Tax for charities and CIC’s is complicated and Voscur strongly recommends that if you have any doubts, particularly if you aren’t a charity, that you seek the support of a reputable accountant.

What taxes do charities have to pay?

Charities must pay VAT but benefit from some other tax reliefs, as standard. The VAT threshold is currently set at £85,000 per 12 months, so a charity would need a ‘VAT taxable turnover’ of this or more to be eligible to pay VAT. A charity does not pay tax on most of its income and gains if it uses it for charitable purposes – this is known as ‘charitable expenditure’.

This includes not needing to pay tax:

• on grants and donations
• on profits from trading
• on rental or investment income, for example bank interest
• on profits when you sell or ‘dispose of’ an asset, like property or shares
• when buying a property

To get tax relief a charity must be recognised by HM Revenue and Customs (HMRC).

Charities can also claim Gift Aid.

What taxes do social enterprises have to pay?

Social enterprises that aren’t also registered charities, such as CICs, are subject to VAT and corporation tax. These organisations do not receive tax breaks from the Inland Revenue because of their legal status, and the only exemptions they would be eligible for are the same exemptions any company is eligible for.

These organisations must treat donations as income, and this is potentially taxable, depending on the organisation’s overall financial position and legal structure. Some organisations apply to HMRC to be recognised as not trading, or operating as a not-for-profit, which means that HMRC usually agrees to some forms of income being treated as non-taxable. If they don’t receive this exemption, which is at the discretion of HMRC, then any donations received will be taxed if the organisation has a surplus/profit. So, whereas a charity only needs to be recognised as a charity, a social enterprise has to specifically apply to be considered as not trading.

Gift Aid only applies to donations given to registered charities.

Do social enterprises have to pay tax on grants?

This is a bit more complicated. Income from grants may be taxable, but it depends on a few factors. As, in addition to whether you have an exemption or not, when an organisation receives a grant it needs to establish if this grant is seen as a donation, or if it could be seen as part of trading i.e. if the project/work the grant is for could be seen as a form of trading/funding other trading activity.

Some examples of this in practice, could be:

• The grant is reliant on you delivering specific activities to a certain number of people, and is paid in instalments after you deliver these activities to the correct number of people (likely taxable)
• The grant is a fixed amount given to you regardless of what you achieve (likely not taxable)
• The terms of your grant agreement state that you must ensure specific outcomes for service users – such as certain number of people getting a job at the end of a programme (likely taxable)
• The project you are delivering with the grant money will also bring some income back into the CIC, as even though the grant is funding some of the cost of the activities some people attending will still pay a contribution to attend (likely taxable)
• The project you are delivering with the grant money won’t bring any income in – it will only cover the cost of delivery (likely not taxable)
• The grant is funding some core costs for your organisation, and your organisation is trading (likely taxable)

Disclaimer

We make every effort to ensure that our information is correct at the time of publication. 

This is only intended as a brief summary of relevant issues and information. Legal advice should be sought where appropriate. The inclusion of other organisations in this information does not imply any endorsement of independent bodies, they are just for signposting purposes.

Voscur is unable to accept liability for any loss or damage or inconvenience arising as a consequence of the use of this information.