Deciding to set up as a charity usually starts off with a decision made without a lot of thought. It simply something that you thought and assumed you wanted or had to do. Whilst there are various advantages in being a charity, both with regard to tax and otherwise, it’s not for everyone and nor is it necessarily suitable.
The main advantages of charitable status are as follows:
From a tax point of view
- The availability of a variety of valuable tax advantages and reliefs
Examples of the advantages available are set out below, but it is important to note that in order to take advantage of these an organisation must fall within the definition of charity for the purpose of tax legislation. So, for tax purposes, a UK body of persons or a trust will be a charity if:
(a) It is established for charitable purposes only
(b) It is subject to the control of a relevant court in the UK
(c) Being an organisation in England and Wales, it has complied with any requirement to be registered in the register of charities maintained by the Charity Commission. (Note here that merely being registered for the Charity Commission, doesn’t make an organisation a charity for tax purposes automatically. You must apply to HMRC for recognition. Also, for example if you want to take advantage of the gift aid provisions separate registration with HMRC is required)
(d) Being an organisation outside England and Wales, it has complied with any requirement set out in the law of the relevant territory requiring charities to be registered in that territory.
(e) Its managers are “fit and proper persons” to be managers of the body or trust
The tax advantages include the following:
(a) So long as that the profits or capital gains are used wholly for the charity’s purposes,
an association or charitable organisation is entitled to exemption from corporation tax on profits and capital gains, and a trust is entitled to exemption from income tax and capital gains tax
(b) Exemption from the payment of Stamp Duty Land Tax (SDLT) on land transactions
(c) For properties occupied by a charity there is mandatory 80% relief on business rates, so long as the property is used wholly or mainly for charitable purposes (plus a possible further discretionary relief of up to 20%). This can have a significant impact on a charity’s operating costs.
(d) A right to reclaim tax on donations made under the gift aid scheme
(e) VAT – a common misconception is that charities are exempt from VAT. They’re not!
- charities may be eligible for zero rate VAT instead of the standard rate of 20% on the purchase of certain goods and services (e.g. advertising, fundraising and building works)
- Charities are entitled to charge zero rate VAT on certain goods and services
- The sale of donated goods by a charity is zero rated for VAT
this area of law in particular is very complicated and it may even be appropriate for a new charity setting up to carry on the trade in shops for example or build a new building through a “normal” company limited by shares instead of through the main charity. Always seek professional advice!
- The availability of various tax incentives to encourage individuals and businesses that pay tax in the UK to make gifts to charities
For example, donors do not generally pay inheritance tax on legacies to a charity or capital gains tax on assets donated to a charity. This is in addition to the gift aid scheme that you may have come across but as mentioned above remember that that needs to be separately registered with the tax authorities.
In addition to the tax benefits there are also other advantages:
- Access to Funding
Charitable status may facilitate access to funding. Many funders are only allowed to fund charities (or may chose only to do so). Charities can often raise funds from the public, grant-making trusts and local government more easily than non-charities.
- Positive Image
It may be easier to raise funds from the public at large for a charity due to the positive image of integrity and credibility charitable status presents
- Availability of Official Guidance
Also, help and guidance is available to charities from the Charity Commission and this may provide the public with reassurance.
It is however, important to bear in mind if you are wishing to set up a charity that the benefits of charitable status are only available in exchange for the not inconsiderable restrictions imposed on how a charity may operate. You should remember, in particular, that all of the assets of the charity must be applied in furtherance of its charitable purposes and that any profit must be applied for its charitable purposes. Furthermore, the charity’s trustees may only receive financial benefits in limited circumstances.
It is important therefore to make sure that the nature of the organisation and proposed business are suited to this form. If you run an organisation which is considering formally becoming a charity, please let us know and we will steer you through the options that are available.
For more information please contact Sue Boyall and Robert Sprake at Excello Law
Sue Boyall firstname.lastname@example.org
Robert Sprake email@example.com