Guidance

Annex ii: non-charitable expenditure

Updated 9 April 2026

Non-UK charitable organisations can no longer apply to get tax relief.

1. Introduction

Where a charity’s income and gains are not expended solely on charitable purposes, its exemption from tax may be restricted.

This restriction of tax relief may apply where:

• an item of expenditure is incurred wholly for non-charitable purposes
• an item of expenditure is incurred partly for charitable purposes and partly for non-charitable purposes
• a charity’s treated as incurring non-charitable expenditure

2. Charitable and non-charitable expenditure

2.1

Charitable expenditure is expenditure that the charity has incurred for charitable purposes only. It includes such items as charitable grants and expenditure incurred on the administration of the charity, to include internal investment in things such as administrative systems, processes and fundraising within the charity.

It’s important to remember that charitable expenditure does not include investments that the charity has made or loans which are accepted as charitable loans or investments for the purposes of sections 558 and 561 Income Tax Act 2007 (for charitable trusts) and sections 511 and 514 Corporation Tax Act 2010. This is because the making of an investment is not generally regarded as expenditure. However, if the charity makes a non-charitable (non-qualifying) loan or investment this is treated for tax purposes as non-charitable expenditure. Read Annex iii for detailed guidance about charity loans and investments.

2.2

Non-charitable expenditure is:

• expenditure which is not incurred for charitable purposes only
• any payment to an overseas body where the charity has not taken reasonable steps to ensure the payment will be applied for charitable purposes, for detailed guidance about payments to overseas bodies read section 9 of this annex for more information.
• any investment or loan made by the charity which is not a qualifying investment or loan

2.3

Charities may make trading losses. If the losses arise from primary purpose trading these will be regarded as charitable expenditure. If the losses arise from non-primary purpose trading (or deemed non-primary purpose trading for chargeable periods beginning on or after 22 March 2006) these will be non-charitable expenditure. Read Annex iv for detailed guidance about charity trading losses.

3. Attributable income and gains

Charities’ exemptions are restricted where the charity has incurred non-charitable expenditure and it has ‘attributable income and gains’. Attributable income and gains means the amount of income and gains that are eligible for tax relief or exemption. It includes Gift Aid donations, payroll giving donations, income such as rental income, interest received, profits from a charity’s primary purpose trading activity, legacy income and capital gains. Income which does not qualify for tax exemption, such as the profits of non-charitable (non-primary purpose) trading or amounts taxable under anti-avoidance provisions is not included.

Legacy income, including property received under a will (as defined in sections 523A ITA 2007 and 474A CTA 2010) will be considered attributable income with effect from 6 April 2026. Any legacy income received before this date, which does not also fall within another class of attributable income, will be excluded as attributable income.

There is no timeframe within which any exempt income must be expended so long as when it is, it is expended on charitable purposes

Other donations made outside the Gift Aid and payroll giving regimes that are outside the scope of tax altogether, are also excluded.

4. The restriction to a charity’s tax relief

4.1

All charities that incur (or are treated as incurring) non-charitable expenditure lose tax exemption on an equivalent amount of their attributable income and gains. Charities cannot set their charitable expenditure against attributable income and gains before their non-charitable expenditure.

Example

A charity has gross Gift Aid income of £28,000 and gross bank interest of £3,000 in a chargeable period.

It would be entitled to tax exemption on those sources of attributable income, totalling £31,000.

The charity spends £10,000 in charitable grants and administration and makes a non-charitable loan of £7,000.

Income and expenditure	Amounts
Attributable income	£31,000
Less: non-charitable expenditure	£7,000
Income on which relief is allowed	£24,000

Tax relief is disallowed in respect of £7,000 of attributable income.

4.2

Where a charity has the tax exemptions on part of its attributable income and gains restricted it can choose which sources of attributable income and gains the restriction’s applied to. The charity must notify HMRC of its preference within 30 days of being notified of the restriction. If the charity does not specify a source, then HMRC will do so for the charity.

4.3

If a charity has incurred non-charitable expenditure, it must complete and file a Self Assessment or Corporation Tax Return for the chargeable period concerned and account for any resulting tax liability. If the return shows the attributable income and gains being allocated against sources of income HMRC will accept this as notice being given as in section 4.2 of this annex.

5. Chargeable periods

The chargeable period for a charitable trust is the tax year ending 5 April. For a charity treated as a company for tax purposes, the chargeable period is its accounting period.

6. Carrying back excess non-charitable expenditure to previous periods

6.1

The amount of non-charitable expenditure incurred by a charity in a chargeable period may be greater than the attributable income and gains in that period. If this is the case, the excess non-charitable expenditure is set against the total income and gains of the charity, that is, the sum of the charity’s attributable income and gains plus all other sources of income or gains, whether chargeable to tax or not (for example, non-taxable grants and other gifts received).

If there’s still an excess of non-charitable expenditure then this excess is carried back to the previous chargeable period, where it’s treated as non-charitable expenditure of that period, and so on until either:

• there’s no longer any excess non-charitable expenditure
• the chargeable period to which the excess is carried back ended more than 6 years before the end of the period in which the non-charitable expenditure was actually incurred

6.2

Where excess non-charitable expenditure is carried back to earlier chargeable periods, an assessment may be made to disallow the appropriate amount of tax relief and adjust the tax liability of that earlier period.

Example

A charity has gross Gift Aid income of £25,000, and gross bank interest of £5,400 in a chargeable period.

It would be entitled to tax exemption on those sources of attributable income, totalling £30,400.

The charity also has other non-taxable grant income of £1,600. The charity spends £10,000 on charitable grants and administration. The charity makes a non-charitable loan of £35,000.

Income and expenditure	Amounts
Attributable income	£30,400
Less: non-charitable expenditure	£35,000
Income on which relief allowed:	£0

The charity’s tax exemptions are lost on all of its attributable income.

The charity has excess non-charitable expenditure of £4,600.

This can be carried back only to the extent that non-charitable expenditure exceeds its total income and gains.

Income and expenditure	Amounts
Total income and gains	£32,000
Less: non-charitable expenditure	£35,000
Excess non-charitable expenditure	£3,000

6.3

The excess non-charitable expenditure of £3,000 is carried back first to the previous chargeable period and the charity exemptions restricted in that period. If there continues to be an amount of unapplied excess the balance is carried back to the period before that, and so on.

7. Payments outside the terms of the charity’s governing document

7.1

If a charity’s governing document specifically prohibits or restricts certain expenditure, it’ll be treated as non-charitable expenditure.

7.2

If expenditure is clearly of a charitable nature, but it’s not specifically authorised by the terms of the governing document of the charity, it will not necessarily be treated as non-charitable expenditure. HMRC may seek the views of the relevant charity regulator in considering the tax treatment.

8. Accumulation

Where a charity accumulates income, or builds up reserves, HMRC needs to decide if this is within the meaning of the phrase ‘applied to charitable purposes only’. HMRC will challenge accumulations of income on the grounds that the income has not been applied to charitable purposes, for example if:

• income is not invested at all but kept in cash or in a current account
• it becomes apparent that investment decisions are not made exclusively for the benefit of the charity, for example, where accumulated income is being invested in a project in which there is a potential conflict between the interest of the charity and the interest of the trustee or provider of the charity funds

9. Payments to overseas bodies

9.1

In general, a payment by a charity for its charitable purposes is charitable expenditure by the charity. However, where the payment is to an overseas body an additional condition must be met in order for the payment to be charitable expenditure for UK tax purposes.

The legislation is at Section 500 CTA 2010 and Section 547 Income Tax Act 2007 for charitable companies and trusts respectively.

9.2

A charitable payment made to a body outside the UK will only be charitable expenditure for UK tax purposes by the charity provided the charity can clearly demonstrate to the commissioners for HMRC that it has taken steps that the commissioners consider are reasonable in the circumstances to ensure that the payment is applied for charitable purposes. If that condition is not met, the payment is treated as non-charitable expenditure by the charity for UK tax purposes.

9.3

Applied for charitable purposes means applied for purposes which are regarded as charitable within Chapter 1 of the Charities Act 2011. The same definition of charitable purpose applies for all charities claiming UK tax reliefs. Payments to an overseas body and payments to a body outside the UK mean any monetary payment to anybody outside the UK, and include monetary payments sent outside the UK to charities, companies, agents, partners and individual persons outside the UK.

9.4

Trustees are required to carry out appropriate research in relation to the overseas body, followed by monitoring and evaluation, and to avoid or minimise risk to the charity’s finances to meet their legal duty as trustees. The charity trustees must be able to describe the steps they take, explain how those steps ensure charitable application of funds, demonstrate that those steps were reasonable and produce evidence that the steps were, in fact, taken.

It’s not sufficient for the charity to simply establish that the overseas body is a charity under the domestic law of the host country. Nor is it enough to keep records of how things are spent. These are important but for overseas payments trustees must do more. The rest of this chapter deals with the situation where the charity makes a payment for which it must take steps to ensure that the payment is applied for charitable purposes.

9.5

When considering whether the steps taken by the charity were ‘reasonable in the circumstances’, HMRC will have regard to:

• the charity’s knowledge of the overseas body
• previous relations with the overseas body
• previous history of the overseas body
• the amounts given in both absolute and relative terms
• the charity’s observance of its own internal financial, management and decision making procedures, and whether or not these were adequate

9.6

When reviewing payments made to overseas bodies HMRC will generally ask the charity trustees to provide information and supporting documentation about the:

• person or persons to whom the payment was given
• specific charitable purpose for which the payment was given, the reasons, and how the decision to provide the payment was arrived at
• guarantees or assurances that have been obtained from the overseas body that the payment will be applied for the purpose for which it was given (such as a partnership or other written enforceable agreements), and what financial controls were in place, including sufficiently detailed financial records providing robust audit trails
• steps the trustees took to ensure the payment will in fact be applied for charitable purposes (such as safeguards, monitoring and oversight)
• follow-up action taken by the trustees to confirm that payments were applied properly

The Commissioners for HMRC must be satisfied that the steps taken by the trustees are reasonable in the circumstances. If HMRC is not provided with sufficiently detailed evidence of the steps taken it may not be able to accept the expenditure as charitable expenditure. This may give rise to a liability to tax.

The steps to be taken will depend upon the nature and circumstances of the expenditure, for example, whether the recipient body may pass on the funds to a connected person who may use the funds for non-charitable purposes. The rest of this section explains what sorts of steps would be reasonable depending on the circumstances of both the donating charity and receiving bodies.

9.7

Trustees are expected to make adequate enquiries to find out such information as is reasonably available about the overseas body and establish what evidence will be provided or made available by that body to show that the payments will or have been applied for charitable purposes. The nature of the steps will depend upon the scale of operations, the size of the sums involved and the relevant circumstances.

Enquiries should also be made to identify risks relating to connections between the body and other organisations. Where visits are required, proper documentation is needed to show the checks carried out.

Trustees should also identify any specific risks for certain projects especially in remote areas where language literacy and banking might be issues. Properly documented systems should be put in place if necessary to manage these. Where payments are to be made to overseas branches or partners, funds should be held in properly operated accounts by authorised persons.

9.8

In the case of small one-off payments, an exchange of correspondence between the charity and the overseas body will normally be sufficient. Where possible, the correspondence should be on headed paper, and it should:

• give details of the payment and the purpose for which it was given
• provide confirmation that the sum has or will be applied for the purpose given

Example 1

A situation where a thank you note on headed notepaper will be sufficient evidence

A pastor from a church outside the UK visits a partner parish in the UK. On his return home he discovers that the church building in his home town has burned down. When writing to the UK church to thank them for his visit he mentions this and the UK church decide to donate £500 to help rebuild the church. The overseas church sends a thank you note and a picture of the new building when it is complete.

This is a situation where the local pastor is known to the UK charity, the amount is a small, one-off payment and there are likely to be good connections between the charity and the overseas church. In this case a thank you note on headed paper is sufficient.

The relatively small amount of the donation affects the level of evidence required. In a situation like this HMRC would accept that the trustees’ personal knowledge of the pastor and his connection with the overseas church is sufficient evidence.

Where there was no history of personal contact and knowledge with the pastor more evidence would be needed, for example press reports confirming that the building had, in fact burnt down, and was, in fact, a church and had been rebuilt.

9.9

More thorough work by the trustees will be required where the sums involved are larger or where a transfer of funds is to form part of an ongoing commitment. This might include independent verification of the overseas body’s status and activities, along with reporting and verification of the manner of application of resources provided. The steps required can be reviewed in the light of evidence of proper use of funds and resources from recent earlier involvement on a particular project.

Example 2

A situation where further evidence of action taken is required

A UK charity becomes aware of a small overseas hospital that’s struggling to afford drugs to treat a local epidemic. They agree to provide funding for 6 months supplies at the cost of £10,000 and enter into an arrangement with a pharmaceutical supplier close to the hospital. The supplier provides the necessary drugs to the hospital and invoices the UK charity.

In this situation the invoices from the drugs company are not sufficient on their own. The trustees must be able to produce sound evidence to show what they did to verify that the hospital warranted the funding. This might include evidence of governance arrangements, financial controls and alternative available funding. In addition as things progress the trustees should check that the correct drugs are actually being delivered to the hospital in the amounts invoiced. A letter from the hospital confirming that they’ve received what the charity purchased would be acceptable evidence.

The larger level of the donation, a lack of detailed knowledge of the recipient charity and the existence of a third party means that more evidence is required than for example 1. In a situation like this the evidence to verify the suitability of the expenditure is likely to include:

• records to demonstrate the research undertaken, including the process in relation to the trustees’ decision to provide funding
• records of meetings or teleconferences with the overseas body
• exchanges of correspondence
• detailed financial records
• a copy of any agreement between the third party and the charity

If the charity was supporting a particular project being carried out by an overseas body, official project documentation and literature.

9.10

The steps taken are to ‘ensure’ that the payment to the overseas body will be applied for charitable purposes. If the recipient body is not bound by its own domestic law to apply all of its income for charitable purposes, then the trustees of the paying charity should consider seeking a legally binding and enforceable agreement to ensure that their payment will be applied charitably.

If the overseas body declines to enter into such an agreement, the trustees of the paying body may have difficulty ensuring that the payment is applied for charitable purposes. If an agreement is entered into the trustees will need to have a means of establishing whether the agreement has been complied with.

9.11

Where a charity makes a series of payments to the same overseas body for the same charitable purpose, it’s not necessary for fresh enquiries to be made in respect of each new payment. If the trustees have recently checked the overseas body is applying its charitable funding properly, for example within the last year, and they’re satisfied that the overseas body has an ongoing need for funding and is bound to apply payments from the charity for charitable purposes, then it’s not unreasonable for the trustees to rely on the results of this review for a payment shortly afterwards.

9.12

However, reliance on the overseas body’s integrity may diminish with the passing of time and the trustees should be able to demonstrate that they are making enquiries of a sufficiently searching nature at regular intervals to ensure that the funds are being properly applied for charitable purposes.

Situations where more positive action is needed.

Example 3a

A charity is approached by an overseas body to provide support for a school building project. This is scheduled to take 18 months to complete. The proposed project is evaluated by the trustees who consider this to be within their charitable objects. They agree to provide staged funding totalling £250,000.

In this case the trustees must be able to produce evidence to demonstrate the research carried out in advance of any funds being made available and detailed financial and other records of how the grants were actually spent.

In a situation that involves large sums of money and a long term commitment, which could involve several overseas contractors, HMRC would expect to see comprehensive evidence of the trustees’ considerations. This might include:

• a detailed project plan
• a formal funding application from the overseas body
• records of the evaluation and decision making procedures carried out by the trustees

In addition HMRC would expect the funding to be dependent on the overseas body entering into a formal agreement with the charity providing for:

• the payment of grants in stages based on specific targets
• a series of reviews to monitor project delivery
• claw back provisions should the project fail or the building is not used as intended

The trustees should also be able to produce evidence of ongoing evaluation as the project advanced including recommendations in relation to further funding.

Example 3b

A charity wishes to endow an overseas body with £1,000,000 to be used for charitable purposes at the body’s own discretion. The research to be carried out by the trustees should include obtaining sufficiently detailed financial records to provide robust audit trails in support of their decision. Further, they’ll need to either:

• obtain detailed and legally binding assurances from the recipient body that the money will be applied for purposes that are charitable for UK purpose
• satisfy themselves that the body is established in such a manner that it is subject to regulation in the overseas country that will ensure its funds can only be applied for purposes that are charitable for UK purposes

If the charity is seeking binding assurances it will need to:

• obtain the assurances in a form that’s legally binding and enforceable in the overseas country, ideally this will be in writing
• ensure, taking specialist advice if necessary, that it will be able to take enforcement action against the overseas body in case funds are not applied as intended
• ensure that it and the overseas body have a clear understanding what expenditure the funds provided are intended to meet and over what time scale
• ensure that effective monitoring arrangements are agreed with the overseas body

If the charity is relying on the manner of establishment of the overseas body and local regulation it will need to:

• ensure, taking specialist advice as necessary, that the overseas body is established in such a way as to ensure that it can only apply its funds for purposes that are charitable within the meaning of English law; in practice this will be set out in its governing document
• ensure, taking specialist advice as necessary, that the domestic legislation and regulatory structure in the overseas country are such that the overseas body will be effectively monitored, and the controlling individuals held to account, if it fails to apply its funds in accordance with its governing document