax Return, including the supplementary pages for charities. A charity is a limited company if it was set up by a constitution, memorandum and articles of association, royal charter, or Act of Parliament.

For charities that are trusts: Complete a Trust and Estate Self Assessment tax return. A charity is a trust if it was set up by a trust deed or will.

You must complete a tax return when HMRC asks you to, even if no tax is due. Penalties may apply if your tax return is late or you fail to complete one when required. Deadlines depend on whether you complete a Company Tax Return or a Self Assessment tax return.

Reclaiming tax

You can claim back tax that's been deducted from income such as:

• Donations (through Gift Aid)
• Bank interest

You can reclaim tax online using the Charities Online service, through compatible software, or by post using form ChR1.

For bank interest, you can arrange to receive interest without tax deducted by showing your bank your HMRC recognition letter. If tax has already been deducted, you can claim it back for the current tax year by asking your bank, or for previous tax years by claiming from HMRC.

Sources

• Charities and tax
• Charities and trading

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.