Business and Non-Business Income Received By Charities

While VAT applies to taxable activities undertaken by charities in much the same way as for businesses whose purpose is to generate profit, there are a number of specific considerations for charitable organisations. Activities undertaken should also be identified as whether being done for a business or non-business purpose, as this will have an impact from a VAT perspective.

This guide explains the difference between business activities and non-business activities, and sets out the VAT rules that apply to charities in the context of charging output VAT appropriately and utilising available reliefs on specific purchases. It outlines how HMRC defines business activities, such as selling goods or providing services for a charge, compared with non-business activities carried out for charitable purposes without consideration. This distinction is the difference of whether or not output VAT must be charged on income received.

Are charities liable to account for output VAT on their income?

Charities are not automatically exempted from charging output VAT on income received - instead, the nature of the supply made, for which consideration is received, will need to be considered. Like any other organisation, they must register for VAT if their taxable turnover exceeds the current VAT registration threshold set by HMRC £90,000 in any 12-month rolling window.

What earnings can charities claim VAT relief on?

The VAT liability of common income streams received by charities is as follows;

• Donated items: income from selling donated goods is zero-rated.
• Charity events: Charitable bodies are able to treat monies received from fundraising activities as exempt from VAT when connected to a qualifying event - where certain conditions are not met, the income received would be standard-rated.
• Membership subscriptions: subscription income received by certain non-profit-making public interest bodies may qualify for exemption. Where the relevant conditions are not met, it is necessary to consider whether there is a single supply (with a ‘principal’ element), in which case this will be a single supply liable to a single VAT rate, or a multiple supply, where no element is ancillary, each element’s VAT liability will need to be determined.
• Grants and donations: payments given freely to the charity, without any direct benefit to the donor or funder, fall outside the scope of VAT.
• Welfare services: charities are eligible bodies for the purposes of providing exempt welfare services, subject to the services themselves being eligible.
• Education: non-profit-making organisations that meet certain conditions are eligible bodies for the purposes of providing exempt education. The specific nature of the services provided must also be considered prior to treating them as exempt.

What VAT is charged in charity shops?

While sales of donated items in charity shops are zero-rated for VAT purposes, any ‘new’ goods purchased specifically for resale are subject to VAT at the relevant rate. This includes products such as new greeting cards, household items or branded merchandise.

It is important to maintain clear records to separate donated stock from purchased stock, as this distinction determines how VAT is reported, the rates applied to sales, and how VAT returns are completed. Keeping accurate records also helps demonstrate compliance if HMRC reviews your activities.

What VAT relief do charities get on purchases?

Certain purchases made by registered charities may be eligible for relief from VAT, even though they would otherwise be subject to a positive VAT rate when purchased by businesses. Some examples of goods and services that may be subject to a preferential VAT rate are as follows:

• Fuel and electricity for specific structures
• Donation solicitation materials and advertising
• Disabled people's aids
• Some building services
• Chemicals and drugs
• Medicine or pharmaceutical substances
• Medical, veterinary, and scientific apparatus
• Imports from outside the UK, depending on their intended use

To take advantage of these benefits, charities must submit verification to suppliers of their charitable status in the form of either;

• Recognition letter from HMRC
• Charities in England and Wales must have a Charity Commission registration number
• HMRC can provide you with a certificate of declaration verifying your eligibility for relief 

Charities should be aware of goods/services that may be subject to relief because, if relief is not applied at the time of purchase, the charity incurs VAT needlessly. If the charity is not VAT-registered, this constitutes an additional, irrecoverable expense.

On a wider scale, targeted reliefs are available to certain types of organisations; for example, hospices and centrally funded academy schools are permitted to recover VAT on non-business costs, provided certain criteria are met. This represents a huge benefit, however, in our experience, some hospice organisations do not have the resources to explore and understand the implications of this.