VAT For Charities

Calculating VAT can be a complicated process for charitable organisations. Therefore, it is no surprise that mistakes are commonly made among charities that fail to recognise they are subject to many of the same rules as regular businesses.

At The VAT People, we have years of experience in helping charities understand their VAT liabilities, VAT reliefs they're entitled to and the potential recovery of input VAT. Our highly experienced team of VAT specialists is on hand to help with any aspect of this complicated area. We can provide checklists, technical updates and seminars relating to this topic, helping you to avoid sanctions and potential legal repercussions from HMRC.

We can also provide a ‘health check’ service, which ensures your organisation is paying what it needs to, as well as making the most of any relief. Speak to our experienced team today for more information by calling 0161 477 6600, or fill out an enquiry form on this page and we will get back to you at a more convenient time.

Watch our video to find out more VAT advice for Charities

What is a charity?

Defining what a charity is for VAT purposes is not always straightforward. To qualify as a charity, the organisation must either be registered with the charity commission or be accepted as a ‘charity’ for tax purposes by HM Revenue and Customs and do one of the following:

• Provide poverty relief
• Advance education
• Advance religion
• Provide community benefits

Many charities of varying sizes are unaware that they should be paying VAT at all due to the nature of their work. However, because an activity is deemed charitable, it does not necessarily mean that it falls outside the VAT system.

Do charities need to register for VAT?

Many charities believe they are exempt from registering for VAT, and while this is true for some, the rules do not apply to all as it is dependent on several factors, including the nature of supplies made. So, under what circumstances do charities have to account for VAT on supplies made and what is the VAT threshold for charities?

A charity must register for VAT if taxable turnover is more than £90,000 in any rolling twelve-month period. However, you can also choose to register if the figure stands below this VAT registration threshold, for example, if you want to reclaim some of the VAT incurred by the charity on expenditure.

If you are registered for VAT, you are required to submit VAT returns periodically, in most cases quarterly. 

If you are unsure of how to work out your taxable turnover, add up the total value of everything you sell within a 12-month period that is not:

• Exempt from VAT
• Outside the scope of VAT

Charity specific reliefs - purchases

Charities may obtain relief from VAT on certain purchases although this is dependent on factors such as the goods and services purchased and whether the purchaser can prove that they are eligible for relief to the person selling them. The VAT People can provide support and advice on the specifics of VAT relief for charities. That includes what VAT relief your charity may be entitled to and when charities can claim back VAT as input tax, freeing up more time for your organisation to focus on what matters.

Reduced rate (5%) VAT

Some goods and services supplied to charities may qualify for the reduced rate of 5% VAT, depending on how they are used. This relief typically applies where the supply supports domestic or charitable non-business activities, such as providing residential care or limited energy usage. Below are common scenarios where the reduced rate may apply:

• Residential accommodation: such as a care home or children’s home
• Charitable non-business activities: such as free daycare for disabled people
• Small-scale use: such as up to 1,000 kilowatt hours of electricity per month, or a delivery of 2,300 litres of gas oil

If less than 60% of the fuel and power is for something that qualifies for relief, you will pay the reduced rate of VAT on the qualifying part, and the standard rate of 20% on the rest.

Zero-rate VAT charity exemption

Charities may be eligible for zero-rate VAT relief on specific goods and services, helping to reduce operational costs and maximise the value of their income. The following examples outline common areas where zero-rating may apply, provided the relevant conditions set by HMRC are met:

• Advertising services: most advertising provided to charities by third parties is zero-rated if it is aimed at the general public, including newspaper adverts, posters, leaflets and website banners.
• Medical and disability aids: certain equipment and services supplied to or for the use of disabled people - such as wheelchairs, medical appliances or adapted motor vehicles may be zero-rated.
• Certain construction services: such as the construction of a ramp, widening a doorway or passage, or providing, extending or adapting a washroom or lavatory

Can a charity claim back VAT on purchases?

VAT can be claimed back on certain purchases, but the ability to do so depends on several factors. If your charity is registered for VAT, you can reclaim VAT on goods and services used to make taxable supplies. This process helps reduce costs and creates more available funds for your charitable activities.

However, not all purchases qualify for VAT recovery. For instance, VAT on goods or services used in carrying out exempt or non-business activities cannot be reclaimed. To determine what VAT you can recover, you first need to differentiate between taxable and non-taxable activities within your organisation.

It’s important to maintain accurate records of your purchases and understand the specific VAT rules. The VAT People provides expert guidance to help you adhere to these rules, so your charity can maximise its VAT recovery potential while staying compliant with HMRC regulations. We’re here to assist you in making informed decisions that benefit your organisation’s financial health.