Follow the trail
- Income Tax/Payroll is on the Pay and Expenses page.
- Helpful Finance Resources (web sites, books, organisations) on charity and community finance in particular.
- Tax Reclaiming by Charities explains the admin issues around handling the 'new' Gift Aid rules. Also lists service/software providers, and has details of the relevant Budget 2000 changes.
- Finance publications include titles covering this area, written specifically for the voluntary sector.
Many voluntary organisations assume that they are not subject to tax. Unfortunately, there is a whole bunch of stuff out there which can catch you out. With the various agencies concerned generally having targets to increase their revenue, working on the basis of 'surely they aren't going to be nasty to a good cause like us' is dodgy. Don't panic if you are just setting out - the advice lines, leaflets etc. are much more user-friendly than they used to be (although patience is often necessary). Clarifying potential pitfalls at the start will ensure you don't end up liable, personally or as an organisation.
Material below, especially on Corporation Tax, needs some updating of details.
Expenses (and Income Tax)
See Pay and Expenses page for how to handle staff issues on this.
Volunteer Expenses can be a trap for the unwary. Even some 'professionals' in this area get it wrong, and could be laying your organisation open to a tax liability, which might include Inland Revenue inspectors imposing penalties. The Inspectors themselves, who come from local offices, will often not be clear about the rules here, and should be persuaded to check them out before proceeding with an audit!
The basic point to note is that as soon as you pay volunteers more than actual costs you are entering taxable territory, and you may end up paying tax on travel costs too (employees would be taxed on any payment for travel to their regular place of work). Volunteers should produce receipts for expenses, even for such things as lunch if possible (perhaps photocopy their travel card, but get at least one original on file after it has been used). See Volunteers and Law for more on travel and volunteer drivers.
Flat rate reimbursement has led to at least one organisation being caught by National Minimum Wage legislation, such that volunteers turn into employees who have to be paid the minimum. As we type (May 02), there is still some lack of clarity around residential volunteers. Those placed via an agency appear to be most clearly OK to have accomodation costs paid, plus 'pocket money', though the latter should only be a 'minor consideration' and more appropriate when based some way from home, to allow for limited 'social interaction'. See the Minimum Wage pages on Gov.uk.
Trustees/Management Committee members will often be classed as Directors (particularly if it registered as a limited company) and some Inspectors will then expect annual returns. As long as they arent paid more than actual expenses, these should not be necessary. Note that you are likely to be obliged to declare the total of committee expenses in the audited accounts (especially for registered charities), and perhaps give more detail if there are any relationships or exceptional items.
It is generally accepted that charities don't pay Corporation Tax, but you may need to exchange some correspondence with the tax office on this. Those using trading companies need professional advice, or to read up the literature, to get things right. Non-profits not registered as charities ought to be able to persuade the Inland Revenue just to impose it on bank interest/investment income, as long as trading (for profit) isn't a significant activity.
The need for trading subsidiaries for smaller charities will be reduced
by the Budget 2000 measures. Up to £50,000 of 'trading' activity
by the charity will be permitted, with a new tax relief to exempt all
profits of small trading and other fundraising activities. The relief
will apply where the charity has a reasonable expectation that the turnover
will be either
- no greater than £5,000, or
- if greater than £5,000 but no more than £50,000, less than 25% of the total gross income of the charity. For example, if non-charitable trading turnover is £45,000, to qualify for tax relief, the total gross income of the charity must be greater than £180,000.
Also from April 2000, charity subsidiary companies will obtain tax relief on Gift Aid donations they make to their parent charity, up to nine months from the date of payment. This means that the company will simply have to make a payment to the charity equal to its taxable profits, within 9 months of the end of its accounting period, and current Deeds of Covenant will disappear.
This is a complex area. There has been some simplification as a result of the Charity Taxation Review, but it is still not straightforward. Those mainly relying on grants and donations will not have to worry, as this is seen as 'non-business' (there is no exchange of money in return for specified goods/services). See HMRC site for current level of business turnover where VAT registration becomes compulsory (was £52,000 April 2000) - as well as charging VAT on 'sales', you will then also be able to reclaim VAT to some extent. It is not always straightforward to identify Business Turnover, as for instance a membership subscription may include a donation element, which doesnt count for this test.
VAT issues to check out include:
- membership subscriptions - how much of these are for something in return (eg magazine, events)?
- sponsorship is trading (i.e. a business activity), except in a few limited cases.
- areas like training, publications, room hire and medical supplies have very specific rules.
- are grants really not in exchange for any consideration? Normally a report on the project will be treated as insignificant, but it can get nasty where it starts looking like a contract to provide services.
Zero-rated VAT now covers (from April 2000) to all charity advertising, including recruitment, and advertisement preparation costs, and the sale or hire of donated goods. Guidance leaflet is 701/58 (Mar 02)
The Taxation Review (1999) tackled the problem of different rules on
"one-off" charity fundraising events for VAT and Income/Corporation
tax relief purposes. The exemptions are now extended and aligned, so that
any event qualifies for exemption from VAT or income tax provided:
- the public are aware that the purpose of the event is to raise funds for charity, and
- the charity holds no more than four events of a similar type (each of which can last for up to 4 days) in the same location in any year.
A leaflet Exemption for Charities and Other Qualifying Bodies (CWL4) sets out the conditions for direct tax and VAT exemptions that apply to fund-raising events.
Reclaiming VAT on listed places of worship: an interim grant scheme has been introduced which returns in grant aid the difference between 5% and the actual amount spent on VAT on eligible repairs & maintenance to listed places of worship. This is intended to bridge the gap up to an European Union review in 2003 which will consider such a reduced rate of VAT.
Registration for VAT can end up creating a lot of extra accounting costs, with little net benefit (if any) in claiming back VAT on expenses. 'Partial exemption' is the name of the bureaucratic nightmare that can result - you have to apportion income and/or expenditure between different activities by their VAT status and only claim in the proportions agreed with HMRC. It is not for nothing that auditors' specialist Charity Units have close links with their VAT experts, but some might cynically suggest that this is only so they can justify their fee, with little benefit for you. A 'VAT audit' may be useful, but be clear of what the motivation of those doing it is!
There is quite a lot of information on VAT registration and collection online at the HM Revenue and Customs site. However the charities section of the newly combined site (spring 05) seems to be lacking specific VAT pages. So check the publications list, although you will probably have to browse through to find all the relevant ones. Most can be downloaded, and then printed off if relevant, which is quicker than ordering via local advice centres. The May 04 update of leaflet 701-1, Charities , is key and much improved.
HMRC VAT notices are also available through Croner Publications Ltd. on their VAT Encyclopaedia CD-ROM - can be got on 30 day free approval. Contact Croner's Customer Services - see Publishers page.
Charity Finance Directors' Group (see Sector support bodies) has VAT advice available via its VAT Club. Liaison VAT Consultancy also provides a tailored service for charities. See Accountancy Services page for their details, plus accountancy firms with charity specialists (see note above).