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COVID-19. Important Tax Considerations for Charities

Even in the COVID-19 pandemic charities need to consider tax.

17 Aug 2020

‘In this world nothing can be said to be certain, except death and taxes.’ Benjamin Franklin

Unfortunately this remains the case, and even in the COVID-19 pandemic businesses and charities need to consider tax.

Charities have had to adapt in the current climate in order to survive and continue to support their communities. Donations and fundraising have fallen significantly as a result of the virus’ implications – volunteers are unable to collect donations in buckets, fundraising events have been mothballed and charity shops have shut.

The population has been hit by Coronavirus in a number of ways including financially and for many, their disposable income has reduced and sadly one of the many cutbacks they make is from their usual donations to charity.

Many charities have however seen an increased need for their services, in particular those providing support or healthcare, food and welfare to those struggling or vulnerable.

With a significant drop in their income, charities have adapted and looked for new ways to raise funds. Many charities have appealed to businesses for support, asking for items to sell to raise money. Others have entered into joint ventures with third parties, with services or goods being volunteered for the charity to use to raise money.

Each income stream for a charity has to be considered carefully for its tax and VAT implications. During the pandemic, the important factor for a charity is to get more money in, but if they are later hit with a tax bill they hadn’t foreseen, this could be terminal for the charity.

Where a new income stream has been established by the charity, they need to consider whether it would is trading income. Charities have an exemption from corporation tax for a small amount of trading income. The small trading exemption limit allows charities with gross trading income under the threshold to treat their non-primary purpose trading profit as exempt for income and corporation tax purposes.

Currently the maximum gross non-primary purpose trading income a charity can receive without paying tax is £80,000 (where the charity’s income is over £320,000). If trading income is below this threshold then it is likely appropriate within the charity, but if trading income has increased as a means to bring in money for the charity, a trading subsidiary may need to be considered.

There are different VAT treatments for certain types of income for the charity. Whilst they may have previously relied on donations, which are outside the scope of VAT, and may not therefore be registered, if they have changed their income streams, VAT may be applicable and they may be forced to register for VAT.

If your charity’s income has changed during the pandemic and you are not sure what the tax or VAT implications may be, then please do get in touch

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