The question comes up from time to time about the tax deductibility of payments to charities
Teaching a Class for Charity
If you are teaching a class for charity, thats to say charging for a class but promising to pay all or part of the proceeds to a charity, then the specific payment will be a deductible expense against your business profits.
If you are teaching a free class for a charity, say at an event, then reasonable costs incurred in organising that class, including your travel to it, should be deductible as normal business expenses.
Making a General Donation to Charity – Sole Traders and Partnerships
There are a couple of different routes to obtaining relief.
First if a donation is “wholly and exclusively” for business, it can be deducted against business profits. If it is a more general donation, then Gift Aid is the mechanism.
Whats the difference? Well:
- If a donation is deducted against business profits then you get both Income Tax and NI relief. The gift is paid to the charity gross, and they can’t claim tax back.
- If a donation is dealt with under Gift Aid then its deemed to be made net of Basic Rate Tax (20%). The charity claims Basic Rate Income Tax back, and the donor can claim Higher Rate Income Tax, if any, via their Self Assessment. There is no NI relief.
- Eg on a donation of £100
- If its claimed as a business expense you pay £100 to the charity, and they receive £100, you deduct the £100 against your Business Profits.
- If its under Gift Aid you pay them £80 and they claim £20 back from HMRC – it goes on your Self Assessment, but its not a deduction against profits.
- If you are a Higher Rate Taxpayer then Gift Aid payments get Higher Rate Tax relief via your Self Assessment. If the donation is claimed against business profits then, likewise, Higher Rate Tax relief is given automatically.
And what makes a donation “wholly and exclusively” for business? This is what HMRC say:
Indications that such donations may not be incurred wholly and exclusively for business purposes might be:
- that the voluntary body has no local connection to the business, thus making any quid pro quo for the trader less likely.
- a personal connection with the donee.
- a lack of publicity surrounding the making of the donation.
It should be noted however that these points are not definitive, nor is the above list exhaustive. Each case must be considered on its own facts.
In simple terms, if the donation is strongly connected to the business you can deduct it against profits, if its more general then Gift Aid is the route.
Note 1 – If a donation claimed against profits, then don’t complete a Gift Aid Declaration.
Note 2 – If you make a Gift Aid donation, you must have paid enough tax to cove the amount the charity will claim back, otherwise HMRC may assess you for this.
Making a General Donation to Charity – Companies
The rules are similar to those for Sole Traders and Partnerships.
However Corporate Gift Aid works differently – there is no tax deduction at source, so payments are made gross by the company, and the charity doesn’t claim anything back. In practical terms this means all donations made by the company can be expensed in the company accounts, however if they are general donations under Gift Aid they can’t be used to create a business loss for tax purpose (if your company still makes a profit after the gift, then you are fine).
Again, no Gift Aid Declaration should be completed.
Donations to Non Charities
Not every organisation you will give to will be a charity.
Donations to a worthwhile cause that isn’t registered as a charity can still be made, but only by offset to business profit, not Gift Aid, so the “wholly and exclusively” tests will need to be considered.
