Advantages and Limitations of being a Charity
The main advantages are that Charities:
- do not normally have to pay income/corporation tax (in the case of some types of income), capital gains tax, or stamp duty, and gifts to charities are free of inheritance tax;
- pay no more than 20% of normal business rates on the buildings which they use and occupy to further their charitable purposes;
- can get special VAT treatment in some circumstances;
- are often able to raise funds from the public, grant-making trusts and local government more easily than non-charitable bodies;
- can formally represent and help to meet the needs of the community;
- are able to give the public the assurance that they are being monitored and advised by The Charity Commission;
- can seek advice from The Charity Commission; and
- can get information from The Charity Commission, for example, their range of free publications.
What are the limitations of being a Charity?:
There are restrictions on what charities can do, both in terms of the types of work they do, and the ways in which they can operate:
- A charity must have exclusively charitable purposes. Some organisations may have a range of activities, some of them charitable, some of them not. To become a charity that organisation would have to stop its non-charitable activities. (The non-charitable activities can, of course, continue if carried on by a separate non-charitable organisation.) Promoters will need to consider carefully if becoming a charity will severely restrict their planned activities. If so, charitable status may not be right for your organisation.
- There are limits to the extent of political or campaigning activities which a charity can take on - The Charity Commission have published guidelines on this in Campaigning and Political Activities by Charities (CC9).
- Strict rules apply to trading by charities. Guidance on this can be found in The Charity Commission's guidelines Charities and Trading (CC35).
- Trustees are not allowed to receive financial benefits from the charity which they manage unless this is specifically authorised by the governing document of the charity or by The Charity Commission. Financial benefits include salaries, services, or the awarding of business contracts to a trustee's own business from the charity. Benefits which are incompatible with the establishment of an organisation for exclusively charitable purposes cannot be authorised at all (further guidance can be found in Payment of Charity Trustees (CC11)). There are similar problems where the spouse, relative or partner of a trustee receives such benefits. Trustees are, however, entitled to be reimbursed for their reasonable out-of-pocket expenses, for example, train fares to trustee meetings.
- Trustees need to avoid any situation where charitable and personal interests conflict.
- Charity law imposes certain financial reporting obligations; these vary with the size of the charity. Further details may be found in The Charity Commission's guidance Charity Accounts: The framework (CC61).