Do charities pay tax?

It is widely thought that one of the benefits enjoyed by charities is that they don’t have to pay tax.  This is not quite correct.  Whilst it is true that charities generally have to pay less tax than businesses or individuals, they are not completely exempt from taxation.  There are, however, ways in which a charity can minimise its liability to tax and, in doing so, maximise the funds available for good causes.

Broadly speaking, it is correct to say that charities should not have to pay tax on investment income or on amounts donated by members of the public.  Quite the reverse: many charities can claim payments from HMRC in respect of donations made under the Gift Aid scheme

If we look at other potential sources of income for a charity, such as trading income, things become less clear-cut.  If a charity wishes to make sure that it does not have to pay tax on income from trading activities, care must be taken to ensure that the activities are planned and organised in such a way as to avoid the inadvertent creation of a tax liability.

Going beyond income tax (or, for an incorporated charity, corporation tax), a charity with employees must account for PAYE (including Employer’s National Insurance) in exactly the same way as any other employer.

The most troublesome tax for charities is often VAT.  There is no general exemption from VAT for charities.  For the most part, charities have to pay VAT on goods or services they buy in the same way that you or I do.  There are a few specific exemptions which apply in certain circumstances, but these are very limited and it is impossible to generalise.

Conversely, if a charity makes supplies of goods or services which fall within the scope of VAT, and if the value of those supplies exceeds the applicable threshold, the charity will have to register for VAT and will be liable to account for VAT on those supplies.  Whilst it is unusual for a charity to make supplies which fall within the scope of VAT, this sometimes does happen.

The conclusion to be drawn from this is that a charity’s trustees and advisers cannot afford to be complacent.   Whilst it is true that a lot of charities don’t pay any tax, some do become liable to tax and it is entirely possible for this to happen without the trustees noticing that it has happened.  On the other hand, if the trustees and their advisers are alert there are occasionally unexpected savings to be made.

If you would like to discuss a taxation issue in connection with a charity, please do not hesitate to call us on 0131 317 7377 to speak to a member of our team.