VAT for charities can be a complex subject due to the mixed activities that many charities undertake. In this article, FPM Senior Manager Adam Strong answers some frequently asked VAT questions.
In my years of working with charities, VAT is the topic that seems to cause the most uncertainty. This article summarises a few key points that will help you get to grips with the basics. However, VAT for charities is a complex issue and professional advice should always be sought.
Do charities need to register for VAT?
Engaging in charitable activity does not mean that your charity is exempt from VAT. Whether or not you need to register for VAT depends on:
- The charity’s activities—for VAT registration purposes, business activities are within the scope of VAT while non-business activities are outside the scope.
- The level of income generated by the VATable activities and whether this exceeds a certain threshold (currently £85,000 in the UK).
What are business and non-business activities for VAT purposes?
Deciding whether your activities are business or non-business is usually straightforward for non-charitable companies. However, for charities, this is more complex. A key step is to determine whether the trading is the primary purpose, incidental, or simply other trading activity.
For other trading activities, it is worth considering whether these activities should be conducted through a trading subsidiary. The subsidiary can donate its full taxable profits to the main charity, thereby reducing any corporation tax that would otherwise be due.
What are the VAT implications of grants and service level agreements?
Where charities receive grants or have Service Level Agreements (SLA) in place, a key question to ask is whether the funder receives any direct benefit.
Generally, grants are outside the scope of VAT.
Where a charity that has an SLA with a funder provides services to the charity’s beneficiaries, these services are likely to be outside the scope of VAT. However, if the charity provides its services directly to the funder, this may be VATable activity.
How are other charity services treated for VAT purposes?
Outside of grants and SLAs, many charities provide services. For VAT purposes, these services are usually treated in the same way as services provided by non-charitable entities—for example, a drug charity paid by the Public Health Agency (PHA) to deliver training to PHA staff is considered to be a business activity and is therefore VATable whereas a PHA grant to provide training and guidance for those at risk is considered to be a non-business activity and is therefore not VATable.
Are any supplies of goods and services exempt from VAT for charities?
Many supplies of goods and services by charities are exempt from VAT. This includes activities such as education and vocational training, health and welfare services, and sales relating to qualifying fundraising events. However, it is advisable to seek advice as the rules are complex. It is also important to be aware that income from VAT exempt activities is not taken into account for VAT threshold purposes and therefore VAT incurred on related purchases cannot be recovered.
Is there VAT on goods sold in charity shops?
Many charities run trading shops. Where these shops sell donated goods, the sales are VATable at 0%. Sales of new goods are VATable at 20%.
How much VAT do charities charge?
Once your income from VATable supplies exceeds the VAT registration threshold (currently £85,000 in the UK) you must register for VAT and charge VAT on those supplies. You can also opt to register for VAT if you are below the threshold although you cannot register if you don’t make taxable supplies. Voluntary registration can be an advantage if your supplies are zero rated.
There are three rates to consider when charging VAT:
- Standard—default rate for taxable supplies (currently 20%)
- Reduced rate—applies to certain specific supplies, such as electricity. Relevant supplies are listed in the VAT Act
- Zero rate—some supplies are zero rated for VAT. It is important to understand the difference between zero rated supplies and exempt supplies as they are treated differently for VAT purposes.
Can you claim back the VAT on charity costs?
When thinking about VAT for charities, an important point to keep in mind is that VAT-registered charities can recover the VAT incurred on costs related to certain VATable business activity. Costs relating to provision of standard or zero-rated business supplies are fully recoverable whereas costs relating to provision of services which are exempt from VAT are not recoverable.
Many VAT-registered charities have a mix of VATable and non-VATable supplies. In this situation, partial recovery applies usually calculated based on the proportion of VATable versus VAT-exempt supplies.
Is there any VAT relief on charity activities?
Charities may be able to claim VAT relief on certain activities. Examples of these reliefs include:
- VAT relief on rent: Charities renting premises for charitable purposes may ask the landlord to disapply VAT on the rent (ie to treat the VAT as not applicable);
- VAT on advertising: Certain advertising materials and supplies of advertising for charities are zero rated;
- VAT on construction: Certain building and adaption work for disabled access is zero rated.
Depending on the charity, various other reliefs may apply regardless of whether or not a charity is registered for VAT. Where possible, it is better to avoid paying VAT at the outset, rather than seek to recover it after the fact.
How is VAT on capital projects calculated?
When embarking on capital projects, it is important to take the VAT implications into account. In particular, charities will need to ascertain whether zero-rating applies. This will largely depend on the nature of the building work and whether the building is for a relevant residential or charitable purpose. Usually, extension work is fully VATable whereas an annex may be zero-rated in certain circumstances. Where a building qualifies for zero-rating, charities will need to issue a zero-rating certificate to their contractor.