How charity VAT works
Charity VAT can be complex . Not only do charities have to deal with the normal VAT rules that apply to all businesses but they also have to answer questions most business never have to think about. For example a normal business doesn’t have to consider if it is in business for VAT whereas this is often one of the biggest VAT issues for any charity.
This guide is designed to give a technical overview of some charity VAT issues. Charity VAT is rarely simple and if you have any questions get in touch. I produce an occasional free newsletter on charity VAT matters. If you would like to subscribe then subscribe here
If you are a Charity and have any questions then please get in touch. I am happy to have an initial chat for no charge. Click here to get in touch. Alternatively look at my services for charities page here
Is a Charity in Business for VAT Purposes
‘Business’ is an important concept in VAT as it determines if VAT must be charged and if it can be recovered. Commercial organisations are generally self evidently in business, but very often a charity will undertake non business activities. This is sometimes, although incorrectly, described as making non business supplies.
There have been numerous cases on the meaning of business for VAT. In the past there were a number of cases that superficially appeared contradictory and there was a bit of confusion. The Court of Appeal judgment in the Longridge case has helped clarify the situation. The correct approach is to look objectively at what a charity does. If it is providing goods or services in return for something (usually money) then it is normally seen as being in business. This will be true regardless of whether it makes a profit. For a commentary on Longridge see here.
This normally means that the business question will be determined by answering the question of whether an activity involves making a supply for VAT. In a charity context this often means asking whether money used to fund work is a contractual payment or a grant. (see below).
Very recently there have been further developments in this area which might be said to confuse matters a bit more. In the Wakefield case a distraction was drawn between consideration and renumeration. This means you could in certain situations have a situation where a charge is made and you still don’t have a business activity for VAT.
Generally HMRC take the view that if a charity makes supplies it is in business; but this can be challenged if the facts are right.
VAT Treatment of Grants and Contracts
Probably the most common VAT question for a charity is whether it must charge VAT on income. Is it a contract or grant for VAT purposes. If the income is a true grant that is outside the scope of VAT then any activity wholly funded by it will be non business.
In some cases the answer to the grant/contract question is obvious. For example a charity might provide free tours but ask for donations from its visitors. With there being no obligation for the visitor to pay, clearly the money received is outside the scope of VAT. At the other extreme a charity may enter into a formal contract to provide services where it states that the money will be consideration for the supply.
The difficultly is that many cases fall between these two extremes. Grants often cause difficulty. Increasingly grant funding agreements are written in terms that resemble contracts with strict service level agreements (SLAs) and break clauses. This raises the question of whether money paid under these agreements is outside the scope of VAT and akin to a donation or should be seen as a payment for a supply. In deciding the VAT treatment in such cases the facts are critical.
In early 2018 HMRC published revised guidance on the grant/contract question. It provides a framework for making a decision by listing various considerations. Unfortunately what it doesn’t really help with is whether there are indicators both ways. But it is great improvement on what was published before and is worth reading. To link to the HMRC guidance click here
For more on the VAT treatment of Grants and Contracts see my webpage :Grants and Contracts
Recovery for Grant Funded Activities
If an activity is wholly funded by income that is outside the scope of VAT such as grants or donations it will be a non business activity. VAT is not charged on the grant income received but neither can it be recovered on costs incurred.
Where an activity is partly funded by grants and partly by admission charges or other fees sometimes HMRC attempt to apply an apportionment. This is often incorrect and there have been a number of cases which demonstrate that a subsidised activity can still be a wholly business activity. An important European case on this was Sveda where a subsidised park was allowed full VAT recovery see Sveda Case.
The VAT Treatment of Sponsorship
Difficulties can also occur with sponsorship income. If a local supporter gives a donation and demands no acknowledgement then the money they give is clearly outside the scope. The problem occurs if the donor insists on recognition. Here it is often arguable if VAT is chargeable. HMRC will generally not see a grant making organisation that insists on recognition (such as national lottery funding) as receiving a supply but might well take a different view if the funder is a commercial organisation that benefits from the publicity. A good source on information about the VAT rules applying to charities is the Charity Tax Group. For information see their website
Charity VAT Recovery
Very often VAT recovery is the most complicated part of a charity VAT accounting. Charities can rarely recover all of the VAT they incur. I have information on how VAT recovery works. See VAT Recovery
Must a Charity be Registered for VAT
The same VAT registration rules apply to charities that apply to any business. They must register if their taxable supplies exceed the VAT registration limit. This means that income which is outside the scope of VAT such as grants and donations not count. Neither does income that is VAT exempt such as that obtained under a welfare contract. What will count is taxable sales such as merchandise, consultancy or publications.
In some cases it may pay a charity to voluntarily register for VAT. This may be the case if the charges it makes with VAT will be to another organisation that can recover VAT. This is because it will allow the charity to recover any VAT it incurs on that activity. Another situation where VAT registration will be beneficial is if the charity makes taxable sales that are subsidised and will be able to recover more VAT that it needs to charge. In practice there are pros and cons for charity VAT registration – you have to balance the potential VAT gain against admin costs.
Very often it is the trading subsidy of a charity that is obliged to be VAT registered rather than the charity. In this case it may pay to seek a VAT group registration that covers both the charity and trading subsidiary.
There is a VAT exemption for charity fundraising events. This allows all supplies made at an event to be treated as VAT exempt, unless they are zero rated. The exemption can be applied to up to 15 events in the same place each year and can apply to any type of event. It is possible to organise events in a VAT friendly way, thereby enabling at least the partial recovery of VAT incurred on the costs of organising them. The HMRC notice their view of the exemption see Fundraising Events
Zero Rated Sales of Donated Goods
Charities can sell goods donated to them at the zero rate. This allows the recovery of VAT incurred on selling such goods by charity shops. However the zero rate will not apply when the charity uses the retail gift aid scheme as in this case the charity is receiving a donation from the donor, on whose behalf the goods have been sold.
VAT Cultural Exemption
Charities organising cultural events may well be able to take advantage of the VAT cultural exemption. In this case the key issue for them will be VAT recovery. For the HMRC notice then see HMRC Notice 701/47 culture
Charity VAT Construction Zero Rates
Some charity construction work can be purchased free of VAT. The rules here require that the building be used solely for a non business purpose. Although HMRC allow up to 5% business use, in practice many charities find this a difficult test to meet.
VAT on Charity Advertising
There is a zero rate for the purchase of charity advertising which means that charities can buy advertising and the services of producing an advert free of VAT. The relief only applies to charities and not their trading subsidiaries. It also only applies to adverts placed in spacer owned by a third party, so you can use it to get a website redesigned for example. It also applies to all types of adverts including recruitment adverts. When adverts are purchased from abroad and a VAT reveres charge applies – as might be the case with say a Google Ad then the zero rate still applies.
In my experience charities often don’t make full use of this relief. This maybe because the suppliers are unaware that it applies – if you are charged VAT on an advert query why.
The HMRC Notice on Charity Advertising can be found here Notice 701/58 Charity Advertising