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Charities and VAT - a complex area

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It may be stating the obvious to say that the issue of charities and their tax liabilities is not straightforward. As always, we are happy to help but we are not VAT experts and HM Revenue and Customs should always be your definitive port of call.  

To be clear on basics, an organisation is considered by the Charity Commission to be a charity if it has charitable status. A non-profit making organisation is not necessarily a charity, however. See the Charity Commission's definition here.   

VAT 

Value Added Tax is essentially a tax on consumer expenditure. It’s collected on business transactions, imports and acquisitions. Being a charity does not grant full or partial exemption from VAT.  In principle, 

  • a charity must pay VAT on business-related activities, not on non-business activities, but 
  • even if an activity might be performed for the benefit of the community or in the furtherance of charitable aims and objectives, it may still in certain circumstances be deemed a business activity for the purposes of VAT.  

 

The standard rate of VAT is 20% and the reduced rate 5%. You must register for VAT if your VAT taxable turnover (the total value of everything you sell that isn’t exempt from VAT) is more than £85,000. The lower or zero rates of VAT are applicable only to definably non-business use.  

Don't worry, we'll look more closely at business uses and non-business uses further on. 

 

VAT affects charities in several ways: 

  • Income might come from a variety of sources, some of which may be liable to VAT if the charity is VAT registered 
  • Charities can claim relief from VAT on some of the goods and services they buy, regardless of whether the charity is registered for VAT 
  • Many of the goods and services that charities buy will be subject to VAT, regardless of whether the charity is registered for VAT 
  • Charities that are VAT registered may be able to reclaim some of the VAT they’re charged.  

 

Energy costs 

Charities can claim the reduced rate of 5% where fuel and power are supplied for  

  • a dwelling or residential accommodation for charitable purposes 
  • charitable non-business activities (see above) 
  • smaller usage levels - electricity supplied at a rate not more than 1,000 kilowatt hours a month or a delivery of not more than 2,300 litres of oil 

 

If less than 60% of the fuel and power is for something that qualifies, you’ll pay the reduced rate of VAT on the qualifying part and the standard rate (20%) on the rest. You should provide the energy supplier with a certificate declaring the percentage of the fuel and power that will be used for a qualifying purpose. https://www.gov.uk/guidance/vat-on-fuel-and-power-notice-70119.  Let’s say, for example, you have calculated that 70% of your premises’ gas supply is used for non-business (qualifying) use. As this is more than 60%, then the whole gas bill should be charged at the reduced rate of VAT. 

If in doubt, we recommend you talk to an expert before proceeding to claim 100% at reduced rate. You can ask us for advice! Contact our Community Development Team on 01362 698216 or email office@communityactionnorfolk.org.uk  

Activities, taxable sales, and income that count as business  

  • Business transactions, then, are liable to VAT. But if a charity’s income from taxable sales is below the threshold, and you do not want to register for VAT, the charity does not need to charge VAT on any of its income. 
  • Hiring of premises for private events or commercial use: if premises are hired out for a reception, by a yoga instructor to teach a class, or for an entertainment event, the hirers will pay a fee for use of the premises. If your charity is VAT-registered, you’ll need to pay full rate VATE on the hire fees. 
  • Certain activities carried out by charities are not subject to VAT. One example is a freely given donation where the donor gets nothing in return for their money. Another is payment of employees’ wages. 
  • A charity will pay VAT on all standard-rated or reduced-rated goods and services they buy from VAT-registered businesses. 
  • Once a VAT-registered charity has decided which of its activities are non-business it will also have to consider how much of the VAT on its general expenses (such as telephone and energy) relate to those activities. The charity will not be able to reclaim the proportion of VAT that relates to non-business activities. 
  • Some charities charge visitors admission fees to places of interest such as historical buildings, gardens, exhibitions, or concerts. This is a business activity, liable for 20% VAT. Donations as admission, rather than fixed fees, are exempt however. 
  • Rent charged for using the charity's property 
  • Membership benefits to members of a club or association is a business activity 
  • Catering is a business activity, normally liable to VAT at the standard rate. But catering supplied as part of welfare services, such as meals for residents of care homes, and food and drink (but not alcohol) from trolleys, canteens and shops to patients in hospitals or inmates is exempt. 

 

Charity shops and sales of goods 

The sale of donated and bought-in goods by charities and their trading subsidiaries is a business activity, normally standard-rated. If a charity buys in goods to sell it will have to account for VAT at the standard rate on the sale of them, unless they are zero-rated items such as children’s clothes or books. 

 

Fundraising  

  • A donation, provided it is freely given, with nothing supplied in return, is VAT exempt. 
  • Events organised and promoted primarily to raise money for the charity are generally exempt from VAT. The exemption covers admission fees and any other income generated at the event. 
  • Bought-in goods sold at qualifying fundraising events are also exempt from VAT. 
  • Fundraising events are restricted, for purposes of VAT exemption, to fifteen of the same kind in a financial year at any one location. An example might be a ‘sale day’ of donated goods, repeated on a regular basis.  
  • Exemption does not extend to the normal trading activities of the charity nor to income generated after the event, for example, the sale of surplus items after the event has taken place. 

 

Sponsorship 

  • Sometimes a charity may be able to organise an exempt fundraising event in association with a different event – for example as a local event under the umbrella of a national campaign.  
  • A commercially organised event is not exempt, and charities should consider the VAT implications of the income they receive from such events. 
  • Where a charity receives money, goods or services from sponsors, and the charity is expected to provide the sponsor with a significant benefit in return, the sponsorship becomes a business activity taxable at the standard rate. But if no significant benefits are provided the charity may be able to treat the income as non-business. 

 

Grants 

If funding is freely given, with nothing supplied in return, then no VAT is due. 

 

Hiring out buildings, including village and community halls 

The hiring out of a village hall or community venue is an economic activity, even though most hirings are to regular volunteer user organisations. Most village halls are not registered for VAT, so they don’t have to charge VAT on their hirings; but of course they cannot reclaim VAT either. 

 

Construction and refurbishment work 

The construction of buildings, especially work to protected buildings, intended to be used solely for non-business purposes, can be zero-rated subject to certain criteria. In some circumstances a charity can benefit from zero rating for the construction of a ramp, widening a doorway or passage, or providing, extending or adapting facilities. 

For more detail visit HM Revenues and Customs’ advice pages.