What is Charity Tax?
All tax rules apply to charities, with some additional rules. The good news is that charities are exempt from tax on most surpluses.
Receipt of grants, donations and legacies
Charity income that does not relate to trading or investments is largely exempt from tax.
Primary purpose trading
One of the key concepts in charity tax is primary purpose trading. This is when your charity engages in trading activities that directly support its main objectives. For example, if your charity runs a school and charges tuition fees, that’s considered primary purpose trading because it aligns with your educational mission.
Tax exemptions for primary purpose trading
The profits your charity makes from primary purpose trading are usually exempt from tax. Here are some examples:
- An independent school charging student’s tuition fees for their education
- A care home charging residents for accommodation and care
- A college selling textbooks to students
- A museum running a café for visitors.
Small trading tax exemption
If your charity engages in trading activities that aren’t directly related to its primary purpose, you might still be eligible for a tax exemption. This is known as the small trading tax exemption. If your non-primary purpose trading income falls below a certain threshold, you won’t have to pay tax on those profits.
Workers who benefit
Another important rule is that if your charity’s trading activities are carried out mainly by the beneficiaries of the charity, the profits may be exempt from tax. For example, if a café run by a charity employs people with disabilities, and the profits are used to support the charity’s mission, those profits might be tax-exempt.
VAT and charities
While charities aren’t exempt from paying VAT, they are eligible for some VAT reliefs. If your charity’s trading income exceeds the VAT registration threshold, you’ll need to register for VAT. However, certain costs, like advertising, can be zero-rated for VAT when supplied to charities.
Setting up a subsidiary trading company
If your charity’s trading activities are substantial and not related to its primary purpose, you might consider setting up a subsidiary trading company. This can help manage the tax implications and ensure that your charity remains compliant with tax regulations.
Navigating charity tax rules can be complex, but understanding the basics of primary purpose trading and the available exemptions can make a big difference. Always consult with tax professionals, such as ourselves, to ensure your charity is making the most of the available tax reliefs and staying compliant with the law.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
