Charities could face tax bills that cancel out their relief

How much tax does the charity sector pay? It’s not meant to pay any, in theory. But in practice it pays a lot, it turns out, according to a very informal survey I carried out last week.

Having spoken to a few charities’ finance directors, it appears many operational charities pay around a tenth of their total income in tax – and this could increase considerably if post-election tax rises come in the form of VAT and national insurance.

We haven’t seen it in this Budget, but it’s likely to come in any post-election announcements. In a worst-case scenario, of every pound given to an operational charity, 12 or 13 pence could end up in the pocket of the Government.

In total, it’s possible the sector will end up paying more than £1 billion in VAT – and it could well be facing a similar bill for national insurance. Add on business rates, water rates, and other taxes that the Government hasn’t exempted the sector from and the bill starts to look pretty high.

In comparison, according to HMRC, the sector received £951m last year in Gift Aid, and around £2.3 billion in tax relief overall. Or to put it another way, the tax the sector doesn’t pay looks pretty similar to the tax it might have to.

So what should the sector do about it? Move all its money offshore? Hire a dodgy accountant to cook the books?

One answer – suggested by one of this site’s bloggers, Charles Nall, corporate services director at the Children’s Society – is to focus not on Gift Aid reform, where there is potentially little money to be had, but on tax reform.

Less fashionable, more difficult and less easy to understand – but the rewards are potentially much greater.