Charities have to deal with tax in a range of ways: claiming Gift Aid, handling VAT, paying tax on commercial income and managing PAYE and expenses. Taking care of all your obligations can be a highly complex business and often needs professional advice and assistance. To help, we have provided some useful tips that look at the main areas of taxation that charities need to deal with.
Managing Gift Aid
Gift Aid, whereby tax can be reclaimed on donations, is a vital source of funding for charities and can increase income by a very generous 25%. However, claiming Gift Aid can be quite complex. There are some forms of donation that do not qualify for Gift Aid, such as those from limited companies or made through Payroll Giving, and there are special rules for other forms of donation, like sponsored challenges, church collections or charity auctions. It is important, therefore, to seek advice about Gift Aid before you start to ask for it.
There are other important things to consider, too. You need to make sure that your Gift Aid forms comply with HMRC guidance and that every donor who is listed has completed a declaration. The declarations need to be kept safe, too, as you may be required to pay back any Gift Aid if they cannot be found.
Charities can now claim Gift Aid on some donations without the need for a declaration. The Gift Aid Small Donations Scheme (GASDS) is for cash or contactless card donations up to a maximum of £20. Again, there are special rules which apply and there is a maximum claim of £2,000 in a tax year.
VAT can be complicated for most organisations, but even more so for charities. Depending upon the nature and size of your income, you may not be able to register for VAT which means you will not be able to claim back the VAT you pay. If you are registered, there are complexities around which activities you can and cannot charge VAT for. This status of being partially exempt can make handling VAT a challenge.
You will need to ensure that your different sources of income are applying the correct VAT treatment as some are subject to VAT whilst others are not. For example, if someone donates a piece of furniture, you do not need to charge VAT if you sell it on as a second-hand item. However, if you upcycle it by turning it into something else, then it is liable for VAT.
There are other conditions regarding VAT that you should also seek advice about as you don’t want to make errors that can turn out to be costly.
Guidance on trading
Charities are allowed to trade in order to pursue their charitable aims, however, there are some restrictions when this is done to generate funds. Most importantly, they cannot engage in commercial trading that puts their assets at ‘significant risk’. When there is a significant risk, a charity must create a trading subsidiary through which to undertake their commercial operations. This way, if the trading subsidiary fails as a commercial venture, the assets of the charity are secure, provided it does not owe any money to the subsidiary or has given guarantees for any borrowing.
Setting up a subsidiary trading arm can have tax benefits. It can, for example, make Gift Aid donations to the parent charity and in doing so, lower or even negate any of its own profits which would be liable for tax. At the same time, accounting becomes easier when the trading and main charity’s finances are kept distinct of each other.
Administering payroll and expenses
Managing payroll can be both complex and time-consuming and often the easiest solution is to outsource it to an accountancy company with charity experience. However, even if you do, there are still a number of things you need to consider.
Firstly, you need to ensure that any payments given to employees which have not been processed through payroll are not liable for tax. In addition, if you have personnel who are hired as self-employed contractors but actually work for you more or less full-time, their employment status, as far as HMRC is concerned, may be that of an employee. If this is the case, you will be required to collect tax and National Insurance contributions. It is always best to check with HMRC about the status of your self-employed workers.
With regards to paying expenses, there are differences in how these are handled for employees and volunteers. Some employee expenses are liable for tax whereas volunteers are entitled to tax-free reimbursements of their out of pocket expenses, including the costs for travel between their home and the charity as well as for postage and telephone calls.
As you can see from this article, dealing with tax is anything but straightforward for charities. In every area, there are various special rules and exemptions which need to be taken into account and if these are not handled correctly, they can cause problems with HMRC and impact upon your finances.
Hopefully, the information provided here will give you a better understanding of how to manage your tax responsibilities, however, if you need more advice from a company that understands the legal and accounting framework for charities, get in touch or visit our charity services page.