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Do UK Charities Pay Tax?

UK charities are exempt from taxes; however, not from all taxes and not always. When it comes to identifying your charity’s tax obligations, here is the main rule: income that gets spent to support your charity’s mission is tax-free whilst income or profit you decide not to use for charitable purposes gets taxed.

At first sight, this sounds simple. But there are a few more aspects you should be aware of to make sure you don’t wake up to an HM Revenue & Customs request to file for a tax return when you weren’t expecting one. Let’s dive deeper into charity tax obligations and talk about tax reliefs, corporation tax, VAT, and the Gift Aid tax relief.

How to Become Eligible for Tax-Exempt Status?

For a charity to benefit from tax relief, it first needs to get recognition for this purpose, and the first box to check is registering with the UK Charity Commission. All charities in the UK must follow the UK Charity Commission regulations to stay accountable for UK law.

Once your registration with the Commission is approved, file for HM Revenue and Customs (HMRC) recognition, and your charity can then begin claiming applicable tax reliefs.

Important: Only UK-based charities that have been established exclusively for charitable purposes can obtain a tax-exempt status.

Tax Relief for Charities

The Charity Commission report for the tax year 2023-2024 showed a 3% increase in tax relief for charities in the United Kingdom. Tax relief totalised over £6.0 billion, comprising tax reliefs for charities (£4.6 billion) and reliefs for donors (£1.57 billion). Moreover, charities received £1.6 billion in Gift Aid from the HMRC.

It is important for charities to distinguish between charitable expenditure and non-charitable expenditure.

Charitable expenditure occurs when a charity uses its income to fund charitable actions. Thus, the charity is exempt from paying taxes on donations, investment income, profits made by selling property or shares, or trading, as long as the money is spent to achieve its mission.

Non-charitable expenditure occurs when charities obtain income that is not destined for charity use. For example, if a charity runs a separate business unconnected to its mission, corporation tax applies.

Charity Tax Rules

Most not-for-profits have various sources of income which often fall under different tax regulations. To ensure that your charity stays compliant and can benefit from tax relief in the UK, you should identify all tax categories that apply to your operations.

Sometimes, this is not an easy job, especially with new tax law amendments introduced periodically, and that’s why many charities rely on their accountants to keep things organised.

However, if you are looking to understand how tax relief works for charities, here are the main taxes you should consider:

Do Charities Pay Capital Gains Tax?

It is not uncommon for a charity to sell some of its properties or investment shares and make a profit. In this case, a company would pay capital gains tax, but not-for-profits are exempt as long as they use the funds for charitable actions or general administrative purposes of the charity.

Yet, there are circumstances when organisations may find themselves in the position of having to pay capital gains tax. This happens if the property sold has lost its charitable status. For instance, if the organisation ceases to be a registered entity, tax reliefs available to charities no longer apply. The same goes if the property was previously employed for charitable purposes but is currently used for non-charitable activities.

Do Charities Pay Tax on Investment Income?

If your organisation holds shares and therefore receives dividends, this type of income is once again exempt from corporation tax or income tax if it is all invested into charity-related activities or goods.

However, charities should pay special attention when investing in foreign companies. The problem with foreign dividends is that some countries impose a withholding tax on foreign investors, which is applied before the income is sent to the investor. Therefore, even if your charity is exempt by the British tax law, it may still need to pay taxes on dividends when overseas companies are involved.

In some cases, charities can benefit from reduced rates of withholding taxes if Great Britain has a double taxation treaty with the country in cause.

Do Charities Pay VAT in the UK?

Depending on the transaction, charities in the United Kingdom may pay either the full VAT rate, a reduced 5% rate, or a zero rate.

Standard VAT applies when charities buy goods and services from VAT-registered businesses, which are not included on the 5% or zero rate list.

The 5% VAT rate applies only for fuel and power if used in one of the following circumstances:

• To power or heat a charitable residential accommodation such as a home for the elderly.
• For charitable activities such as providing free day-care for the disabled.
• If the consumption is under 1,000 kilowatt hours/ 2,300 litres of gas oil per month.

Charities pay zero rates for services such as construction, advertising for fundraising, drugs and chemicals, medicine, medical equipment etc. You can consult the full list here.

Moreover, for goods imported from outside the UK, charities don’t pay VAT if these goods cover basic utilities, can be sold at charity events, or represent equipment to help the organisation fulfil its charitable actions.

Do Charities Pay Property Taxes?

Charities are exempt from business rates on income generated from renting properties or other receipts from land or property as long as the funds are directed toward charitable purposes. However, in most cases, income generated from additional services such as catering is not exempt.

Not-for-profits can also benefit from the Stamp Duty Land Tax (SDLT) Relief when they purchase an interest in land. This relief remains active as long as the land or property is used for charitable purposes. If after 3 years, the organisation still owns the property, but it is used for purposes other than charitable, the HMRC can withdraw the relief.

For property owners who rent their property to charities, the business rates relief applies, which can grant up to 80% off their business rates bill.