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Corporation Tax for Charities – Are you Claiming Charitable Exemptions Correctly?

Posted on: February 8th 2024 · read

It is easy to fall into the trap of thinking that because your organisation is a charity then all of its income is covered by charitable exemptions and non-taxable. 

Perhaps that’s always been the case, and maybe it was reviewed at some point in the past, but it is very easy for circumstances to change, new sources of income creep in, or the nature of income streams to alter over time, so if you haven’t looked at this for a while, it can be worth reviewing again.

A good starting point is a refresher on what actually is covered by corporation tax charitable exemptions.

Understanding what costs can be claimed as a charitable exemption

Firstly, all income received has to be applied for charitable purposes for it to be exempt, but on the basis that it is, normal property rental income is exempt, as is interest income and most chargeable gains when disposing of assets such as land & buildings, though developing and selling land & buildings for a profit would usually be taxable trading income.

Trading income is usually the most difficult area for charities when determining whether there is any taxable income. If there is just a small level of trading activity, this may be covered by the small trades exception. If total income for the charity is over £320,000 then trading income up to £80,000 is treated as exempt. Qualifying fundraising events are also exempt too, which follow the same rules as VAT so if it is exempt for VAT purposes it will be exempt from corporation tax.

Is the income primary purpose trading for the charity? 

For trading income which is above the small trades exception and isn’t qualifying fundraising, then you need to consider whether the income is primary purpose trading for the charity (or ancillary to primary purpose). 

This requires checking the charities objects, which can be found in a charity’s governing documents – its constitution or memorandum & articles of association. A school or university’s objects may say it is set up for the provision of education, a social housing provider might be to provide affordable housing for people on low incomes and so on. If income falls within the objects of the charity then it is likely to be exempt as primary purpose trading. 

Exactly what is included and what isn’t will vary from charity to charity, but here are some examples of non-primary purpose trading:

  • Sale of goods in a shop. Sometimes these will be directly related to the charities activities, such as reproductions of artworks in a gallery with no other function, but promotional mugs, tea towels etc. would be commercial and therefore taxable.
  • Letting of accommodation to people who aren’t beneficiaries – this could be university accommodation being provided to the general public outside term time, or the sale by a social housing provider of shared ownership properties to people not on low incomes.
  • Sale of food or drink in a café to members of the general public and not the charities beneficiaries.

There are many more examples and it is not always at all obvious what is primary purpose and what is not primary purpose and therefore taxable.

Sponsorship income

Sponsorship income is another area where charities need to be careful. If a business sponsors a charity then it is paying to be associated with the charity. On its own that may be exempt, but if a charity does anything for the business in return for the sponsorship, this could tip the income over into becoming taxable.

It is really important for a charity to regularly monitor its income streams to ensure that it is within the charitable exemptions and if it does have taxable income to get advice to calculate this and minimise any tax payable. 

Regular monitoring can also mean a charity can take steps to modify its activities to ensure it doesn’t pay any tax.

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Trading income is usually the most difficult area for charities when determining whether there is any taxable income. If there is just a small level of trading activity, this may be covered by the small trades exception

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