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Churches and corporation tax

Photo of Stephen Mathews Stephen Mathews
3 min

What have churches got to do with corporation tax?

We are all exempt, aren’t we?

We don’t need to do tax returns and pay tax do we?

As always with half-truths, the danger lies in only hearing one half. It is a myth that charities do not pay any tax (see this helpful blog), but most churches are fortunately indeed exempt from nearly all liability to pay corporation tax. You can see why charities become confused about their responsibilities regarding Corporation Tax, as they usually don’t have anything to do with it.

Being exempt from liability for corporation tax does not, however, mean they are exempt from having to do corporate tax returns (CTR) when asked to do so by HMRC.

Charitable companies and CIOs (Charitable Incorporated Organisations) are defined by HMRC as ‘corporates’.   As a result, they are subject to the regime of submitting CTR, even if there is no tax to pay.

HMRC have a policy of asking for CTR to be prepared by some charities annually (normally large charities) and some occasionally (most churches and smaller charities).  If they are not submitted, then HMRC can, and do, make ‘assessments’ (their word for ‘a guess’) for an amount of corporation tax that may be payable. Also, the charity becomes liable for a penalty for failing to submit a CTR when required to (often around £150 – but does increase over time).

HMRC have increased the frequency of requiring charities to prepare CTR, especially as new CIOs are being formed. Churches who form a new CIO can expect to have to prepare a CTR in the early years, but then will probably not have to prepare another one for a long time (maybe not for another 5-10 years).

HOWEVER, what we are beginning to see is that churches do not realise that they need to prepare a CTR when requested by HMRC, regardless of whether any tax is payable. So, the request from HMRC (which can look very bland) is filed or thrown away, as church pastors and administrators think it is something that isn’t required. Sometimes they assume it is to do with PAYE, which is being dealt with elsewhere. This can be compounded by the ‘assessments’ and demands also not being appreciated for what they are, or sometimes going to the wrong address, with the risk that the HMRC system issues demands for payments followed by visits from bailiffs. At that point, real costs can be involved and even an impact on a church’s ‘credit position’.

Churches don’t need to become corporation tax experts, but they are likely to need to engage a tax professional to do a CTR for them. Once done, however, for the large majority of churches, they won’t need to do another one for a long time. If a small or medium charity gets very regular requests from HMRC to complete a CTR, it is worth contacting the HMRC Charities helpline to request that this frequency be reviewed.

The moral of this is: Keep an eye out for correspondence from HMRC which indicates a need to prepare a CTR, and don’t throw it away but deal with it promptly.

If you have received a CTR request from HMRC and don’t know how or if you should respond, please contact us and we will provide you with appropriate guidance. Sign up for our Consultancy Helpline service to access Stewardship’s internal experts, along with advice and guidance from our external partners here: Consultancy Helpline (stewardship.org.uk)

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Profile image of Stephen Mathews
Written by

Stephen Mathews

Stephen has been at Stewardship for 15 years, advising churches and Christian charities on a breadth of issues around money, culture and governance. Previous to that, he gained valuable experience working for 20 years in the accountancy profession, alongside church leadership in his spare time.

Stephen is passionate about Local Church, UK Poverty & Debt, and International Aid, with a particular focus on educational development in Africa and in youth violence and racial inequality.