As the cost-of-living crisis continues its squeeze on the charity and not-for-profit (NFP) sector, the importance of assistance from unpaid volunteers increases. This can range from charity shop volunteers to non-executive directors and council members. Sometimes organisations operating in this sector may wish to show appreciation for these invaluable volunteers, perhaps via a small honoraria or ex-gratia payment as well covering expenses incurred.
As volunteers are not considered employees, many charities and NFPs look to pay all such amounts gross outside the “normal” PAYE system and do not consider whether there may be any payroll reporting requirements. Payments to volunteers are a complicated area of tax.
If a volunteer incurs necessary expenses in carrying out their voluntary work and is either paid in advance or reimbursed for those expenses and nothing more, the expenses or reimbursements are not taxable nor subject to National Insurance Contributions (NIC). Similarly, if the organisation for which the volunteer works makes reasonable payments to cover expenses which the volunteer would not otherwise have incurred, such as the cost of travelling from home to the place where the voluntary work is done, there is usually no income tax or NIC due, depending on the rates paid. Sometimes HMRC’s scale rates are used to cover volunteers’ travel and subsistence costs, as these are accepted by HMRC as being ‘reasonable’ and should not of themselves trigger any argument from HMRC that there is profit element to the amounts paid.
However, a common area of contention with HMRC is whether any profit element arises to volunteers on the reimbursement of expenses to them by means of any other round sum allowances (see further below). To avoid adverse tax consequences, expense reimbursement should do no more than reimburse the volunteer for the expenses actually incurred in doing their work.
Volunteers offered reimbursement of expenses from a charity may choose to waive those expenses or wish to gift them back to the charity. The most tax-efficient way of doing this is for the volunteer to receive the expense payment and then to gift it back to the charity as a gift aid donation. For Gift Aid to apply, there must be an actual payment donated to the charity; a waiver of expenses does not involve a payment and so would not count.
From April 2020, treatment of expenses, as free of income tax and NIC for unpaid officeholders, is on a statutory basis. HMRC’s guidance provides that such individuals “will not have any taxable earnings unless it can be shown that the office holders are being remunerated for their services”.
From April 2020, treatment of expenses, as free of income tax and NIC for unpaid officeholders, is on a statutory basis. HMRC’s guidance provides that such individuals “will not have any taxable earnings unless it can be shown that the office holders are being remunerated for their services”. HMRC guidance to its inspectors states that if the sums involved “are small, they should not spend time examining the amounts paid to such officials to compensate them for the extra expenses they incur as a result of holding office”. These principles are intended to apply to small amounts of travelling and subsistence payments, rather than regular small payments for undertaking the role. There is no guidance on the meaning of small!
National Minimum Wage (NMW) and National Living Wage (NLW) legislation does not apply to voluntary workers employed by a charity, a voluntary organisation, an associated fundraising body or a statutory body. However, it does apply to anyone doing work or providing services on a voluntary basis who receives any form of payment or reward over and above expenses actually incurred. The Gov.uk website includes examples showing that even paying a flat rate nominal travel allowance to a volunteer who actually incurs no travel expenses, could bring that volunteer into the scope of the NMW/NLW.
It is therefore crucial that charities and NFPs using voluntary workers should not pay blanket allowances to all volunteers, without checking that the individual volunteers have incurred the expenditure intended to be covered by the allowance. The NMW/NLW legislation does not apply to office holders working on an unpaid voluntary basis.
When a charity or NFP wishes to pay more than described above, there will likely be tax and NIC issues, and possibly NMW/NLW issues. For an honorarium, or similar payment such as an ex-gratia payment, to be considered employment income subject to PAYE tax and NIC:
- the individual needs to hold an office or employment
- the payments or other benefits received must
- arise from that office or employment – usually as
- reward for services provided.
If a volunteer holds a position in a charity such as secretary, treasurer or chairperson, this will usually be deemed an office by HMRC as such positions usually have a continued existence over time. If the office-holder receives anything other than reasonable reimbursement of expenses, any such payments or benefits are likely to be seen as employment income and, depending on the sums involved, HMRC will likely argue that the amounts received should be paid via the payroll and subject to both PAYE and Class 1 NICs.
The payroll position of notional payments to non-office holders is more difficult to determine as it depends on their employment status and whether they may be deemed to hold an office or employment. For example, a non-executive director or council member may receive a gross annual payment, essentially as a “thank you“ which bears no relation to the amount of their time commitment. HMRC may contend that the individual is an office holder and that payments to them should have been processed through the payroll.
Charities and NFPs should ensure that they have a thorough expenses policy in place and used in practice to ensure that unexpected issues do not arise. Any payments made over and above the reimbursement of expenses should be treated correctly for tax purposes as well as considering any issues due to the organisation’s charitable or NFP status.
If you would like to discuss any of the points raised in this article, please contact PEM.