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The Future of Charity Taxation - Working toward a Stronger Civil Society

on Friday, 20 March 2020.

A reminder of charity tax reliefs and all you need to know from the Charity Tax Commission's report

The Commission's Report

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
  • Value Added Tax
  • business rates relief

Gift Aid - What is it and How Does it Work?

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:

  • The Gift Aid regulations are complex and it is difficult (particularly for smaller charities) to claim the relief. This is not only because of the administration involved in making the claim, but also because charities must make sure they are able to establish the required audit trail.
  • In order for the charity to receive the full value of the additional and higher rate tax payers relief, it is the individual who must make a claim. HMRC then pays the necessary amount to the individual and the individual then donates that tax to the charity, which of course makes charities overly reliant on donors for this.
  • The relief's relationship with technology is also outdated. Gift Aid declarations are required for each donation and, as more and more people donate via phone, there can be a disjoin between donor declarations and phone company information.
  • For the GASDS, the scheme is seen as difficult to navigate, with limited information available with the result that take up is lower than was predicted.

CTC Recommendations:

  • An opt-out should be set up so charities receive basic rate relief, plus the value of higher rate and additional rate relief. This recommendation addresses the issues around an individual needing to reclaim the tax in order to donate this to the charity. Instead, the amount would go directly to the charity increasing the charity's income.
  • That a Universal Gift Aid Declaration Database is established, allowing a donor to complete one declaration to cover all future gifts to charities by that donor.
  • That the Government promotes Gift Aid to improve awareness and understanding of the relief.
  • HMRC should conduct research regarding the audit trail issues and the relationship between text donations and Gift Aid declarations.

Value Added Tax

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:

  • a review of the implementation of the relevant charitable purpose rules in respect of VAT to encourage public and private sector collaboration
  • that public bodies should detail the VAT status for any funding relationship

Coronavirus Legal Advice

Business Rates Relief

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:

  • The Government should consult on a potential extension of the relief to apply to all wholly-owned subsidiaries of charities.
  • Discretionary rate criteria should be easily accessible from local authority websites and a standardised form created.

How can VWV Help?

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.


VWV has dedicated Tax and Charities teams who are able to assist with any queries you may have regarding the reliefs discussed above or wider issues for charities. Please do get in touch using the form below.

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