Navigating Charity Tax Regulations: Essential Compliance Guide

Just like with running a business, charities also have to remain compliant with tax regulations. As non-profit organisations, dedicated to benefitting the public, charities are required to adhere to tax regulations just like everyone else but whilst also navigating the complexities of having a charitable status. Understanding tax obligations is key for managing their finances, and accurate reporting is crucial to ensure the public maintains trust in the charity.

The Importance of Tax Compliance

Tax compliance isn’t just something that charities have to legally abide by, it allows for transparency so that donors and stakeholders can see exactly where funds are being spent. Non-compliance can not only cause reputational damage but can lead to financial penalties and also hinder the charity from receiving financial support in the future.

Taxable Activities For Charities

While charities can take advantage of certain tax relief, they are required to declare particular income or activities that are subject to taxation, including:

1. Investment income – this can include interest from bank accounts and dividends from shares.
2. Trading income – income generated from trading activities such as running a charity shop. This may be subject to Corporation Tax.
3. Rental income – income from renting out properties or spaces owned by the charity may be subject to both Income Tax or Corporation Tax.

Charities should carefully consider their sources of income and determine whether any of the activities are taxable. It is also worth noting that tax laws can be subject to change, so charities should always seek professional advice from a qualified accountant to ensure they remain compliant.

Tax Returns

Just like with any business, charities are required to submit annual tax returns to HMRC, here are a few examples of common tax returns for charities:

• Charity Annual Return (CT600): this is used to report income, expenses, and financial position.
• Short Annual Return (SA800): this is a simplified version of the CT600, and is used by smaller charities with less complex finances.
• Gift Aid Return (SA100): this form is used to claim Gift Aid, a tax relief on donations made to charities by individuals.

Charities with an annual income of more than £10,000 (and all charitable incorporated organisations regardless of income) must submit annual returns. Registered charities with less than £10,000 income need to submit annual update forms.

There are several tax reliefs that charities are entitled to, which can help to improve their financial status:

1. Gift Aid – this allows charities to reclaim from HMRC a portion of the tax paid on donations made by individuals.
2. Business Relief Rates – charities may be eligible to receive reduced business rates on properties they rent.
3. Exemption From Inheritance Tax – charities are exempt from Inheritance tax on gifts made as part of a will or trust, and donations.

When it comes to VAT for charities, this can become quite complex. In general, charities don’t have to pay VAT on their purchases but may need to register for VAT if their turnover exceeds the threshold (£85,000). They may also have to account for VAT on sales of goods or services if they run a charity shop, for example. Again it is best to seek financial advice on this matter.

Financial Reporting

Maintaining accurate and comprehensive records is essential for complying with tax regulations if you run a charity. The records should include all details of income, expenses, assets, liabilities, and transactions. By having electronic records, charities are able to keep their finances up-to-date and it also means they are easily accessible when the time comes to prepare the tax return.

Charities may be subject to audits by HMRC to verify whether they are tax-compliant. Just like with businesses, a review of financial records and documentation will take place to ensure the charity has accurately reported its income and expenses.

Submitting Charity Accounts

Here are some things to bear in mind when submitting charity accounts:

1. Prepare financial statements

This is the hardest part of navigating a charity tax return. Charities need to compile all their financial statements including a balance sheet, a statement of financial activities, and any explanatory notes to go alongside these.

2. Audit

Depending on the charity’s earnings and the applicable regulations, the charity may need to undergo an audit or independent examination. This ensures that all financial information is precise and complete.

3. Draft an annual report

An annual report is also required alongside the charity’s financial statements. This demonstrates a full overview of the charity’s undertakings, accomplishments, and plans for the future. It should be drafted in a way that is understood by donors, beneficiaries, and the general public.

4. Online submission

Both the financial statements and the annual report must be submitted online, which is usually just through an online portal where the documents can be uploaded.

5. Record keeping

As with any tax return, this must be completed by the required deadline and within 10 months of the financial year-end. Late submissions will not only cause the charity to be financially penalised, but can also damage the charity’s reputation as it looks like there is something to hide.

Tax compliance is a key aspect of managing a charity in the UK, so having a full understanding is important to ensure charities remain legally sound and maintain the trust of the public. Charities can easily maintain their charitable status by implementing effective tax-compliant strategies, and seeking professional guidance when required. For more information on how the team at Wright Vigar can help with this, get in touch today.