We often get asked whether charities should pay VAT or not. It’s complex and it depends. There are some ‘reliefs’ available for charities, so they do not always have to pay VAT, but such reliefs are very specific, and the relevant conditions must be met. Unfortunately, many costs incurred by charities will include VAT. However, this VAT could potentially be reclaimed, either via a VAT return, if VAT registered or via an alternate mechansim known as a Section 33, or S33, claim (eligibility conditions, pending).
Charity VAT is complicated, and so are the special rules affecting charities. The purpose of this article is to provide some high-level clarity.
VAT Registration:
Generally speaking, if a business (which can include a charity) must register for VAT if:
– They sell more than £90,000 of goods or services, which would be liable to VAT if VAT registered, over a rolling 12-month period,
or
– They expect to generate more than the VAT registration threshold (currently £90,000) in relation to the sale of goods and/services within the next given 30 days
A charity also has to register for VAT if the value of its own taxable supplies, plus the value of services bought-in from overseas businesses comes to more than £90,000 in a rolling 12-month period.
If the charity sells less than £90,000 of goods and services (which would attract UK VAT if VAT registered), the charity could choose to register for VAT.
Taxable supply:
Taxable supplies are goods or services which would attract UK VAT at the standard rate of 20%, reduced rate of 5%, or zero rate of 0%, when supplied by a VAT registered organisation, including a VAT registered charity.
Examples include:
- Sales of made and bought-in goods
- Goods which have been donated are zero rated when sold by charities
- Supplies of food and catering –
- Specific rules determine whether the supply is that of standard rated catering or hot take-away food, or zero-rated food
- Advice and consultancy
- Sponsorship/advertising/use of logos
- Sponsorship can be a tricky area, as depending on the specific arrangements, this can be outside the scope of VAT, rather than standard rated
- Management/administration charges between a charity and its subsidiary
- Vehicle and equipment hire
- Some property rentals
Non-business or non-taxable supplies:
VAT exemption:
Some services are what is known as exempt from VAT. These are normally supplies provided as part of a business activity but are not taxable. These include certain:
- Education and vocational training services
- Health and welfare services
- Cultural services
- Sports facilities
- Sales in connection with a qualifying fundraising event
- Some property rentals
Outside the scope of VAT for charity:
Where something is given for nothing in return, it will normally be seen as a non-business activity and be ‘outside the scope of VAT’. This is because for something to be within the scope of VAT, there has to be a supply in return for payment (monetary or otherwise) and be done by way of business. Donation and grant income is not considered payment for a supply and falls outside the scope of VAT as the income is freely given and is treated by the charity as a gift.
Recovery of VAT:
Generally speaking, a VAT registered business can reclaim VAT it has incurred which has a ‘direct and immediate’ link to its taxable, or intended taxable, activities. VAT incurred which has a direct and immediate link to either non-business activities, or VAT exempt supplies is generally not recoverable.
However, charities will incur general overhead costs that cannot be said to only relate to taxable supplies, or only to VAT exempt or non-business activities. These overhead costs are referred to as ‘residual’. Charities (and other organisation’s which are VAT registered) which make both exempt and taxable supplies are referred to as ‘partly exempt’ and are required to carry out a ‘partial exemption calculation’ within their VAT returns. This includes an annual adjustment each year, in relation to the recovery of VAT incurred on residual costs. Residual costs incurred which incorporate non-business activities can also be partly recovered, via the VAT return. Unlike partial exemption, however, there is no set calculation and instead, the charity should determine a method which is ‘fair and reasonable’. Funding agreements can cause a headache and need careful consideration to determine whether they are actually grant agreements (outside the scope) or service agreements (which could be taxable).
Where a charity is not VAT registered but is defined as a ‘specified body’ in accordance with Section 33 of the VAT Act 1994, it can make VAT reclaims by submitting Section 33 claims.
VAT reliefs:
Although charities generally pay VAT on all goods and services they buy from VAT-registered businesses, there are a number of reliefs that apply, irrespective as to whether the charity is VAT registered or not. For example, they can pay VAT at a reduced rate on fuel and power, such as gas and electricity, and the zero rate on some goods and services including:
- Advertising and items for collecting donations including recruitment advertising
- Aids for disabled people
- Construction services
- Drugs and chemicals
- Equipment for making ‘talking’ books and newspapers
- Lifeboats and associated equipment, including fuel
- Medicine or ingredients for medicine
- Resuscitation training models
- Medical, veterinary and scientific equipment
- Ambulances
- Goods for disabled people
- Motor vehicles designed or adapted for a disability
- Rescue equipment
There are some very specific rules on these zero rated goods so take a look at https://www.gov.uk/vat-businesses/charging-vat-to-charities.
In order to claim these, the charity may have to provide its supplier with an eligibility declaration. It is also possible for a charity to incur no VAT on leasing a building (or part of a building), provided the property will be used solely for non-business activities and a relevant declaration is provided to the landlord, prior to entering the lease agreement. Again, conditions apply.
If you’d like some further help navigating VAT within a charity, please contact our VAT Partner, Sandy Cochrane, VAT Director, Diane Savory or our Charities team, Katherine Wilkes and Robert Kirtland.
