What every charity should know about corporation tax

GR writes: I have acted as a trustee of a modest charity, which is registered with the Charity Commission and provides support to the underprivileged. The Inland Revenue has asked us to complete a corporation-tax return and to provide a copy of the charity´s accounts. Does this mean that charities now have to pay corporation tax, which they can ill afford?

Answer

There is a popular misconception that charities are exempt from corporation tax. They are not and never have been. There are significant exemptions for certain categories of a charity´s income, which mean many charities do not pay corporation tax, but it is crucial that these are carefully applied. Legislative changes mean that a charity can engage in trading activities up to a total income of £50,000 (or 25% of the charity´s total income if lower). Tax on anything above this limit, including certain fundraising activities, can be avoided by routing trading activities through a subsidiary, which donates all its taxable profits to the charity through Gift Aid or deed of covenant. The trading company´s expenses, which are not allowable for corporation-tax purposes, can mean that the donation has to exceed trading profits to avoid tax. This can lead to the insolvency of the trading company. It is also important to understand the restrictions that can be imposed on a charity´s income that can be exempt from corporation tax. These restrictions usually arise from "non-qualifying expenditure", which includes spending that cannot legitimately be attributed to the furtherance of the primary charitable objectives as defined in the charity´s constitution. They also include investments (other than in acceptable quoted securities or involving the purchase of freehold or leasehold property) and loans (except those made to other charities), unless the Board of Inland Revenue has agreed the spending can be regarded as qualifying for tax exemption. In the past, the Inland Revenue has asked to see copies of charities´ accounts on an ad hoc basis and it is likely that much trading or non-qualifying spending has gone undetected. The Revenue is now putting this on a more formal basis by requiring the submission of a corporation-tax return and sight of the accounts. So far, it has issued returns to a sample of charities. You should ensure that your corporation-tax return is submitted within the time limits stated on the form to avoid any question of a late-filing penalty, although it is a moot point whether such penalties are valid if there is no corporation tax due. Provided your charity´s affairs are properly organised and monitored, and you avoid any of the complications outlined above, it is unlikely that there will be any corporation tax to pay. However, your professional advisers should review your tax affairs to ensure that you do not fall foul of any of the potential corporation-tax pitfalls and, of course, to look at your Vat arrangements - yet another area that can be complex for a charity.