VAT and Charities: charity doesn’t always mean VAT free. There is a widely held assumption that anything to do with charities is tax and VAT free. Unfortunately the VAT rules are not so generous and charities are required to pay VAT on their business sales and purchases in the same way as any other business owner.
The VAT legislation does, however, include a number of reliefs to reduce the VAT burden on non-business activities. The charity sector has estimated that the VAT increase on 4 January this year will increase their VAT costs by some £140m so it’s important to make sure that charities are taking advantage of any and all VAT reliefs to which they are entitled.
VAT and charities is one of the most complex areas of VAT as different aspects of information fall within different parts of the VAT legislation or in some cases extra statutory concessions, so you have to know where to look to find information that may be helpful for your particular charity. And as with all VAT reliefs, each of them is subject to certain criteria. In some cases the VAT relief only applies if the charity/customer issues a certificate to the supplier within certain time limits so make sure you’ve checked the rules in advance.
HMRC Information
There is a lot of information on the HMRC website about VAT and charities, including a dedicated section about VAT and other tax reliefs here: http://www.hmrc.gov.uk/charities/vat/intro.htm. There is also a list of notices that contain relevant and detailed information about the various VAT reliefs here: http://www.hmrc.gov.uk/charities/vat-notices.htm.
The problem is, of course, that there is so much information and it’s contained in so many notices that it’s often difficult to know where to start. So the aim of this section is to briefly summarise the main reliefs and tell you the most relevant notice about the particular issue to help you navigate round the wealth of information available on the HMRC website.
Basic VAT rules
To begin with, there are a couple of fundamental VAT issues that apply to charities that affect not only whether or not they have to pay VAT on income, but also whether they can recover VAT on related expenditure.
The main difference arises due to the fact that most charities have both business and non-business activities as the VAT law makes a very clear distinction between the application of VAT in these situations.
Business/Non-business
Under normal VAT law, business owners (or “taxable persons” as the law defines them) are required to account for VAT on any supplies made “in the course or furtherance of their business”. This is a particularly important phrase in the case of charities, because of the simple fact that the activities of charities typically include both business and non-business. Business activities generally cover those situations where a person provides goods or services in return for payment, monetary or otherwise and applies to the activities of most business owners. Charities, on the other hand, receive donations – i.e. money or goods or services freely given – and use the funds to pay for the cost of goods or services that are used within their particular cause. For example, a charity for the homeless might use its donations to pay for the cost of running a shelter for homeless people to visit or sleep in.
So it seems quite logical that income received in the form of donations by a charity isn’t regarded as “business” income and therefore isn’t liable to VAT. Likewise the charity can’t recover VAT on the costs of running the shelter as the cost don’t relate to any business activity.
But most charities have some sort of business activities that are used to generate income to fund their charitable causes – for example the sale of Christmas cards, charity shops, property portfolios. Income from these activities is treated as a business activity and means that the charity is subject to the same VAT rules as any other VAT registered business owner.
Classes and rates of VAT
There are currently 2 classes and 3 rates of VAT in the UK. The classes are “exempt” and “taxable”.
All business activities, whether carried out by charities or non-charities, fall within the same classes and rates of VAT.
“Taxable” supplies are liable to VAT at one of the 3 rates currently in force, i.e. the standard rate of 20%, the reduced rate of 5% and 0% (or the “zero rate”). Unless stated otherwise all taxable supplies are liable to VAT at 20%. The 1994 VAT Act includes lists of the goods and services that are liable to VAT at the 5% rate or at the zero rate. If you are registered for VAT then you can recover VAT on the cost of goods and services that are used to make taxable supplies, whatever rate of VAT applies.
The other class of supplies is “exempt” from VAT. This means that VAT isn’t charged on the price. However there is a downside as VAT can’t normally be recovered on the cost of goods and services used to make exempt supplies.
Most of the reliefs from VAT come in the form of zero-rating, which applies to many supplies of goods or services that are purchased or funded by charities. Certain supplies are exempt from VAT or liable to the reduced rate. Zero-rating also applies to many goods or services that are supplied for the disabled.
VAT and Charities: charity doesn’t always mean VAT free: HMRC Guidance
The main starting point for information provided by HMRC is VAT leaflet 701/1/04 Charities http://tinyurl.com/5wugmqh. It is a good notice, but only covers part of the subject so in the following sections, I’ve set out below where to find information on other charity related VAT issues.
So where do I look for information on specific issues?
There are several VAT reliefs and for ease of reference, I’ve grouped them within 3 headings as follows:
- VAT reliefs on expenditure
- VAT reliefs on income
- Construction and buildings
Strictly speaking, the subject of VAT on construction and buildings falls within the VAT reliefs on expenditure, but it is a big subject in its own account and is worthy of its own dedicated section. Also the variety of reliefs that are available in respect of property and construction are particularly important as this is often the largest part of a charity’s expenditure.
Our list is not exhaustive and often you’ll find information on a particular subject in more than one notice. But it gives you somewhere to start, instead of having to wade through several long publications for the relevant information.