Charities continue to feel the squeeze from rising energy bills, rising staffing costs, and inflationary pressures across core services. This is often amplified by increased demand from beneficiaries and uncertainty around future funding.
In response, many charities are understandably focused on fundraising and cost‑cutting. However, one of the most effective and least disruptive ways to increase revenues is often overlooked: reclaiming tax that should never have been paid in the first place.
Across the sector, charities miss out on tax reclaims and statutory reliefs simply because they are hidden, misunderstood, or assumed to be immaterial. In reality, these reclaims and reliefs can provide valuable short‑term support and, in many cases, can be claimed retrospectively.
Gift Aid: Still One of the Most Commonly Missed Reclaims
Gift aid allows UK charities to reclaim basic rate tax (20%) on donations from individuals, boosting the value of a gift by 25% (i.e. 25p for every £1) at no extra cost to the donor, on the proviso that they have paid enough income/capital gains tax.
Although the Gift Aid scheme is well known, in practice it is frequently under-claimed.
In our experience, many charities either do not claim Gift Aid on all eligible income streams or discover historic gaps when records are reviewed. Gift Aid can generally be reclaimed on cash donations, which can include:
- Donations made via online platforms
- Donations made at fundraising events
- Certain membership fees (where there are no benefits for the donor)
- Sponsored events such as challenges and adventure‑style fundraising
- In some cases:
- Proceeds from goods sold at charity auctions; and
- Donations for admission to charitable property.
We are also seeing a notable increase in Gift Aid queries, particularly where charities have diversified their fundraising efforts in response to the cost-of-living crisis and are unsure whether a receipt constitutes a donation for Gift Aid purposes.
Another consideration is ensuring charities have valid donor declarations in place to avoid invalid claims or delays in HMRC processing. This can be through aged declarations (+2 years) where changes to personal circumstances have not been checked.
Charities can usually make Gift Aid claims up to four years after the end of the financial year to which the donation relates, provided valid declarations are in place, resulting in possible Gift Aid reclaims on historic donations.
Ensuring every eligible donation attracts Gift Aid remains one of the simplest ways to boost income without additional fundraising effort.
Gift Aid Small Donations Scheme (GASDS)
In addition to the above, the Gift Aid Small Donations Scheme allows charities to claim a Gift Aid‑style top‑up on small cash or contactless donations where individual donor declarations are not available.
The scheme is particularly relevant for charities that receive:
- Cash collections
- Contactless donations at events or venues.
There are a number of conditions attached, including a requirement for charities to have a good compliance history (usually 2 years of successful gift aid claims). Given the time requirement for valid GASDS claims, it’s often forgotten about by charities currently claiming Gift Aid, but if claimed can provide small additional sums.
Taking Care With Trading Income Streams
Whilst charities’ income streams benefit from the various charitable exemptions, difficulties can arise where charities receive large amounts of trading income, which is incorrectly assumed to be exempt or where existing trading activities are not reviewed as an activity evolves.
The current small trading exemption allows charities to receive trading income of up to £8,000 per year when total charity income is below £32,000, or 25% of total charity income (capped at £80,000) when total charity income exceeds £32,000.
Common areas which can cause charities difficulties are:
- Corporate sponsorship/advertising income
- Fundraising events that do not meet the exemption or where non-charitable benefits are substantial
- Sale of bought-in goods
- Other income streams that are not directly/indirectly attributable to a charity’s primary purpose.
This doesn’t mean charities cannot diversify their income streams to generate more income, but any new or increases in existing income streams should be considered carefully, either before or at the outset, in order to see whether these should sit within the charity or a trading subsidiary in order to mitigate any tax and commercial risks of trading.
Research and Development (R&D)
In some instances, charities undertake activities that may resemble research and development, particularly where they seek to resolve a scientific or technological uncertainty.
Charities themselves do not qualify for UK R&D tax relief. However, where qualifying R&D activity is undertaken by a non‑charitable trading subsidiary that is within the charge to corporation tax, that subsidiary may be eligible to claim relief under the UK’s merged R&D Expenditure Credit (‘merged RDEC’) scheme.
For accounting periods beginning on or after 1 April 2024, under the merged R&D scheme, this provides a taxable expenditure credit at a headline rate of 20% gross (15%-16.2% net), subject to the relevant conditions being met.
Although trading subsidiaries with sufficient distributable reserves typically Gift Aid their taxable profits to the parent charity, often reducing corporation tax liabilities to nil, the merged RDEC can still be valuable. As an above‑the‑line taxable credit, it may result in a payable cash credit, or an increase in taxable profits that can either be retained to build distributable reserves or Gift Aided to the parent charity, depending on the subsidiary’s tax position and the application of the merged RDEC payment steps.
Given the complexity of the R&D and Gift Aid rules, specialist tax advice should always be sought.
Bank Interest, Investment Income, and Legacy Receipts
Charities are generally entitled to receive interest and income from certain other investments gross. Charities, either directly or as beneficiaries of an estate, can still suffer a tax charge on these.
If the charity holds investments, we recommend carefully reviewing the tax reports to determine whether any tax has been incurred, and seeking advice on whether the tax can be reclaimed and on the mechanism for doing so.
Where tax is deducted from income within an estate, charities are usually issued with an R185 form enabling them to reclaim tax suffered.
Recovering this tax ensures charities receive the full value of a legacy due to them.
VAT Reclaims
VAT is often a significant and confusing cost for charities. As charities have multiple income streams with differing VAT treatments, not all VAT can be reclaimed.
Beyond various VAT exemptions for certain sectors, there are important considerations that can increase VAT reclaims or prevent further issues down the line. These include, but are not limited to:
- Don’t assume charity = no VAT – Charities do not have a general VAT exemption. It depends on who and what the charity does
- Revisiting the charity’s supplies to consider whether:
- Their apportionment between business and non-business use is still correct, and
- The partial exemption calculation needs to be revisited
Where a charity has non‑business activities alongside VATable and exempt business income, VAT recovery is determined through a two‑stage process. Reviewing both the business/non‑business apportionment and the partial exemption calculation can be worthwhile, as assumptions, methodologies or income patterns may have changed over time. While there is no de minimis for non‑business VAT, de minimis limits or special methods may be available at the partial exemption stage
- Ensuring zero or reduced‑rate VAT is charged to the charity on certain goods and services, such as advertising, medical equipment, or construction works for charitable use
- Check that the correct amount of VAT is charged on gas and electricity bills. Energy is normally charged at the standard VAT rate of 20%, but charities may qualify for the reduced rate of 5% where a building is used for non‑business charitable activities, residential accommodation, or certain care‑related purposes. Where relief applies, charities must submit the appropriate VAT reduced‑rate and Climate Change Levy exemption declarations to their energy suppliers, as these reliefs are not applied automatically.
- Correct VAT treatment of grants versus contracts. This is a crucial distinction as this can affect VAT recoverability. Note if a service is provided to the funder, it might be VATable regardless of the ‘grant’ label
- Groups – To VAT Group or not to VAT Group – that is the question?
VAT grouping may offer administrative simplification and cash‑flow benefits. However, it can also restrict VAT recovery or create unintended liabilities, so the decision to VAT‑group (or not) should be carefully assessed
- Fundraising – Although fundraising income is often VAT‑exempt, this exemption can limit the amount of VAT a charity can reclaim. A clear understanding of how fundraising affects overall VAT recovery is therefore essential.
Given the complexity of VAT rules, even a short review can sometimes identify savings or reclaim opportunities that may have been missed for years.
Our VAT team can conduct a VAT health check on a charity or charitable group to assess their current VAT recovery position, identify whether it can be improved, requires correction/ or provide recommendations to help improve future VAT recovery.
Business Rates Relief and Discretionary Top‑Up
While most charities qualify for mandatory 80% business rates relief, fewer pursue the remaining 20% discretionary relief available through local authorities.
Some local authorities are willing to award up to 100% relief, particularly where the charity delivers clear community benefit – A powerful way of cost‑saving at a time of rising property‑related costs.
Why Overlooked Reclaims Matter
While individually these reclaims may appear to be modest, taken together they can materially improve cash flow and financial resilience.
As the old Tesco advert once put it, “Every little helps!” and in this day and age, every penny counts towards delivering your charity’s objectives.
If you have any questions or require any assistance, our Charities team will be able to happy to help you.
This material is for informational purposes only and should not be relied upon as professional advice.
