VAT can be one of the most complex areas of charity finance. While many assume that charities are automatically exempt, the reality is far more nuanced.
In practice, a charity’s VAT position depends on the type of activities it carries out. Like any form of tax compliance, getting it wrong can lead to unexpected liabilities or missed opportunities for recovery, as well as potential penalties from HMRC.
Understanding when VAT applies, when it doesn’t and exemptions apply, the impact of this and how to manage VAT recovery and compliance effectively is essential for maintaining good financial governance.
Many activities by charities are subject to the same VAT rules as businesses when they provide goods or services for a charge. However, there are some key rules that apply only to charities.
The key initial question is whether the charity’s activities are classed as business or non-business for VAT purposes:
Only business activities fall within the scope of VAT, meaning exemptions need to be considered, and if VAT does apply then at what rate, either 0%, 5% or 20%. This needs to be considered prior to considering the amount of VAT recoverable on costs.
Non-business activities, on the other hand, are a ‘non-supply’ and VAT recovery on costs is usually restricted.
Charities should register with HMRC if their ‘taxable’ supplies exceed the VAT registration threshold (currently £90,000), but they may also choose to do this voluntarily so that they can reclaim the VAT on supplies and services that they have purchased.
Once a charity or not-for-profit organisation has registered with HMRC it will be required to complete VAT returns and submit them to HMRC using software that is compatible with Making Tax Digital for VAT.
Charities can benefit from a number of VAT reliefs, but understanding which apply requires careful analysis.
Some of the most common include:
However, each relief comes with specific qualifying criteria. Incorrectly applying zero-rating or exemption can lead to assessments and penalties from HMRC, so charities should always confirm eligibility before assuming VAT relief applies.
Charities that aren’t VAT registered can also ask their suppliers to charge them at the reduced five per cent rate or zero rate on certain goods and services based on their status.
Organisations also benefit from a VAT exemption on qualifying goods that are imported from outside the EU.
The VAT recovery position/calculations for charities is often a two-stage process, the first is identifying those activities that are business and non-business and then with those that are business, identifying what is taxable and what is exempt.
This is often referred to as a charity's partial exemption position, and due to the complexities of calculations, often a method needs to be agreed with HMRC for VAT recovery.
Charities are expected to maintain robust systems for VAT accounting, record-keeping and reporting. Regular reviews, accurate VAT coding and timely VAT returns are all essential. Trustees should also ensure they receive clear reports on the charity’s VAT status and potential exposures.
Please contact our VAT specialists, Jas Dhillon (jaspaldhillon@lubbockfine.co.uk) and Sharon Parker (sharonparker@lubbockfine.co.uk), or our Charity partners, Hazra Patel (hazrapatel@lubbockfine.co.uk) and Lee Facey (leefacey@lubbockfine.co.uk), to arrange a confidential discussion.
