Uncovering the charity tax burden
February 2011
The common misconception that charities are 'exempt' from taxation has, for too long, obscured the tax costs charities do incur.
Any organisation employing staff has to pay employer's national insurance and will have to pay VAT on most goods and services it purchases. The basic rule of recovering VAT on inputs (business purchases) and charging VAT on outputs (supplies) get scomplicated because the main objective of charities is not to make a profit in the course of business and engage in commercial activiities. As Pesh Framjee pointed out in the Caritas Guide to Finance (December 2010), “Charities are affected by income/corporation tax, VAT, employee taxes, and capital gains tax (CGT) and a vigilant penalties regime means that charities cannot afford to be ignorant of potential tax liabilities.”
Quite apart from the liabilities themselves one of the biggest problems is the cost of compliance. The issue of whether charities should have further concessions from HMRC is rather separate from unncessary costs of compliance imposed by an inefficient collection system. While charitable status confers some basic benefits, it is the complication of working out where the tax reliefs are and the various different compliance regimes that eats into valuable operational resource.
The Charity Tax Map
So the recent research from Charity Tax Group (CTG)
[1] outlining what the precise impact of the current tax regime on the sector has gone a long way to engage the government and HMRC in what can be done to help the sector. Dave Hartnett, the permanent secretary for tax and head of HMRC sees part of the solution to driving down compliance costs as moving as fast as possible over to electronic media and welcomes the research “because it promotes transparency.” He was speaking at the launch of the Charity Tax Map on 3 February 2011.
Objectives of the research
These were to:
· establish the extent of different taxes affecting charities;
· estimate the total amount of tax paid;
· estimate the costs of compliance; and
· identify any important messages and conclusions about charities’ tax liability.
Key points
The number of taxes (a total of 18 different types!) and the extent of their impact on any particular charity will depend entirely on the size, scope and activities undertaken by that charity.
Simplification of the tax regime could benefit both charities and the government and help to reduce costs. Also, it is very difficult for charities to keep up with frequent changes in law which, although understandable and necessary in some cases, are burdensome.
The research, based on the responses of 31 charities to a questionnaire on the financial/compliance impact of taxes revealed the following:
- 4 pence in every £1 of income was spent on tax – the range varied from 1 pence to 18 pence per £1.
- 18 taxes were potentially applicable and the average was 6 taxes paid [range 3 – 9].
- Tax paid is broadly proportional to expenditure and averages 6 pence in every £1 of expenditure.
- Employer’s National Insurance Contributions (NICs) [54%] and irrecoverable VAT [38%] represent the vast majority of the tax burden [92%]. Compliance costs for irrecoverable VAT were significantly higher than Employer’s NICs for less tax revenue.
- Corporation tax, income tax, stamp duty land tax and capital gains tax can all lead to significant compliance costs in order to minimise a tax bill or to take advantage of an exemption / relief.
- Gift Aid compliance costs can make the benefits of Gift Aid questionable for small charities – the range varied widely from 1 pence to 70 pence per pound of tax reclaimed.
- The total tax bill paid by the respondents was £147m, incurring compliance costs (internal time and adviser fees) of £2.8m
This exercise was the first attempt to try and quantify the level of taxation and the compliance burden for charities. Data gathering is extremely difficult, particularly for smaller charities.
John Hemming, Chairman of CTG explains that the report "navigates charities to the reliefs to which they are entitled. It will also ensure that they are fully aware of all the tax responsibilities their charity faces. By revealing the full extent of the tax burden on charities, we hope that the government will take steps to simplify parts of the tax system and its processes."
Cathy Pharoah, co-director of the Centre for Charitable Giving and Philanthropy, Cass Business School, who supervised the analysis of the findings said: “The research has shown how very difficult it is for charities to compile an accurate picture of tax and compliance costs. Data gathered so far indicates a range of cost that is mainly related to what charities do and not to their structure. It seems unfair that some causes should have to struggle with this more than others."
Next steps
Charity Tax Group hopes to develop and repeat the survey to gather more targeted information from a larger sample, which will hopefully enable us to begin to identify and analyse patterns and key trends in the tax burdens facing charities.
Further research will be undertaken on those compliance costs which seem disproportionate to liabilities and particularly disproportionate for smaller charities.
[1] This research was entirely funded by the Nuffield Foundation
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from Cass Business School. She has been one of the judges for the non-profit category of the Chartered Institute of Marketing's Excellence in Marketing Awards for the second year running.
She has also acted as clerk to the trustees of a small almshouses charity and as a member nominated trustee to a pension scheme of a multinational publishing company.
Click here for other articles written by Clarissa Dann
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