We often get asked whether charities should pay VAT or not. It’s complex and it depends. If your charity sells something that is VATable, it is possible to reclaim VAT on the related purchase. Some goods and services are also available to purchase at zero rate VAT providing an eligibility declaration is in place. We’ve set out the rules in more detail below to help you navigate this VAT minefield.
If your charity sells more than £85,000 of VATable goods or services you must register for VAT. If you sell less than £85,000 of VATable goods and services, you can choose to register if you want to reclaim VAT on your supplies. However, if you do not make any VATable sales you cannot usually register.
So let’s start with what is considered a VATable supply.
Taxable or VATable supplies tend to be goods and services, such as
- Sales of made and bought-in goods (donated goods are zero-rated)
- Supplies of food and catering – (watch out for specific rules which determine if it is standard and zero rated)
- Advice and consultancy
- Sponsorship/advertising/use of logos
- Management/administration charges between a charity and its subsidiary
- Vehicle and equipment hire
- Some property rentals
However, some services are what is known as exempt supplies which no VAT is charged on. These include some:
- Education and vocational training
- Health and welfare services
- Cultural services
- Sports facilities (but precise details currently in debate)
- Sales in connection with a qualifying fundraising event
Donation and grant income is not considered a supply and is a non-business activity that falls outside the scope of VAT as this income is freely given and is treated by the charity as a gift. Other examples that fall outside the scope of VAT include delivery of a free service, or giving away goods and investment income. VAT is not recoverable in relation to non-business activities and a special method may be required to determine how much VAT is recoverable when a charity has both non-business and trading activities.
Funding agreements can cause a headache and need careful consideration to determine whether they are actually granted agreements (outside the scope) or service agreements (which could be taxable).
Partial exemption is calculated when an organisation is registered for VAT and makes exempt supplies and taxable (VATable) supplies which is often the case for many VAT-registered charities. The organisation can only recover a proportion of the input tax paid on its purchases. Input tax used exclusively to make taxable supplies is recoverable in full. Input tax used exclusively to make exempt supplies is not recoverable.
If your charity does not make any VATable supplies, all is not lost. Although charities generally pay VAT on all goods and services they buy from VAT-registered businesses, they can pay VAT at a reduced rate (5% on fuel and power) or ‘zero rate’ on some goods and services including:
There are some very specific rules on these zero rated goods so take a look at https://www.gov.uk/vat-businesses/charging-vat-to-charities.
In order to claim these you may have to provide your supplier with an eligibility declaration.
If you’d like some further help navigating VAT within a charity, please contact Katherine Wilkes.
Please note that this briefing does not constitute advice. VAT is a complex area and charities should seek advice to take into consideration any specific circumstances.
First Published 1 October 2021
Last Updated 1 October 2021
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