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Many charities mistakenly believe that they need not concern themselves with taxation issues. As a result, they find themselves saddled with liabilities that they need not have incurred and miss out on valuable reliefs.
Unlike many of the other taxes, there is no blanket exemption available for charities from VAT and therefore this tax deserves a special mention. For example, charities considering capital projects may benefit from substantial VAT savings by making purchases under a single 'overall' contract. In addition, VAT exemptions exist for donors of goods and services (e.g. employee secondment) to charities - many of which have to be claimed.
Charities will also need to consider the tax implications when they set up trading subsidiaries, engage in fundraising activities, remunerate employees, buy, sell or lease buildings/land or deliver services. For example, a trading subsidiary set up in order to carry on non-charitable activities (for example, running a shop) will be subject to corporation tax on its profits, unless it is able to make an effective gift-aid donation to its parent charity. Charities should also consider whether (and how) to claim Gift Aid on donations.
Disputes may arise with HMRC, and prevention is better than cure. However, even after a dispute has arisen a settlement or concession can often be negotiated. In this context, it is important to understand that a charity does not need to be registered with the Charity Commission in order to attract tax relief.
At a time when many charities are faced with falling donations (in spite of government efforts to encourage private charitable donations through tax incentives), it has become increasingly important that as much of the money raised as is possible is spent on actually delivering the service. It has become imperative for charities to understand and consider the tax consequences of their operations, not only to minimise their own exposure to tax thereby increasing the amount available to be spent on delivering services, but also to attract donations.