TAX AND CHARITIES / 
VOLUNTARY ORGANISATIONS

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The main types of tax affecting small voluntary organisations and charities are:

PAYE, Corporation Tax and VAT. Tax reclaims may also be made under the Gift Aid scheme.

If your organisation has paid staff you may need to deduct income tax and national insurance contributions from their salaries. This is paid together with the employers national insurance contribution to the Inland Revenue through the Pay As You Earn system. When you register as an employer the Inland Revenue send you a pack explaining all about the rates of tax and how it is administered. You can register with the Inland Revenue on the New Employers Helpline 0845 607 0143.

This is paid by voluntary organisations who are not registered charities. Usually the tax charge is based on income such as bank interest. It is not charged on grants.

If the organisation is carrying on a trade, eg selling to the general public then it will be taxed on its profits, unless the trade element is very small in relation to the rest of the income of the organisation.

Charities can apply to the Inland Revenue for a special exemption to tax on income and gains*, so long as they use surpluses for charitable activities.

*Capital gains arise when you sell things like investments and buildings for a profit.

It is up to the organisation to tell the tax office that it exists. You can find your local tax office number in the phone book under Inland Revenue. Your accountant should be able to register for you.

Value Added Tax is administered by Customs and Excise. An organisation is not required to register for VAT until its taxable supplies (business income) reaches £55,000* in a twelve month period, but it may register voluntarily.

Grants and donations do not form part of "business income".

VAT is charged at rates from 0% to 17.5% depending on what is being sold, e.g. sale of donated goods at 0%.

Even if your organisation is registered for VAT it may not be able to recover all the VAT incurred. VAT can usually only be reclaimed where it relates to the activities on which you charge VAT, eg. if you sold consultancy services you could claim back the VAT on things you have had to buy to provide that service.

VAT cannot generally be recovered on non-business activities, such as grant funded activities.

There are some special VAT reliefs for goods bought for people with disabilities.

If you are thinking about a voluntary registration you need to consider whether you will be able to claim back sufficient VAT to justify:

charging VAT to clients who may not be able to reclaim it eg. VAT on a training course you deliver and,

increased administration and accounting costs

penalties and surcharges if you get it wrong

Custom and Excise has a useful leaflet No 701/1/95 which gives details of VAT issues specifically relating to Charities

If your income excluding grants and donations is approaching the registration limit, currently £53,000, seek specialist advice. If you choose to contact Customs and Excise yourself, keep a copy of all correspondence.

A charity can reclaim tax on gifts by individuals making a declaration under the Gift Aid Scheme. The charity must keep records to be able to identify the donor ie. name & address, description of donation and declaration that it is made under Gift Aid and that donor is paying an equivalent amount of tax to that recoverable on the donation Tax reclaim forms are available from the Inland Revenue on 0151-472-6293.

Company donations under the Gift Aid scheme are now made gross so there is no need to reclaim the tax.

* Watch out for changes in future budgets

Community Accountancy Service