The Pros and Cons of Charity Status

Pros of Charity Status

OVERVIEW

There are two main reasons to consider charity status:

1. Tax

2. Status

TAX

A charity is exempt from tax on most forms of income and capital gains if they are applied to charitable purposes. There are also tax advantages for donations to charities.

1. GIFT AID

Donations made by UK taxpayers under Gift Aid result in a 28% increase in the value of the gift made e.g. £100 donation results in a further £28 gift aid claim.

There are a number of further considerations:

a) Higher rate taxpayers can make a claim on their tax return and obtains a tax rebate e.g. £100 donation results in a £23 tax rebate.

b) Companies pay gross (no gift aid repayment claim is made by the charity) but the company obtains full corporation tax relief on the gift.

c) There are some special rules regarding subscriptions and benefits received by the donor.

2. INVESTMENT INCOME

Interest earned on bank and other savings accounts is paid gross, rather than subject to a 20% tax deduction. Rents and dividends are not subject to tax, but tax deducted on dividends cannot be recovered.

3. CAPITAL GAINS

Gains made on the disposal of assets (shares, property) are free of tax.

4. GIFTS OF SHARES AND PROPERTY

There are special tax reliefs for gifts of shares or property which can make it highly beneficial for an individual to gift shares or property to a charity.

5. INHERITANCE TAX

Gifts to charities are exempt from Inheritance tax.

6. BUSINESS RATES

Charities are entitled to 80% business rate relief on any premises that they occupy. This can be extended to 100% at the discretion of the local authority.

7. STAMP DUTY

Exemption from Stamp Duty applies to most transactions, but charities can be caught if they are involved in mixed use housing schemes.

8. TRADING

Profit from trading is exempt where:

a) the trade is carried out to fulfil a primary purpose of the charity

or

b) the trade is mainly carried out by beneficiaries of the charities

and in either case

c) the profits are applied solely for the purposes of the charity

This is a complicated area and as with all charity tax matters, specific advice should be obtained.

9. VAT

There are a few minor reliefs for charities, but in general charities are unable to reclaim VAT on expenditure.

10. RETURNS

Returns must be made to reclaim Gift Aid and other tax deducted.

Generally, income tax and corporation tax returns are not required.

STATUS

As a registered charity, governed by the Charities Act and monitored by the Charity Commission, an organisation will achieve enhanced status.

1. REPUTATION

Having charitable status may result in greater support and involvement from both individuals and organisations.

2. FUNDRAISING

a) Public - reassured by charitable status

b) Government and other statutory bodies - improved chances of obtaining grants

c) Charitable trusts - some have a policy only to give to charities.

Cons of Charity Status

OVERVIEW

The disadvantage of registering as a charity is the cost of complying with regulation.

REGISTRATION

This is a one off cost in completing registration forms.

The guidance on registration (CC21) runs to 40 pages and the main application form (APP1) to 48 pages.

Charity Commission usually come back with queries and the process generally takes several months.

See the steps required in Appendix 3.

ONGOING COMPLIANCE

Additional work and responsibilities are involved in operating as a charity.

Charities are required to comply with charity legislation and are monitored by the Charity Commission. The trustees of the charity are responsible for such compliance which includes the areas of finances, income, property, funds, staff, fundraising, personal liability, no personal benefit.

There are more onerous requirements regarding the preparation and examination of accounts.

Charities must ensure that they operate strictly within their objects.

CESSATION

An organisation cannot deregister as a charity.

If it wishes to cease operation it must pass its assets to another charity with similar objects.

Alternatives to Charity Status

UNINCORPORATED ASSOCIATION

This is a simple structure and suitable if there are no serious contractual obligations.

COOPERATIVE

Two types:

1. Friendly Society

2. Industrial and Provident Society

There is some limited liability for those running them, and less rigid rules than Companies or Charities Acts requirements.

COMPANY LIMITED BY GUARANTEE

There are no beneficial owners of such a company. There is the comfort of limited liability protection, but there are no tax exemptions, which is more of an issue now that the £10,000 nil rate band for corporation tax has been abolished.

COMMUNITY INTEREST COMPANY

This is a relatively new structure.

There are no tax exemptions, but they are more flexible than charities in respect of obtaining finance and paying directors.

Summary

PROS

1. Tax

2. Fundraising

CONS

1. Compliance with regulation

ACTION

1. Discuss if there are potential benefits

2. Do a cost benefit exercise

3. Consider if you have a suitable administrator

4. Look at Charity Commission website and publications

Important Publications Appendix 1

CHARITY COMMISSION

INLAND REVENUE

Charitable Tax Exemption - www.hmrc.gov.uk/charities/guidance-notes/annex1/annex_i.htm

Gift Aid Form - Appendix 4

Benefits Received by Donors -  www.hmrc.gov.uk/charities/guidance-notes/chapter3/sectiond.htm

Contact Organisations Appendix 2

Setting up a Charity Appendix 3

1. Decide in principle whether worth doing

2. Read Charity Commission (CC) publication CC21

3. Decide on:

- Objects

- Legal Structure

- Trustees

- Name

4. If limited company route, form limited company

5. Set up bank account

6. Complete CC documents APP1, DEC1

7. May need to produce accounts and publicity material

8. Answer CC questions