HMRC has issued a tax warning to charities and non-profits in the UK. They are increasing their checks through a new programme called HMRC Structured Risk Reviews. The focus is on reviewing records, tax returns, Gift Aid claims, payroll, VAT treatment, and financial governance.
Many charities might find this news concerning, but it doesn’t mean they’ve done anything wrong. It shows that HMRC is becoming more detailed and proactive in checking tax compliance. With the help of AI checks and the HMRC Connect system, even small inconsistencies in tax records and claims may raise questions.
Charities are crucial in communities across London and the UK. They include local groups, community projects, and large organisations that rely on public trust, donations, grants, and careful financial management. This tax warning is important for them because it concerns governance, accountability, and their reputation.
At Clarkwell & Co. Chartered Certified Accountants, we help businesses, landlords, property investors, estate agents, and organisations in London with tax, VAT, accounting, and HMRC issues. This update is particularly important for charity trustees, finance teams, treasurers, and anyone responsible for keeping charity records accurate.
HMRC’s New Charity Tax Warning Explained
HMRC is starting a new programme of Structured Risk Reviews for charities and non-profits. Azets says this is a data-focused approach, using the upgraded Connect analytics system, now with AI, to gather information from tax filings, public records, social media, and over 30 other data sources.
In simple terms, HMRC will check if the figures charities report match information from different sources. For example, they might compare VAT returns, payroll records, Gift Aid claims, filings from Companies House and the Charity Commission, as well as public accounts and social media content. If the information doesn’t match, charities may face further questions.
This is why charities should pay attention to the latest HMRC warning. Small mistakes in a VAT return, unclear Gift Aid processes, unreported payroll benefits, or wrongly classified income could now be easier for HMRC to spot. Previously, some of these issues might have gone unnoticed longer; now, data matching makes that less likely.
However, charities shouldn’t worry too much. A review doesn’t mean HMRC has found any wrongdoing. Often, it just means they want to understand how the charity works and if tax rules are being followed. Still, since these reviews can be stressful and take time, charities should be ready before HMRC contacts them.
What Is an HMRC Structured Risk Review?
Many trustees and charity managers are asking: What is an HMRC Structured Risk Review (SRR)? An SRR is a formal review by HMRC to check tax risks in an organisation. It examines how well the organisation understands and manages its tax responsibilities.
In the charity sector, HMRC may review multiple areas at once, including Corporation Tax, charitable spending, trading income, VAT treatment, Gift Aid claims, payroll records, employee benefits, and governance controls. This means an SRR may involve several tax topics.
The main goal of an SRR is to gather information. HMRC wants to see where risks might be and if further investigation is necessary. If they find underpaid tax, incorrect claims, weak controls, or poor record keeping, the review could lead to tax repayments, interest charges, and penalties.
That’s why charity compliance with HMRC should be a top responsibility for the board. Trustees can’t just rely on a bookkeeper, volunteer treasurer, or finance officer to manage everything. They have duties related to financial oversight, risk management, and governance. If HMRC asks questions, the organisation must clearly explain its processes.
Why HMRC Is Checking Charities More Closely
Many people are asking why HMRC is checking charities now. One reason is that charities have a large financial impact. As of March 31, 2025, there were 170,862 charities registered, and in the 2024-2025 financial year, they handled £102 billion in income and £101 billion in spending.
Charities get money from donations, grants, Gift Aid, trading, investments, and sometimes from abroad, making taxes complicated. Some organisations also run cafes, shops, events, training programmes, property projects, membership schemes, or fundraising activities, each with different tax rules.
Another reason for HMRC’s checks is its goal to close the tax gap. When HMRC finds that tax has been underpaid, overclaimed, misclassified, or reported incorrectly, it tries to get back what it sees as “lost tax.” In charities, this can involve VAT mistakes, Gift Aid problems, payroll tax errors, or incorrect trading income reports.
Many charities have small teams, often relying on volunteers or part-time staff who may lack tax expertise. While this does not lessen their responsibilities, it can increase the chances of mistakes. Charities should see tax compliance as a continuous process, not just something to review when HMRC reaches out.
How HMRC Uses AI to Find Unpaid Tax
Technology plays a key role in tax checks done by HMRC. Many people want a simple explanation of HMRC’s AI tax reviews. HMRC doesn’t just have one person checking each tax return one by one. Instead, it uses data analysis to find patterns, gaps, mismatches, and risks.
The HMRC Connect system is essential for this. It is a data analytics platform that gathers information from tax filings, Companies House, Charity Commission, banking data, and public sources like websites and social media.
HMRC uses AI mainly for recognising patterns and matching data to find unpaid taxes. For example, if a charity claims to have expanded, hired more staff, or started new activities, HMRC expects its tax filings to reflect that. If the payroll submissions or tax returns don’t match the charity’s public statements, the system may flag it for review.
AI does not make final decisions, but it helps HMRC officers figure out which organisations need closer examination. This means charities should assume that HMRC has more information than they think.
For charity trustees, the message is simple: your charity’s numbers must match everywhere. Accounts, tax returns, payroll submissions, and public statements should support each other. If they don’t, HMRC may question why.
Which Charities Could Face HMRC Compliance Checks?
HMRC compliance checks are more likely for organisations with complex operations. Azets identified several reasons for Structured Risk Reviews, such as many employees, various income sources, repayment claims, and overseas activities.
Larger charities often have higher risks due to more transactions, staff, income types, and reporting requirements. However, smaller charities should not think they are safe. A small charity can still face issues if it misuses Gift Aid, incorrectly handles trading income, doesn’t maintain proper payroll records, or misinterprets VAT rules.
For instance, a community charity might hold paid workshops, sell items, rent rooms, receive grants, claim Gift Aid, and hire part-time staff. Each of these actions can lead to tax questions. If the charity doesn’t properly manage restricted funds, trading income, donations, and VAT, issues can quickly arise.
A not-for-profit tax review may also happen due to repayment claims. If a charity frequently asks HMRC for VAT or Gift Aid repayments, HMRC might check if these claims are accurate. While repayment claims are okay, they need to be backed by strong records.
Gift Aid Checks: A Key Risk Area for Charities
Gift Aid is a key focus in charity tax. HMRC says charities and community sports clubs can get back 25p for every £1 donated if they follow the rules.
Because Gift Aid can lead to large repayments from HMRC, checks on Gift Aid will be important for compliance. HMRC may examine if the charity has valid claims, if the donor paid enough UK tax, if the donations are eligible, and if the records support the claims.
Many charities make honest mistakes with Gift Aid. For instance, it may not apply if a donor receives a large benefit. It can also get complicated with memberships, event tickets, donated items, sponsorships, or charity shop sales. HMRC’s guidance states that Gift Aid donations are treated as made after basic rate Income Tax is deducted. Charities can reclaim this tax only if they meet the conditions.
Charities should take HMRC Gift Aid and VAT checks seriously. They need to show who donated, when, what declaration they used, how they calculated the claim, and why the donation qualified. If they lack clear records, HMRC may dispute the claim.
To reduce risk, charities should regularly review:
- Gift Aid declaration wording
- Donor records
- Online donation systems
- Retail Gift Aid procedures
- Event and membership benefits
- Claims submitted to HMRC
- Evidence for each claim
- Training for staff and volunteers
Good charity tax records help during investigations and protect charities from mistakes. They also help trustees show responsible governance.
VAT Rules: Where Charities Often Get Caught
VAT is often confusing for charities. Some activities may not require VAT, while others might be taxable, exempt, zero-rated, or eligible for special reliefs. Charities should carefully review VAT rules, especially if they earn money from trading, property, events, shops, cafes, training courses, or paid services.
An HMRC charity tax review checks if income is reported correctly and if VAT is applied properly. It also examines partial exemption, which affects how much input VAT a charity can recover. For charities with mixed activities, this can quickly get complicated.
For instance, a charity might earn money from donations, grants, sponsorship, ticket sales, shop income, room hire, and consultancy fees. These different income sources may be treated differently under VAT. If the charity uses one simple rule for all, it risks underpaying or overclaiming VAT.
Professional help can be valuable. Clarkwell & Co.’s VAT Return Services in London are useful for charities and non-profits needing assistance with VAT records, preparing returns, checking partial exemption calculations, or fixing past VAT mistakes.
HMRC is unlikely to accept “we didn’t understand the rules” as a valid reason if a charity could have sought advice. Therefore, trustees should document and review VAT decisions and ensure they are backed by proper evidence.
Payroll, Benefits, and Employment Tax Under Review
Payroll is a key focus for HMRC. Recent reports indicate that HMRC may check payroll as part of its risk review, especially for charities with large or spread-out teams.
Charities can have full-time staff, part-time workers, event staff, fundraisers, consultants, freelancers, trustees, or volunteers who get expenses. Each type of worker must be classified correctly. If someone is really an employee but is treated as self-employed, HMRC may challenge their tax and National Insurance status.
Benefits and expenses can also be risky. Things like travel costs, accommodation, mobile phones, company vehicles, staff gifts, relocation support, and trustee expenses need careful checking. Some expenses can be claimed, while others must be reported through payroll or on a P11D.
This can be tough for smaller organisations because their finance processes may be informal. However, informal processes can lead to serious tax issues. A charity should understand who gets paid, why, what tax rules apply, and what evidence supports these decisions.
If HMRC finds payroll errors during audits, the charity could owe unpaid PAYE, National Insurance, interest, and penalties. Therefore, charities should review their payroll systems before HMRC does.
Charity Governance and Record Keeping Now Matter More
This update isn’t just about tax returns; it also involves charity governance in the UK. HMRC’s data-driven method means poor governance can lead to tax risks. If trustees can’t explain their decision-making, record-keeping, or tax checks, HMRC might see this as a lack of control.
Good governance means a charity has clear systems. It should clearly identify who approves spending, reviews Gift Aid claims, checks VAT, controls payroll, maintains records, and reports to trustees. These tasks should not be handled by one person alone.
The Charity Commission emphasises reporting and accountability. For instance, charities must submit their annual returns within 10 months after their financial year ends. If those filings don’t match tax returns or public accounts, it can raise questions.
Strong governance also protects trustees. They must act responsibly, manage resources well, and fulfil their legal duties. If a charity receives a letter from HMRC, trustees should not ignore it or assume it’s a minor issue.
This is why many organisations now need better teamwork between accountants, trustees, payroll teams, VAT advisers, and legal advisors. Good accounting is not just about year-end statements; it’s about being ready for review at any time.
What Charities Should Do If HMRC Contacts Them
Many trustees are looking for guidance on what to do if HMRC reaches out. First, don’t ignore the letter. HMRC deadlines are important, and delaying or giving incomplete answers can make things worse.
Next, understand what HMRC is asking for. A Structured Risk Review may request documents, explanations, policies, calculations, accounts, payroll details, or Gift Aid records. Review all information carefully before sending it to ensure it is complete and accurate.
Seek professional advice as soon as possible. If HMRC starts a review, avoid guessing or rushing responses. A tax adviser can help pinpoint risks, prepare your responses, communicate with HMRC, and minimise penalties.
Clarkwell & Co.’s Tax Investigation Service in London is useful for organisations that receive HMRC letters or investigation notices. Professional help is important since HMRC reviews can quickly become complicated.
Finally, keep a detailed record of all interactions with HMRC. This includes letters, documents sent, phone calls, meeting notes, and deadlines. Having this record will help the charity stay organised if HMRC requests more information later.
How Charities Can Prepare Before HMRC Reviews Them
The best time to get ready for an HMRC review is before you receive the letter. Many now want to know how charities can prepare for these tax reviews. The key is to conduct an internal tax health check.
Start by reviewing key tax areas like VAT, Gift Aid, payroll, Corporation Tax, trading income, property income, overseas operations, and expense claims. The goal is not to instill fear but to identify and fix errors early and improve systems before HMRC asks questions.
Trustees should also compare public information with financial records. Check if the annual report matches the accounts. Are fundraising claims consistent with Gift Aid submissions? Does the website accurately reflect activities in VAT and tax records? Do payroll costs align with staffing statements? Is the Charity Commission record up to date with current operations?
Here’s a helpful preparation checklist:
- Review VAT treatment for all income sources
- Check Gift Aid declarations and claims
- Review payroll and worker status
- Confirm expenses and benefits reporting
- Check trading income and subsidiary arrangements
- Review restricted and unrestricted fund records
- Compare public statements with financial documents
- Keep board minutes for major tax decisions
- Document advice from accountants or tax experts
- Fix known errors before HMRC finds them
Understanding HMRC charity compliance is practical. A review is not just about having the right numbers but also explaining how those numbers were reached.
Why This Matters for London Charities and Not-for-Profits
London charities often work in a complicated environment. They often have various funding sources, different teams, high property costs, events, business activities, corporate partnerships, and connections abroad. This makes their risk level higher than it may seem.
A London charity might get grants, offer paid training, rent spaces, host fundraising dinners, manage volunteers, hire staff in different boroughs, run a charity shop, or partner with organisations overseas. Each of these activities raises questions about taxes, VAT, payroll, and governance.
For charities in London, having local accounting help can be very beneficial. Clarkwell & Co. offers services through its Accountants in Central London and Accountants in Ruislip, assisting clients with tax, accounts, VAT, bookkeeping, and compliance with HMRC, all while understanding the needs of London businesses and charities.
Local support is important because tax advice should be practical. A small community organisation doesn’t need the same process as a large national charity. However, both must keep accurate, consistent, and reliable records.
Property, Landlords and Charity Structures: A Hidden Risk Area
Some charities and non-profits own, lease, or manage properties, which can complicate taxes. They must review property income, rental agreements, development projects, staff housing, and related transactions carefully.
For instance, a charity might rent a hall for events, lease offices, accept property donations, provide accommodation, or manage investment properties. These activities can lead to questions about VAT, direct taxes, restricted funds, and whether income is from charitable activities or business trading.
This is where property tax knowledge helps. Clarkwell & Co. offers Property Tax Accountants in London to assist charities, trustees, landlords, and non-profits with property income, tax reporting, and compliance issues.
Estate agents and letting businesses that work with charitable landlords also need accurate accounting. Clarkwell & Co. provides Accounting Services for Estate Agents and Lettings in the UK to help these businesses maintain better records and improve tax compliance.
It’s crucial to take property activities seriously. If a charity’s public purpose, rental income, VAT handling, and accounts don’t match, HMRC may enquire further.
The Cost of Getting Charity Tax Wrong
Poor compliance can be costly for charities. If HMRC finds unpaid tax, the charity may need to repay the tax, pay interest, and face penalties. This can hurt cash flow, reserves, grant commitments, or services for beneficiaries.
The reputational damage can be even worse. Charities depend on trust. Donors, funders, beneficiaries, volunteers, and the public expect charities to handle money wisely. An HMRC review doesn’t always mean wrongdoing, but poor records or tax mistakes can still weaken trust.
HMRC tax crackdown storeys should be a wake-up call, not a reason to panic. Charities that act quickly can lower risks, improve systems, and feel more prepared if HMRC contacts them.
Good compliance helps with funding applications, audits, board reports, and planning. Funders want proof that organisations are well-managed. Accurate accounts, clean tax records, and good governance can make a charity more trustworthy.
Common Mistakes That Could Trigger Problems
Many charity tax problems start with small errors that can grow serious over time. As AI tax compliance in the UK advances, HMRC may spot these patterns more easily.
A frequent mistake is classifying all income as donations. Some income may actually come from trading, sponsorships, grants, memberships, or VATable sources. Each type has different tax rules.
Another common error is assuming Gift Aid is always available. Gift Aid has strict rules. If the donor declaration is missing, the donor hasn’t paid enough UK tax, or the donor benefits too much, the claim may not count.
Charities also make payroll mistakes. They may pay casual workers without proper checks, reimburse expenses without proof, or misclassify regular workers as self-employed without reviewing their status.
Other common mistakes include:
- Not keeping Gift Aid declarations
- Mixing restricted and unrestricted funds
- Ignoring VAT exemptions
- Failing to review trading income
- Poor payroll control
- Weak oversight by trustees
- Incomplete board minutes
- Vague expense policies
- Incorrect handling of property income
- Delayed responses to HMRC letters
These issues are fixable, but it’s best to address them before HMRC discovers them.
A Practical HMRC Readiness Plan for Trustees
Trustees don’t need to be tax experts right away, but they do need a practical plan. The first step is to ask key questions at the board level. For instance, trustees should ask: Do we know which income sources are taxable? Has VAT been applied correctly? Are our Gift Aid records complete? Are payroll and expenses being checked? Have we sought advice on complex issues? Can we explain our tax situation if HMRC enquires?
The second step is to assign responsibilities. One person should handle VAT, another should manage Gift Aid, and someone else should oversee payroll. There should also be someone to ensure filings are submitted on time. External accountants can help, but trustees still need to oversee these tasks.
The third step is to document decisions. If a charity decides that certain income isn’t subject to VAT, this should be recorded with the reasoning and advice. If Gift Aid is claimed on specific donations, the process should be clear. If workers are treated as self-employed, the reason should be documented.
The fourth step is to review regularly. Tax compliance shouldn’t just be checked once a year. A quarterly review can catch problems early and avoid surprises at year-end.
This structured approach can better prepare a charity for HMRC tax reviews in 2026 and future compliance checks.
How Clarkwell & Co. Can Support Businesses and Property Clients
Clarkwell & Co. Chartered Certified Accountants does not work with charities or non-profits, but it supports many businesses, landlords, and property investors in London with tax, VAT, accounting, bookkeeping, and HMRC issues.
For businesses, the firm reviews VAT returns, improves payroll systems, prepares accounts, and helps with HMRC enquiries. Companies facing increased HMRC scrutiny can get proactive support to lower risks and stay compliant.
If HMRC has contacted a business, the Tax Investigation Service London can assist in responding correctly to avoid mistakes. If VAT is an issue, VAT Return Services London can help check calculations, records, and submissions. For property clients, Clarkwell & Co. offers valuable expertise in property tax and landlord accounting.
The aim is not just to handle HMRC matters but to create better systems so business owners and finance teams are confident in their records.
Do Not Wait for HMRC to Find the Problem
Charities and not-for-profit groups in the UK must take the latest HMRC tax warning seriously. With new AI checks and the HMRC Connect system, it’s important for these organisations to keep their records accurate and complete.
This is also a chance to improve. By reviewing their VAT, payroll, Gift Aid, governance, and tax records now, charities can lower their risk and build trust. This will also make things easier for trustees, staff, donors, and funders.
The main point is clear: don’t wait for HMRC to find issues first. If your charity deals with complex income, repayment claims, trading, property income, or unclear records, now is the time to assess your situation.
A calm review early on can help you avoid a stressful HMRC enquiry later. If HMRC has already contacted your organisation, seeking professional advice can help you respond accurately and confidently.
