A guide to VAT for charities and not-for-profit organisations
By Rob McCann, Director at The VAT People
Many of the rules that apply to regular businesses also apply to charities, but there is additional legislation that is solely applicable to charitable organisations which organisers should be aware of. Due to a lack of knowledge in applying VAT to charities, those responsible for arranging the tax obligations frequently make mistakes, both in failing to recognise where VAT obligations overlap with the business sector in addition to overlooking possible VAT reliefs, to minimise the burden of VAT on the organisation.
Because VAT is a self-assessed tax, it is the obligation of the charity to verify that they are accurately accounting for VAT – failure to do so may lead to fines. Correcting mistakes can cost time and money, both of which could be better spent supporting the charity’s efforts. It is critical for charities to determine the right way to apply VAT to supplies made at the earliest opportunity, as well as to be aware of any opportunities to minimise the cost of VAT in compliance with UK legislation.
This article will look at the VAT obligations that apply to charity and not-for-profit organisations, as well as how charities may be able to find opportunities for savings.
The impact of VAT
VAT is divided into two categories:
- Output VAT – due on supplies made by a business/charitable organisation
- Input VAT – VAT incurred on the acquisition of goods/services in the course of making taxable supplies.
Charities must first determine if they are making any supplies that may be subject to VAT, as they may be required to register and account for output tax on such qualifying supplies. A VATable supply – which can be of goods or services (or a combination of both) – is anything done in exchange for a consideration, which can be monetary or non-monetary. The belief that the nature of charitable activity blocks VAT from applying is not the case, and VAT may still be owed on activities conducted by a charity where consideration is received.
VATable supplies can be charged at the standard-rate (20%), reduced-rate (5%), or zero-rate (0%). Charities that make supplies that are subject to one of these three VAT rates have a duty to register and account for output VAT at the applicable rate if the value of their income from those supplies exceeds £85,000 in a rolling 12-month period (or in the next 30 days alone).
Goods and services can also be exempt from VAT or fall outside of the scope of VAT entirely. Examples of supplies that are not subject to VAT include:
- Donations for which nothing in return is offered
- Grant funding provided to charity organisations. Funding agreements should be thoroughly reviewed to see whether the monies donated are linked to a supply made by the charitable organisation, which could constitute a taxable consideration
- Activities for which the charity does not charge
Income received in regard to exempt supplies and those outside the scope of VAT is not included in determining whether the VAT registration threshold has been surpassed and, if so, is not subject to VAT.
A charity may choose to register for VAT on a voluntary basis, even if the value of taxable supplies does not exceed the VAT registration threshold. Doing so presents the advantage of allowing for the recovery of input VAT incurred while making taxable supplies. This provides an opportunity to recover monies that would otherwise be irrecoverable. However, in order to recover input tax (via quarterly VAT returns), there must be a clear and direct link to a taxable supply on which output VAT is accounted for at the applicable rate.
As a result, the potential benefits of collecting input tax should be balanced against the impact on consumers, who may potentially pay irrecoverable VAT on charitable supplies. Output VAT charged by a charity can be reclaimed as input tax if the receiver is registered for VAT and incurs it for business purposes. If supplies are made to non-VAT-registered businesses or members of the public, the supplies will carry an additional and irrecoverable cost to the recipients. Importantly, input tax cannot be recovered when the supply is exempt from VAT. Should a charity incur input tax that relates to both business supplies (including exempt supplies) and non-business supplies (i.e., those outside the scope of VAT), multiple apportionments may need to be undertaken to calculate the extent to which this relates to taxable supplies and is therefore recoverable.
Potential Benefits
Some purchases made by registered charities may be liable to the zero-rate fo VAT – where these would otherwise be subject to a positive rate of VAT for businesses. The following are some examples of goods and services that may be subject to a preferential VAT rate:
- Fuel and power for certain buildings
- Advertising and items for collecting donations
- Aids for disabled people
- Certain construction services
- Drugs and chemicals
- Medicine or ingredients for medicine
- Medical, veterinary and scientific equipment
- Goods for disabled people
- Imports from outside the UK, depending on their usage
To take advantage of these benefits, charities must provide proof to suppliers of their charity status in the form of either;
- HMRC letter of recognition
- Charity Commission registration number for charities in England and Wales
- Certificate of declaration confirming eligibility for relief – both of which may be obtained from HMRC.
It is critical for charities to be aware of the goods that could be subject to relief since, if relief is not applied at the time of purchase, the charity could overpay VAT. Paying too much represents an additional, irrecoverable cost when the charity is not VAT-registered.
Targeted reliefs are offered to certain organisations on a broader scale; for example, hospices and centrally-funded academy schools are entitled to recover VAT on non-business expenditures if specific criteria are met. This is a significant benefit, but several hospice organisations lack the resources to investigate and understand the ramifications of missing out.
Following steps
VAT can affect charities in a variety of ways, and while addressing your duties may be daunting, HMRC has put in place benefits to minimise the burden of VAT suffered by charity organisations. Seeking guidance for VAT for charities ensures that you are doing everything possible to maximise any relief your charity may be eligible for while complying with HMRC’s VAT requirements.
Taking the leap and increasing your level of expertise can result in savings – ignoring VAT might result in mistakes and more time spent retroactively correcting them, as well as the possibility of facing financial penalties.
As a result, time invested today developing this knowledge and understanding VAT for charities can save you both time and money in the long run, which can be better spent promoting the great causes that are the focus of your charitable endeavours.
