21 April 2021
Contrary to popular belief, colleges are not completely exempt from tax. Instead, there is a complex web of very specific tax exemptions which you must work within if corporation tax is not to become payable.
This means it is very easy to accidentally end up with a corporation tax liability.
As charities, colleges are exempt from corporation tax on interest receivable, capital gains and rental income from property. However, there is no general tax exemption for trading profits, and only profits from directly carrying out the college’s charitable purpose (so called ‘primary purpose trading’) are exempt from tax.
Colleges are established with the charitable purpose of advancing education for the public benefit. Fortunately, this is a very wide object and covers most structured provision of education. This can even include bespoke courses for individual employers, provided the skills being taught to employees are readily transferable to another employer. Colleges do, however, need to check their objects do not have a restriction on, for example, the age range of students or the geographical area that you can work in.
The advancement of education is not the only charitable purpose and activities such as allowing the local community to use your facilities, particularly sports facilities, in return for payment can be charitable. However, it will only be tax exempt if it is within your college’s charitable objects.
There are a couple of other tax exemptions which are often forgotten about, but which can be very useful. Fundraising events such as concerts, dinners, dances, firework displays etc. can often be arranged in a tax-exempt way. There is also an exemption for small scale trading activities where the annual turnover (from all non-charitable activities) is below £80,000, or there are reasonable grounds to expect that it would be. This is particularly useful if you have solar panels and receive feed in tariff income, as there is no specific charity tax exemption for this.
It is common for charities, including colleges, to use a wholly owned non-charitable subsidiary to carry out any non-primary purpose trading. While a non-charitable subsidiary has no corporation tax exemptions, it can legitimately pay any profit to the college under corporate gift aid to avoid a tax liability. This may seem like a simple solution, but it involves three of the easiest ways for your college to unwittingly end up with a tax liability.
Acquiring shares in a subsidiary
Acquiring shares in a subsidiary, either newly incorporated or by taking over an existing company, requires the consent of HM Revenue and Customs (“HMRC”) otherwise the amount invested is treated as non-charitable expenditure. This will result in a pound for pound withdrawal of your college’s tax exemption. Fortunately, most subsidiaries only have a few pounds of share capital, so it is not an issue, but where an existing company is being bought, there can be a significant liability.
Lending to a subsidiary
A more common problem is lending money to a subsidiary. This too requires HMRC agreement under rules aimed at preventing tax avoidance and ensuring that tax exempt charitable funds are only used for charitable purposes. As with buying shares not getting this consent means that the amount lent is treated as non-charitable expenditure resulting in a pound for pound withdrawal of your college’s tax exemption.
Providing services to a subsidiary
Finally, having set up a subsidiary to carry on the taxable activities it is easy for you to unwittingly replace these with a new taxable trade of providing services or facilities to your subsidiaries and making a management charge. Worse still is not charging, which results in non-charitable expenditure and a withdrawal of tax exemption. The solution is a cost sharing arrangement whereby the college and subsidiary each bear their proportionate share of relevant costs, but you need to ensure this is set up properly.
So, what is your survival strategy to ensure your college doesn’t end up with an unexpected corporation tax liability?
- Understand your charitable objects – these are fundamental to everything you do.
- Think about your sources of income and how they fit into the various tax exemptions available.
- If something does not fit, think about the potential tax liability and whether a subsidiary is appropriate.
Remember you should do what leaves you with the maximum resources for frontline service delivery. Paying a small amount of tax might be the right and cost-effective thing to do, even if it is a little unpalatable.
If you have subsidiaries:
- Look at your group’s activities – are they all in the right entity?
- Do you have appropriate cost sharing agreements in place and are you following them correctly?
- Are funding arrangements properly documented and HMRC approved?
Finally, if you are planning any new activity, selling land, or doing anything you do not normally do, think about the tax as early as possible. It is normally too late to do anything to change the tax position after the event. It all comes down to following good tax governance, getting the housekeeping right and regularly talking with your tax adviser to make sure your college is tax fit for purpose and as future proof as possible.