Charity tax: an introduction

Tax for small charities and community groups can be complex. There is a lot to be acquainted with and there are a number of widely held myths. It’s important that your trustees understand their legal responsibilities and that staff undertake duties that fulfil all the organisation’s obligations. The treasurer has a key role.

For updates concerning tax for small charities and community groups, follow/like us on Twitter and Facebook and/or subscribe to CASH eNEWS.

Income tax & national insurance (NI)

There is a myth that charities are not as tightly regulated as commercial companies and Her Majesty’s Revenue & Customs (HMRC) will take a more lax attitude to the payment of tax.

The regulations surrounding charities employing staff are just as stringent as for comparable sized commercial enterprises. There are strict penalties for the non-payment of tax and national insurance (NI).

You are required to submit information to HMRC monthly online and to make payments monthly.  There are also annual tasks. You can be charged interest on late payments and fined for not keeping proper records.  There is a long list of tasks associated with payroll and tax.

Read our factsheet, CASHFACTS Payroll: CASH’s advice & guidance.

CASH advises groups to use a payroll service. CASH runs a payroll service in London. Phone 020 8969 0747 email deborah@cash-online.org.uk

CASH charges £5 per payslip. See our price list.

The self-employed

Employers have to be careful that someone is genuinely self-employed otherwise they will be responsible for the person’s income tax and national insurance.

A supplementary school or nursery may employ a tutor to come in three times a week to run a music class. They already have an art tutor who is self-employed so the music person will be too, right? Not necessarily. There are a number of factors that determine someone’s employment status.  You should check.

HMRC has a summary of how to identify someone as self-employed and what the tax and employment rights are: there is also an online tool

You can also phone for guidance if you are still uncertain.

Volunteers

Small charities and community groups should only pay strictly out of pocket expenses, the most common being for a meal and travel. All payments should be signed for by the person receiving the money and the person making the payment.  A voucher for signing is illustrated below.  The receipts should be stapled to the voucher.

Volunteer expenses form

If this strict policy is not adhered to your organisation may be liable for the tax.

You may be liable if other expenses are paid, these can include some childcare or giving a volunteer a computer for home use which isn’t used solely for the organisation’s business. The latter would likely apply if you were buying them a new, top-of-the-range computer, not if you were giving them an old machine that has been collecting dust in the office for three years. There’s guidance on HMRC’s website for the person doing the payroll/working out expenses.

When paying expenses you have to be wary of not creating a contract of employment which would give someone an entitlement to the minimum wage and various rights.

On the HMRC’s website, there are a number of examples intended for volunteers to identify where there may be a problem.

Keep things in perspective, however, note that some charities have been taken to industrial tribunals. Your local Volunteer Centre or Council for Voluntary Service (CVS)/Infrastructure organisation will be able to help further.

Tax on any volunteers expenses due can be paid through monthly payrolling or annually. See CASHFACTS Payroll: CASH’s advice & guidance.

There is a complete list of what may be taxable on gov.uk.

All this adds up to another good reason to use a payroll service.

CASH operates a payroll service, see our Accountancy Services. It costs £5 per payslip: CASH Payroll service price list. Phone us for more information (020 8969 0747) or email deborah@cash-online.org.uk

Reporting to Companies House

Charities that are companies are required to submit an annual return online to Companies House, now called a confirmation statement. Charities that are companies have to file annual accounts online with Companies House.

It is best to complete these tasks as soon as your annual accounts have been signed off. There are penalties for late submission.

Corporation tax and registering with HMRC

Charities don’t have to pay tax on most types of income if it’s used for “charitable purposes,” this includes donations and profits from trading.

HMRC has a guide to when charities may or may not qualify for tax relief. In order to gain relief, you need to get recognition from HMRC through an online application.

If your charity has income that doesn’t qualify for tax relief you must complete a corporation tax return online. This applies to charitable companies, unincorporated charities and charitable incorporated organisations. It’s best to do this as soon as your annual accounts are signed off. There is some further guidance produced by the Charity Commission.

If your charity has been granted an exemption from completing corporation tax returns and has not become liable to pay tax during you don’t fill out a corporation tax return unless your charity is selected by HMRC as part of a sampling or checking exercise.  Charities that are trusts established by a will or trust deed will be asked to fill out a self-assessment for trusts.

Note you need to get recognition from HMRC to get tax back tax relief on Gift-aid donations or tax paid on bank interest.

As part of our Accountancy Services CASH can help you complete your group’s corporation tax return. Fee around £100.

Rates

Charities pay business rates on non-domestic buildings, but they get up 80% mandatory relief and can be granted a further 20% as discretionary relief by a local authority. Non-profit organisations that are not charities may also get discretionary relief.

Charities & VAT

There is a guide on gov.uk on VAT for charities.

Charities pay VAT at a reduced rate (5%) or the ‘zero rate’ on some goods and services. Zero rate goods include:

To get VAT relief you must:

You don’t need to be registered for VAT to reclaim VAT.

You must register for VAT if your charity’s VAT taxable turnover (the total value of everything you sell that isn’t exempt from VAT) is more than £85,000.

In practice, few local small charities and community groups will be required to register for VAT. VAT isn’t something that CASH deals with directly, but as part of our Accountancy Services, we may be able to help you find a suitable accountant.

———-

CASHFACTS Charity tax: an introduction is reviewed at the start of every financial year. It may be amended throughout the year. If you want to be informed of major updates subscribe to CASH eNEWS or follow/like us on Twitter and Facebook.

———-

Support our work

Make a donation

If you found this factsheet helpful please make a donation. Click the PayPal button and pay with your debit/credit card or by joining PayPal. You won’t be charged a transaction fee.

£2.50