Charities still have to pay their taxes

Paying tax is often a shock to smaller charities – after all, their profits all go back into funding the good work they do! Nonetheless, charities are taxed on trading income the same as any other organisation unless planning arrangements are put in place.

Of course, deciding what income comes from trading is a complex area, since for most charities, the trade relates at least in part to the aims of the charity. Activities which risk creating taxable profits include operating a cafe attached to a visitors’ attraction, having a gift shop or hiring out a hall for private use.

HMRC allow a de minimis limit, below which charities are not subject to corporation tax. At present, these limits are:

• £8,000 for charities with gross income below £32,000
• 25% of gross income for charities with income between £32,001 and £320,000
• £80,000 for all bigger charities

Where trading income is expected to exceed these limits, charities are advised to consider establishing a trading subsidiary, which is usually a limited company owned by the charity. The profits made by the company are, of course, subject to corporation tax like any other company, but with planning, the tax liability can be reduced or eliminated through donations to its owner.

There are other advantages to operating non-charitable activities through a trading subsidiary, including protecting the charity’s assets if the trading activity starts to make losses and gives greater flexibility for arranging new ventures and sponsorship.

Our EQ Charities team are experienced in identifying if this is the right solution for your charity and offer a full range of advice on managing your charity’s finances.

If you would like advice on any issues affecting your charity, please contact a member of our EQ Charities team via charities@eqaccountants.co.uk or contact one of our offices.