In the main, a charity is treated like any other business for VAT purposes. Contrary to popular belief, there is no blanket VAT exemption for charities. In fact, the rules relating to charities can be more complex, and experience shows that HMRC can be particularly harsh on those that get things wrong.
That said, there are various reliefs and ways to structure a charitable organisation that may help to reduce its VAT exposure.
The Scrutton Bland VAT team is highly experienced in the not-for-profit sector and we welcome discussions with charitable organisations to explore the possibility of reducing the financial and administrative burdens created by the VAT system.
Is the charity defined as being ‘in business’ for VAT purposes?
The term ‘business’ is not defined in VAT legislation. A charity may be seen to be in business for VAT purposes in working to fulfil its primary charitable objectives.
It is an important distinction because the charity will be within the VAT systems if it supplies goods and/or services which are deemed be made in the course or furtherance of a business activity.
Simply put, where there is a direct or sufficient ‘link’ between the supplies made and the payments received, the activity (whether or not it is charitable) is likely to be considered a business one.
Liability of supplies
Once their business status is clear, the charity may have to register for VAT. Once this is done it is important that the correct VAT liability is applied to all income streams.
Ensuring the correct VAT rate is charged is important, so there are no hidden surprises in future. An under-declaration of VAT which cannot later be charged to clients using its services, an overpayment which falls out of the time limit to reclaim from HMRC, or incorrect classification resulting in negative adjustments required under partial exemption (see below), could all be catastrophic for a charity.
Most of the applicable VAT rates are well known, but some are often overlooked, such as a charity being able to split a membership subscription into its component parts (with differing VAT liabilities), the VAT exemption for fundraising events, and zero-rating for the re-sale of donated goods. Your tax adviser can explain more.
Partial exemption and non-business restrictions
Where a charity carries out both business and non-business activities, there is likely to be a restriction required to the level of input VAT it can recover on its costs.
Similarly, where both taxable and exempt business supplies are made (for example a sports club with a bar), a restriction is likely to be required.
Many charities will be in a position where both non-business and partial exemption restrictions are required. However, it may be possible to agree methods with HMRC to minimise restrictions and simplify calculations.
VAT reliefs on purchases
There is no general exemption for charities to avoid VAT on purchases. However, there are some useful reliefs which may be applicable, if claimed in a proper and timely way.
These include the placement and design of advertising media, supplies of fuel and power, some building works, and the purchase of medical and scientific equipment.
There are also various HMRC Extra Statutory Concessions which zero-rate some common expenses.
It is always worth checking the VAT status of purchases as most suppliers will charge VAT to be on the safe side.
Sector specific VAT issues
Scrutton Bland has a long and demonstrable history of helping charities of all sizes and descriptions including theatres and other cultural attractions, welfare institutions, membership bodies and associations, sporting teams and groups, charities operating in the educational sector through the myriad of complex VAT legislation and HMRC requirements.
VAT is a significant issue for charities. It can be a major drain on their finances if things are not reviewed properly from the outset and can lead to problems in both in the short and the long term, for example by applying the wrong rate to a supply made, or incorrectly paying (or not) VAT on the construction of a new building.
Implementing VAT planning and structuring recommendation from a specialist can potentially have huge benefits, and of course will provide peace of mind things are working as they should.
If your charity is planning a capital project and want to ensure that your tax planning opportunities are maximised, or if you just want to be reassured that you are managing your VAT regulatory requirements properly, do get in touch to talk to an experienced and qualified VAT adviser. Daniel can be reached at email@example.com or phone him on 0330 058 6559.