The National Council for Voluntary Organisations commissioned a report to explore the tax reliefs available to charities (which are a major advantage of charitable status) and how such reliefs could be improved.
The Charity Tax Commission (CTC), set up to explore the reliefs, published its report last year. Here we set out key findings, as well as brief reminders about what those reliefs are.
The report focusses on three key areas:
Gift Aid has three key mechanisms which allow charities to make the most of donations from individuals. These are Gift Aid declarations, the Gift Aid Small Donations Scheme (GASDS) and the reliefs available to additional and higher rate taxpayers.
The CTC findings:
The CTC found that Gift Aid is most important for charities with a lower income, although larger charities make the majority of claims. The CTC notes that it is more likely for larger organisations to make a claim, and to make them more frequently than smaller organisations. It identified that this is due to infrastructure, with larger organisations being able to process a greater number of smaller donations through Gift Aid. Importantly, it noted that for organisations with an income below £500,000, around 10% of this income is from Gift Aid donations, clearly making it a significant relief.
The CTC identified a number of areas requiring attention:
CTC Recommendations:
This area of taxation is complex and wide ranging. However, the key issue for charities is that most charities which do not charge for their services cannot recover VAT on purchases made for their charitable activities. For those that do, most are unable to recover VAT because their services are exempt.
Smaller charities are likely to be more affected, due to reduced access to specialist advice, the issue around funding agreements (identified by the CTC) and being unable to ascertain accurately what is inside or outside the VAT regime. A further issue is the sharing of resources between charities and non-charitable organisations which can create irrecoverable VAT.
The CTC recommends:
This is the largest tax relief for charities through which charities claim 80% of the business rates on property which is used for charitable purposes - this being a mandatory relief. In order to qualify for the mandatory relief, the property must be wholly or mainly used for charitable purposes. A further 20% discretionary relief is available from the local authority. The CTC's research suggests that charities receive an average relief of £19,300 for the mandatory element and £1,860 for the local authority discretionary element.
The relief is crucial for smaller charities, as this amount represents the equivalent of a third of the income for organisations with an income of £10,000 to £100,000. Education charities benefit the most with this - likely as a result of the grounds held by a number of these charities. The CTC identifies that local authorities grant much less on the whole than the 20% discretionary relief available to them.
Trading companies are frequently set up by charities in order to carry on non-charitable trade, and VWV frequently advises in this area. Rules around trading companies can be complex. The CTC notes that for charities complying with charitable trading, rules can mean a loss of the business rates relief. This loss is due to the trading company being seen as the occupier rather than the charity. The property being wholly or mainly used for charitable purposes is also ambiguous and open for interpretation.
CTC recommendations:
One of the key aspects of the report is the limited data available. More research and greater transparency would better enable recommendations to be identified, and the value of the reliefs both socially and financially could be better measured.
The CTC's recommendations are sensible and go a substantial way in addressing the key issues. The most progressive suggestions seem to be the establishment of a Universal Gift Aid Declaration Database and the potential extension of the business rates relief to apply to all wholly-owned subsidiaries of charities.
You can read the Charity Tax Commission Report here.