Most charities will have to complete corporation tax returns if notified to do so by HMRC or where they have non charitable trading profits that are liable to corporation tax.
Charities where all income and expenditure have been incurred for charitable purposes will not be liable to corporation tax but may still need to file a corporation tax return if it is required to do so by HMRC. It is possible for charities where all income and expenditure have been incurred for charitable purposes to apply to HMRC to file a corporation tax return every 3 – 5 years rather than annually.
Where a charity receives trading income that is not a primary purpose trade of the charity (a charity’s primary purpose is stated by its governing documents) this could be liable to corporation tax and annual corporation tax returns will be required.
A charity’s primary purpose is stated by its governing documents.
Where trading income is not liable to corporation tax
Small trading exemption limit
This exemption can be claimed where the charity’s trading profits are below set limits. These are:
N.B A charity’s gross annual income is the total turnover before deducting tax and expenses.
If the charity’s small trading turnover is higher than the exemption limits then it will have to pay tax on all of its profits from that trade.
Using a trading subsidiary
A charity can set up a single or multiple subsidiary companies that conduct the taxable trade on its behalf. This could be beneficial for a number of reasons:
- The charity makes profits on trading that is not linked to its primary purpose;
- The charity makes a profit that comes close to or is higher than the small trading tax exemption limit;
- The charity wants to protect its assets from any trading losses;
- The charity wants to have a separate organisation to carry out all its trading activities
Where a trading subsidiary donates its taxable profits to its parent charity within 9 months of the year end, it will not have to corporation tax on its taxable profits. The taxable profits must actually be transferred to the parent charity’s bank account, an accounting adjustment is not sufficient.
What should I do next?
If you would like to discuss your charitable organisation’s tax position please contact Jess Gray, our Business Tax Advisor.
Critchleys Clients: If you have specific questions, do not hesitate to get in touch with your Critchleys contact directly.