VAT can affect a charity’s purchases, income and ability to recover tax. Charitable status does not automatically mean an organisation is exempt from VAT or that it can reclaim all the VAT it pays.
Understanding the rules can help charities identify available tax reliefs, meet their responsibilities and make informed financial decisions.
Charities may qualify for VAT relief on certain goods and services, but the relief depends on what they buy and how it will be used.
Some purchases may be zero-rated or reduced-rated. Examples include certain advertising costs, some utility costs for residential or non-business activities, and construction of buildings for relevant charitable purposes, such as village halls.
Charities may also face VAT on property purchases. Whether VAT applies can depend on the circumstances of the sale and whether the seller has chosen to charge VAT on the property.
To receive eligible VAT relief, a charity must provide evidence to its supplier that it qualifies. A charity does not need to be VAT-registered to claim these reliefs.
Charities cannot automatically reclaim all the VAT they pay. Their ability to recover VAT depends on their VAT registration status, the type of income they receive and how their purchases are used.
Some charities can benefit from purchasing goods or services at a reduced rate or at zero rate. For example, donated goods sold by charities can qualify for the zero rate of VAT.
Zero-rated sales are still taxable for VAT purposes. This means a charity may be able to register for VAT and reclaim VAT on costs directly associated with those sales, subject to the relevant rules.
Some charities, including certain air ambulance services, search and rescue organisations, medical couriers and hospices, may also qualify to reclaim VAT relating to their non-business activities under specific arrangements.
A charity’s income may be taxable, exempt from VAT, or outside the scope of VAT. Donations, fundraising income and grants are generally outside the scope of VAT when they are non-business income. However, the treatment of grants depends on the circumstances, including whether the funding is payment for services.
Charities need to distinguish between these different types of income when calculating their VAT-taxable turnover.
Under the GOV.UK guidance, a charity must register for VAT when its VAT-taxable turnover exceeds £90,000. This refers to the value of sales that are not exempt from VAT, rather than all the money the charity receives.
A charity can also choose to register voluntarily if its taxable turnover is below the threshold. One reason may be to reclaim VAT on eligible costs.
VAT treatment depends on the charity’s activities, purchases and income. Different rules can apply to different transactions, even within the same organisation.
Charities receiving income that is exempt from VAT may also need to consider the partial exemption rules, which affect how much VAT can be reclaimed.
Community interest companies (CICs) and community amateur sports clubs (CASCs) do not necessarily qualify for the same VAT reliefs as registered charities. Organisations should check which rules apply to their own legal status and activities.
Charities with questions about their own circumstances can seek advice from a qualified tax adviser or accountant with experience of charity VAT.