Advantages and Disadvantages of Charitable Status

To be charitable, a group’s objects must fit under the thirteen headings of charity AND be set up for public benefit AND be non-profit-distributing under the terms of their governing document. Below are some of the benefits and restrictions of charitable status.

Advantages

• Some funders will only fund charities
• Credibility – people recognise and trust charities and this can make it easier to raise or access funds
• Charities receive help and guidance from the Charity Commission on some matters
• Charities are subject to scrutiny by the Charity Commission and other bodies, which can help prevent abuse and safeguard a charity

Tax Benefits

• Tax Relief – Do not pay income tax or corporation tax on surplus/profit or capital gains tax on gains from the sale of assets, this is provided the profits are used wholly for the charities’ purposes
  
• Exemption from paying stamp duty on most transactions
• Rate Relief – 80% mandatory, 20% discretionary from local authority
• Tax effective giving – Gift Aid, payroll giving
• Donors do not generally pay inheritance tax on legacies to a charity and do not generally pay capital gains tax on assets donated to a charity
• *Eligibility for zero rate VAT for some goods and services purchased by the charity
• *If registered for VAT, the right to charge zero rate VAT for some goods and services provided by the charity
• *(VAT issues are very specific and can be extremely complicated. It is recommended that groups take advice from an accountant on VAT issues.)

Disadvantages

• Charities are public bodies and therefore open to public scrutiny
• All charities must prepare annual accounts and most must prepare annual reports. This obviously takes time and some expense.
• Registered charities with income or expenditure over £10,000 must have their accounts audited and submit them to the Charity Commission annually (however many charities have to have their accounts audited anyway to comply with funders’ requirements or their constitution)
• Restrictions on payments to the Board unless for expenses – ie mailings of secretary, travel to meetings etc
• Restrictions on benefits to trustees – (Unless the constitution specifically says eg service users can be trustees. Advice should be sought from the Charity Commission on this matter)
• Restrictions on political activities – charities can undertake non-party political activities which are directly related to their objects but there are limits on other political activities and campaigning which they can undertake
• Restrictions on trading activities - Charities can charge for charitable activities or services which they provide for their beneficiaries, and for goods produced or services provided by their beneficiaries, but there are limits on other trading which they can undertake

Further help and Contacts:

This factsheet was put together with help from the following:

The Voluntary Sector Legal Handbook, S Adirondack & J S Taylor, 2nd Edition, DSC, 2001.