Don’t get confused by your charity’s tax and VAT responsibilities in 2024! Here’s a useful article by The VAT People to help those in our sector with these issues; Thank you to Rob McCann for this guest post which aims to guide charities and not-for-profit organisations around the subject of VAT.Â
Calculating VAT accurately can be complex for any entity, but this is particularly the case for not-for-profit and charitable organisations. Many of the regulations that apply to regular businesses also extend to charities, yet there is extra legislation solely applicable to charitable organisations of which administrators must be mindful. Owing to a lack of expertise in applying VAT to charities, those tasked with managing the tax responsibilities often make mistakes, both in neglecting to identify where VAT duties overlap with the business sector and in missing potential VAT reliefs, to alleviate the impact of VAT on the organisation.
As VAT is a self-assessed tax, it falls upon the charity to ensure that VAT is accounted for accurately – any failure to do so could result in penalties. Rectifying errors can cost resources and money, both of which could be more effectively utilised to support the charity’s mission. It is essential for charities to ascertain the correct way to apply VAT to supplies provided as early as possible, and to stay informed about any opportunities to reduce VAT costs in line with UK law.
This article explores the VAT responsibilities relevant to charity and non-profit organisations, as well as how charities might uncover potential savings.
The Impact Of VAT:
VAT is split into two categories, output VAT, which is due on taxable supplies delivered by an organisation, and input VAT, which is VAT incurred on the procurement of goods/services used in the production of taxable supplies.
Charities must first establish if they are offering any supplies that are subject to VAT, as they might need to register and account for output tax on such eligible supplies. A VATable supply, which could be of goods or services (or both), is anything done in return for a consideration, which could be cash or non-cash (other than those supplies listed in the VAT exemption schedule). The presumption that the charitable nature of an activity prevents VAT from applying is mistaken, and VAT might still be due on activities performed by a charity where consideration is received.
VATable supplies can be levied at the standard rate (20%), reduced rate (5%), or zero rate (0%). Charities that provide supplies subject to one of these three VAT rates are required to register and account for output VAT at the corresponding rate if their income from those supplies exceeds £85,000 in a rolling 12-month period (or in the next 30 days alone).
There are some activities that lie entirely outside the scope of VAT. Examples of supplies not liable to VAT include:
- Donations where nothing is given in return
- Activities for which you does not charge
- Grant funding given to charity organisations (Funding agreements must be closely reviewed to determine if the funds granted are linked to a supply offered by the charitable organisation, which could be a taxable consideration.)
Furthermore, some activities are exempt from VAT when delivered by charities such as certain welfare services and educational supplies. Income derived from exempt supplies and those outside the scope of VAT is not included in determining whether the VAT registration threshold has been exceeded and, if so, is not liable to VAT.
A charity may opt to register for VAT voluntarily, even if the value of taxable supplies does not surpass the VAT registration threshold. This carries the benefit of permitting the reclaim of input VAT charged during the production of taxable supplies. This offers a chance to recover funds that would otherwise be lost. However, to recover input tax (through quarterly VAT returns), there must be a clear and direct link to a taxable supply on which output VAT is charged at the relevant rate.
As a result, the potential advantages of reclaiming input tax should be weighed against the impact on consumers, who may end up paying irrecoverable VAT on charitable supplies. Output VAT charged by a charity can be reclaimed as input tax if the recipient is registered for VAT and incurs it for VATable business purposes. If supplies are made to non-VAT-registered businesses or individuals, the supplies will carry an extra and irrecoverable cost to the recipients. Notably, input tax cannot be recovered when the related supply is exempt from VAT. If a charity incurs input tax that relates to both business supplies (including exempt supplies) and non-business supplies (i.e., those outside the scope of VAT), multiple apportionments may need to be performed to calculate the extent to which this relates to taxable supplies and is therefore reclaimable.
Potential Advantages:
Some purchases made by registered charities may be subject to lower rates of VAT – where these would otherwise be liable to the standard rate of VAT for businesses. The following are some examples of goods and services that may be subject to a preferential VAT rate:
- Fuel and power for certain buildings
- Advertising and items for collecting donations
- Aids for disabled people
- Certain construction services
- Drugs and chemicals
- Medicine or ingredients for medicine
- Medical, veterinary and scientific equipment
- Goods for disabled people
- Imports from outside the UK, depending on their usage
To avail of these benefits, charities must provide proof to suppliers of their charity status in the form of either a HMRC letter of recognition, a Charity Commission registration number for charities in England and Wales, and/or a certificate of declaration confirming eligibility for relief. It is crucial for charities to be aware of the goods and services that could be eligible for relief as, if relief is not applied at the time of purchase, the charity could overpay VAT. Overpaying equates to an extra, unrecoverable cost when the charity is not VAT-registered.
Targeted reliefs are offered to certain organisations on a broader scale; for instance, hospices and centrally-funded academy schools are entitled to reclaim VAT on non-business expenditures if specific criteria are met. This is a significant advantage, but several hospice organisations lack the resources to investigate and understand the implications of missing out.
Next Steps:Â
VAT can impact charities in numerous ways, and while addressing your responsibilities may be intimidating, HMRC has established benefits to mitigate the burden of VAT suffered by charity organisations. Seeking advice on VAT for charities ensures that you’re doing everything feasible to maximise any relief your charity may be eligible for while adhering to HMRC’s VAT rules.
Investing the effort and enhancing your expertise can lead to savings, whereas disregarding VAT might result in errors and more time spent retroactively rectifying them, as well as the risk of incurring financial penalties.
As a result, time spent today developing this knowledge and understanding VAT for charities can save you both time and money in the long term, which can be better spent advancing the worthy causes that are the focus of your charitable efforts. For more information, advice or support, check out The VAT People’s website: thevatpeople.co.uk/charitiesÂ