We have heard from a few member groups recently who have been contacted by HMRC and asked to submit a Company Tax Return (CTR). This is the tax return for paying Corporation Tax.
They are all registered charities and have not previously had to submit CTRs or pay any tax, and so contacted us to ask why they were being asked to do so now – and how to do it.
Why might we have to submit a CTR?
Our members registered as charities don’t generally have to pay tax or file a CTR.
However, it is important to understand that charities are not completely removed from the taxation system. The reason they don’t generally have to file CTRs is because there are tax reliefs in place that mean they are unlikely to have to pay any tax or therefore file a CTR.
But they are still in the tax system (and can sometimes owe tax, as set out below), so if HMRC ask you to complete a CTR, you must comply (or could face a fine). Even if you don’t actually owe any tax, you still need to submit the CTR to state that this is the case. This is what has happened to members who have got in touch.
It seems that HMRC target certain sectors at random – and random charities in that sector – and ask them to complete a CTR. Given we haven’t really heard from groups being asked to do this in the last five years – and have had three recently – we think other groups might receive such requests. It seems very likely that it is HMRC checking at random, so a request is nothing to be nervous about – although you might feel a bit unlucky!
If you do get a request, bear the following in mind:
- You can file the CTR via your online HMRC account for free. You don’t need any specialist taxation software. If you claim Gift Aid, you should have one set up. If you don’t have an account set up, you will need to create one. Our Gift Aid resource has more information on how to do this
- You will have to supply a balance sheet
- Assuming you don’t owe any tax, you can complete the online CTR claiming the charity exemption
- The online form is fairly easy to use, but the charity exemption section is a bit more complicated
If you receive a request to file a CTR, please get in touch – we can help with all of the above, and it is useful for us to monitor how many requests are coming in.
When might a charity actually owe tax?
You do not have to pay tax on any income you receive which you put towards meeting your organisation's charitable purposes. Generally, our members meet this condition and so do not have to pay any tax.
However, there are some activities that might mean income is taxable.
Trading: Charities don’t have to pay tax on income they receive from trading that helps the charity’s aims and objectives. This is known as ‘primary purpose trading’. Things like membership subscription income and event ticket sales are primary purpose trading – and therefore no tax is due.
If a charity trades and the activity is not related to its charitable purposes, then tax may be due. An example for members might be selling T-shirts. However, there is an exemption for this type of trading called ‘small trading tax exemption limits’. If your income from these activities is below the limit, you do not owe tax, and we think most members groups will be under the limit. If your income from these activities exceeds the limit, you owe tax on that income and would have to file a CTR. If this is the case, we would recommend setting up a separate trading subsidiary that donates its taxable profits back to the charity, thus eliminating a tax charge. You can contact us to find out more.
Charity’s gross annual income*
Trading tax exemption limit
£32,001 to £320,000
25% of your charity’s total annual turnover
*this is total income, not surplus / profit
Non-charitable expenditure: you have to pay tax on any money you do not use for charitable purposes. This can be a complicated area and is not one we think will impact members. If you are only spending money on your music group’s activities and meeting your charitable objectives, you will be fine. As always, get in touch if you have any questions.