Charity VAT FAQ
Q.1 Are UK charities exempt from VAT?
We are a charity and don’t need to pay VAT is a common misapprehension. Generally, charities pay VAT. Unlike the direct tax system, where there is a charity exemption, there is no automatic exemption for charity VAT. There are some specific reliefs but no general charity VAT exemption.
Reliefs that might allow a charity to buy without charging VAT include
Charities can obtain some new buildings and construction VAT Free
There is a zero rate for new charity buildings and construction. Unfortunately, this only applies to buildings that will be used for a non-business purpose. Many charities make charges, and the VAT system sees them as being in business. This prevents the relief from applying. It also only rarely applies to work to existing buildings. So refurbishments are not covered unless they partly assist the disabled.
Certain goods For disabled charities can be VAT free
The rules here are complex. Unfortunately, this means there can be a tendency for charities to give certificates to obtain zero-rating when they shouldn’t. This can be dangerous.
Charity advertising is VAT Free
If you provide advertising to a charity, then you generally won’t need to charge VAT. This will also be true of the services of preparing adverts for third party media. However, the relief doesn’t apply to targeted advertising, so it doesn’t apply to direct mail. This can be a problem with social media advertising on media such as Facebook. This is always targeted, and HMRC now argues this should be subject to VAT.
Q.2 Can a Charity recover VAT?
Just because a charity is VAT registered does not necessarily mean it can recover VAT. Some charities are lucky and can recover all of their VAT. But the majority suffer a restriction. This might be because they undertake non-business activities or make VAT-exempt supplies.
The answer here is that it depends on what the charity does and how the VAT rules apply to it.
Q.3 Is there VAT on a Grant?
VAT is only chargeable if there is a supply. This requires something to be provided in return for a payment. If a charity obtains grant funding because a funder likes their work and uses it to pay for overheads, there is rarely a question. The funds are outside the scope of VAT. The problems are more likely to arise when specific projects are funded. This is particularly true if the projects only happen because the funding is provided. Here there may be a supply.
Even if there is a supply, it may not be subject to VAT. Charities often provide services that are within the VAT welfare exemption. This means they do not have to charge VAT.
I provide more information about these answers in my section on A Guide to Charity VAT