Countless surveys and studies show that volunteering makes people happier. However, a friend has warned you that if a charity pays your travel costs or other expenses you’ll be landed with a tax bill. Is she right?
What’s a volunteer?
The usual rules for deciding if someone is an employee or worker, and so has corresponding rights to holiday or sick pay etc., apply whatever label you or they attach to the role. However, someone who works for no financial reward will almost always be a volunteer and so won’t be entitled to employees’ or workers’ rights.
Employee or worker?
Paying a volunteer doesn’t automatically make them an employee or worker as long as the amount represents, as far as you or they can reasonably tell, no more than a reimbursement of the costs they incur as a result of working for you. However, even then there can be tax consequences.
Not employment income
There’s a temptation to apply the rules for employees when considering the tax position of expenses payments. This is a mistake. The tax and NI rules for employment-related income simply don’t apply to volunteer workers.
Tip. Where your organisation reimburses a volunteer’s expenses, whether you’re a charity or a business, e.g. a care home, you have no obligation to report the payments to HMRC.
Not self-employment income
Similarly, the rules for self-employed work don’t apply because volunteers aren’t in it to make a profit from the work they do even if the expenses they receive unintentionally outweigh their actual costs. However, that’s not the end of the story.
Is it taxable at all?
HMRC uses a catch-all rule to make expenses taxable income. If you make a “profit” from the expenses you’re paid, i.e. they outweigh all the costs you incur as a result of doing voluntary work, the excess is taxable income.
Tip. Notwithstanding any potential tax bill, there is no corresponding liability to NI contributions. They can only apply to earnings, i.e. a reward in return for work. Reimbursed expenses aren’t earnings even if they are taxable.
Deductible costs
HMRC says you must declare the profit element of reimbursed expenses in the “other income” part of your tax return. The amount to declare is that after deducting costs you’ve incurred, even if they don’t directly relate to the expense you’re being reimbursed for. For example, if you’re paid a mileage allowance for journeys in connection with your voluntary work which exceeds your related costs or HMRC’s approved mileage rate, but receive nothing for, say, the phone calls you’ve had to make, you can deduct the latter from the profit you made on the motor expenses and only declare the balance. However, there’s an alternative which can exempt the income all together.
Tip. The “trading allowance” specifically exempts income within the scope of the catch-all charge, up to £1,000 per year.