Presented by
Robert W Maas, FCA, FIIT, FTII
of Blackstone Franks

Tax Exemptions for the Charity

- Charities are not exempt from tax. What is exempt is certain income of charities, i.e.
a) rents (and other receipts from land),
b) interest and other income taxable under Case III (and equivalent Case IV or V income),
c) dividends and other distributions taxable under Sch F,
d) trading profits, but only if they are applied solely to the purposes of the charity and either -
i) the trade is exercised in the course of the actual carrying out of a primary purpose of the charity, or
ii) the work in connection with the trade is mainly carried out by beneficiaries of the charity,
e) profits accruing to a charity from a lottery and which are applied solely to the charity's purposes
(s 505, ICTA 1988)

- the exemptions at (a) to (c) apply only to the extent that the income is applied to charitable purposes only

- if the income of a charity exceeds £10,000 and it has non-qualifying expenditure the exemption is restricted (ss 505(3) and 506, ICTA 1988)

- charities are also exempt from CGT to the extent that the gain is applied for charitable purposes

- but a CGT charge is triggered on both realised and unrealised gains if the charity ceases to be a charity (s 256, TCGA 1992)

- and there is an IHT charge if a charitable trust ceases to be charitable (s 70, IHTA 1984)

- for 2000/01 onwards a charity is also exempt from tax on trading income (and certain Case VI income) if it is applied solely for the purposes of the charity and the charity's gross income for the accounting period either
a) does not exceed £5,000, or
b) does not exceed 25% of all of the charity's incoming resources for the accounting period - subject to a ceiling of £50,000 (s 46, FA 2000)

- if the limit is exceeded but there was a reasonable explanation at the beginning of the accounting period that the income would be under it, it is still exempt.

VAT reliefs for the charity

Zero-rating by a charity

a) the first grant by a person constructing (or converting) a building intended for use solely for a relevant residential or a relevant charitable purpose (Sch 8, Group 5)

- the charity has to give a certificate

b) the sale (or hire) by a charity of goods donated to it for sale, letting or export (Sch 8, Group 15, item 1)

c) the sale (or hire) of such donated goods by a profits-to-charity person (one who has agreed in writing to transfer his profits from such sales to a charity or whose profits are otherwise payable to a charity) (Sch 8, Group 15, item 1A)

d) the export of any goods by a charity to a place outside the EC

e) the supply of talking books etc for the blind and handicapped (Sch 8, Group 4, item 1).

Zero-rating of supplies to a charity

i) buildings as in (a) above,

ii) various supplies to a charity for handicapped persons are zero-rated (Sch 8, Group 12)

- including supplies to adopt its own premises for use by handicapped persons

iii) the donation of goods for sale (or letting or export) by a charity (or a profits-to-charity person) (Sch 8, Group 15, item 3)

iv) the supply of relevant goods (as defined in Note 3) for donation to a nominated eligible body (a medical or research body) where the goods are purchased with funds provided by a charity

- or the supply of such goods to an eligible body which pays with them from funds from a charity (Sch 8, Group 15, items 4 & 5)

v) the supply to a charity that consists in the promulgation of an advertisement by means of a medium of communication with the public

- or the supply of a right to promulgate such an advert
- or the supply of services of design or production of such an advert (or one that was intended to be promulgated by such a medium) (Sch 8, Group 15, items 8 to 8C)

vi) the supply to a charity providing care or medical or surgical treatment for human beings or animals (or engaged in research) of a medicinal product where the supply is solely for use by the charity in such care, treatment or research (Sch 8, Group 15, item 9)

vii) the supply to a charity of a substance directly used for synthesis or testing in the course of medical or veterinary research (Sch 8, Group 15, item 10)

viii) the supply to a charity of wireless receiving sets or apparatus solely for the making and reproduction of cassette tapes which are solely for gratuitous loan to the blind (Sch 8, Group 4, item 2)

ix) the supply of (and repairs to) a lifeboat and ancillary equipment to a charity providing rescue or assistance at sea (Sch 8, Group 8, item 3).

Exempt supplies by charities

a) education (a charity will be an eligible body) (Sch 9, Group 6),

b) the supply, other than for profit, by a charity of welfare services (defined in Note 6) and of goods supplied in connection therewith (Sch 9, Group 7, item 9),

c) the supply, other than for profit, of goods and services incidental to the provision of spiritual welfare by a religious community to a resident member of that community in return for a subscription (Sch 9, Group 7, item 10),

d) the supply of goods and services by a charity in connection with an event (a fund-raising event)

i) that is organised for charitable purposes by a charity (or jointly by charities or by charities and a qualifying body),
ii) whose primary purpose is the raising of money, and
iii) that is promoted as being primarily for the raising of money (Sch 9, Group 12)

- a charity for this purpose includes a company wholly owned by a charity provided that it will donate the profits to the charity (Note 2)
- an event can be accessed electronically only (Note 1)
- the exemption is limited to 15 events of the same kind in a single location each year (Note 4)
- but any producing gross takings of £1,000 or less are ignored (Note 5)
- accommodation must not normally be provided in connection with the event (Note 8)
- the exemption does not apply if the event "would be likely to create distortions of competitions such as to place a commercial enterprise carried on by a taxable person at a disadvantage.

Reduced rate supplies to a charity (5%)

i) supplies for use by a charity otherwise than in furtherance of a business of fuel and power (Sch 7A, Group 1),

ii) supplies of services of installing List A energy saving materials in a building intended for use solely for a relevant charitable purpose (Sch 7A, Group 2)

- The above items are charity specific. Charities can of course also attract reliefs that are available generally.
- If zero rating applies on the grant of an interest in a building intended for use by a charity and the use ceases within 10 years, part of the zero-rating is clawed back by reference to the period of qualifying use
- prior to 1 June 2002 the whole amount was clawed back.

Gift Aid

- A donation to charity by an individual qualifies for gift aid relief if

a) it is a payment of a sum of money,

b) it is not subject to a condition as to repayment,

c) it does not fall within the payroll deduction scheme,

d) neither the donor nor a connected person receives a benefit in consequence of making the donation (or the value of any benefit does not exceed 2.5% of the gift (subject to a maximum of £250) - or 25% of the gift if it is up to £100 or £25 if the gift is up to £1,000),

e) it is not conditional or associated with the purchase of property by the charity from the donor or a connected person, and

f) the donor is UK resident (or have UK taxable income or capital gains to cover the grossed up amount of the gift)
(s 25, Finance Act 1990).

- the donor must make an appropriate declaration

- if it is not in writing the charity must write to him to confirm it
- a declaration can cover past and also future donations to the charity

- the donation is treated as a net gift from which tax has been deducted (s 25(6), FA 1990)

i.e. donation £1,000

deemed to be £1,282
donor claims tax relief
40% x £1,282 £513
less deducted at source £282 231 231
net cost 769
after tax reclaim charity gets £1,282
so tax relief is £513 = 51.3% of £1,000 gifted.

- the donor will get a tax charge if he has insufficient taxable income and/or capital gains to cover the tax deducted

- from 2003/04 onwards an individual can elect to treat a gift aid donation as made in the previous year of assessment (s 98, FA 2002)

- the election must be made on or before the date he delivers his tax return for the previous year
- and in any event not later than 31 January following the end of that year
- a donation can be carried back only if there is tax payable in the previous year to cover it
- the election does not affect the tax position of the charity

- a deduction by a company works differently

- the company simply claims a deduction for the donation (s 338, ICTA 1998)
- if the donation is made by a close company conditions (b) to (e) in relation to an individual again apply (s 339(3B)-(3E))
- as with an individual, the donation must be of a sum of money (s 339(3G))
- a company which is wholly owned by a charity can elect to carry back a gift aid donation to an earlier accounting period (ending within the previous 9 months) (s 339(7AA))
- it does not appear that the donation needs to be made to the same charity

- payments under charitable deed of covenant are now treated as gift aid donations.

Other Reliefs

s 83A, ICTA 1988 - gifts in kind to charities
- Sharkey v Wernher principle does not apply
- article must be stock or plant or machinery used in the business
- donor must carry on a trade, profession or vocation
- if the donor or a connected person receives a benefit in any way attributable to the making of the gift that benefit is taxable on the donor.

s 86, ICTA 1988 - employees seconded to charity
- can obtain a deduction for the whole of the employee's salary
- must be carrying on a trade, profession or vocation or a business (contrast with s 83A).

s 86A, ICTA 1988 - charitable donations contributions to agent's expenses
- if an employer operates a payroll deduction scheme any expenses paid to the agent charity are deductible.

s 202, ICTA 1988 - payroll deduction scheme
- sums withheld from earnings under a payroll deduction scheme are treated as expenses deductible from the earnings
- the sums must be paid to an agency charity, not direct to the charities chosen by the employee
- there is no limit for 2000/01 onwards
- the employee must be free to choose which charities he wants his money to go to.

S257, TCGA 1992 - gifts to charities
- and sales at an undervalue
- no adjustment to market value is made under s 17(1), TCGA 1992
- but is treated as a no gain no loss disposal
- unless it is sold for more than cost
- and the charity takes over the donor's CGT history
- if a charity becomes absolutely entitled to settled property (other than on the death of a life tenant) the deemed disposal and acquisition by the trustees is also exempt.

s 587B, ICTA 1988 (s 43, FA 2000) - gifts of shares and securities to charities
- gives income tax relief where an individual or a company (other than a charity disposes to a charity the whole of its beneficial interest in a qualifying investment (s 587B(1))
- a qualifying investment is quoted shares, unit trusts, OICs or investments in offshore funds (s 587B(9))
- the relief is given as a deduction from income for an individual and a charge on income for a company (s 587B(2))
- the amount of the deduction is the market value of the shares gifted (or the undervalue on a sale at an undervalue) (s 587B(4))
- the charity is treated for CGT purposes as acquiring the shares at market value less the amount of the donor's deduction (but not below nil) (s 587B(5))
- the amount of the deduction is reduced by the value of any benefits received (s 587B(5))
- and in the case of a gift, increased by an disposal costs (s 587B(6))

s 44, FA 2000 - gifts to charity from certain trusts
- where a settlor retains an interest in an offshore settlement (and is therefore taxable on the trust income) the amount taxable on him is reduced by any income paid to a charity by the trust in the same tax year or to which a charity is entitled under the terms of the trust
- where the trust has income from several sources the charitable deduction is apportioned rateably amongst them for the purpose of determining the tax payable on the balance

- s 45, FA 2000 - loans to charities
- an interest free loan of money by an individual to a charity does not constitute a settlement.

S 97, FA 2002 - gifts of real property to charity
- for 2002/03 onwards the relief under s 587B also applies to a gift of a qualifying interest in UK land, i.e. a freehold or a lease for a term of years absolute (s 587B(9)(e) & (9A))
- the relief also extends to a simultaneous gift of any easement or other right benefiting that land (s 587B(9B))
- a grant of a lease (for a term of years absolute) out of a freehold qualifies even though the reversion is retained (s 587B(9C))
- but an agreement to acquire land (or a lease) does not qualify (s 587B(9D))
- if the land is held jointly all of the joint owners must gift their interests to the charity (s 587C(2))
- it appears they can decide amongst themselves how to share out the relief (s 587C(3))
- what if the charity is one of the joint owners?
- the charity must give the donor a certificate specifying the land and date of acquisition and confirming that it has acquired the qualifying interest in it (s 587C(4) & (5))
- the relief will be withdrawn if a disqualifying event occurs before the 5th anniversary of 31 January following the end of the tax year in which the gift was made (6 years for a gift by a company) (s 587C(6)-(10))
- a disqualifying event is if the donor (or one of them) or a connected person becomes party to an arrangement under which he enjoys some right in relation to part of the land other than for full consideration in money or money's worth (s 587C(8))
- unless that occurs as a result of a death.

back to top

© Blackstone Franks
Barbican House
26-34 Old Street
London EC1V 9QR
September 2002