VAT Advice 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

How we can help with charity VAT advice

We offer a wide range of VAT-related services for not for profit charities, including:

• General VAT enquiries
• HMRC assessment reviews
• HMRC VAT investigations
• Partial exemption
• Transactional VAT advice
• VAT health checks
• VAT planning
• Deregistering for VAT
• Dispute prevention and resolution
• Reclaiming VAT from overseas
• VAT training
• Reclaiming VAT in the UK

What is the importance of getting charity VAT correct?

Getting VAT right is essential for charities because errors can directly affect funding, cash flow and compliance. Unlike many commercial businesses, charities often receive a mixture of taxable income, exempt income, grants and donations, each of which may have a different VAT treatment.

Incorrectly categorising income or expenditure can lead to VAT being overpaid, underpaid or recovered where it should have been restricted. This can result in HMRC assessments, interest and penalties, as well as unnecessary costs that reduce the funds available for charitable activities.

Charities may also miss opportunities to apply VAT reliefs or recover VAT correctly if their activities are not reviewed properly. Regular VAT reviews can identify risks, improve recovery and ensure that the organisation’s VAT position remains compliant.

The VAT People can help charities understand their VAT obligations, review income streams and expenditure, and identify opportunities to improve VAT recovery while reducing the risk of HMRC challenge.

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. 

Charity specific reliefs - purchases

Charities may be entitled to VAT relief on certain purchases, helping to reduce costs and maximise the funds available for charitable activities. However, eligibility depends on the type of goods or services purchased, how they will be used and whether the charity can demonstrate that it qualifies for the relief.

In many cases, the supplier will require the charity to provide a valid declaration confirming that the conditions for relief have been met. Applying the wrong VAT treatment can lead to underpaid VAT or the loss of valuable reliefs.

It is also important to distinguish between business and non-business activities, as some reliefs are available only where goods or services are used for qualifying charitable non-business purposes. Although charities can benefit from a number of specific VAT reliefs, they remain subject to many of the same VAT rules as other organisations.

The VAT People can help charities identify which VAT reliefs are available, determine whether purchases qualify and advise when VAT incurred on those purchases may also be recoverable as input tax.

Reduced rate (5%) VAT - fuel and power

Some supplies of fuel and power supplied to charities may qualify for the reduced rate of 5% VAT, depending on how they are used. This relief commonly applies where the supply supports domestic or charitable non-business activities.

Examples include:

• Residential accommodation, such as a care home or children's home.
• Charitable non-business activities, such as providing free daycare for disabled people.
• Small-scale fuel and power supplies, including up to 1,000 kilowatt hours of electricity per month or a delivery of up to 2,300 litres of gas oil.

Where less than 60% of the fuel and power qualifies for relief, the reduced rate applies only to the qualifying proportion, with the remaining supply charged at the standard rate of VAT.

Zero-rate VAT charity exemption

Charities may also qualify for zero-rated VAT on certain goods and services where the conditions set out by HMRC are met. Zero rating allows qualifying purchases to be supplied without VAT being charged, helping to reduce operating costs.

Common examples include:

• Advertising services aimed at the general public, including newspaper advertisements, leaflets, posters and website banners supplied by third parties.
• Medical and disability aids, including certain wheelchairs, medical appliances and adapted motor vehicles supplied for the use of disabled people.
• Certain construction services, such as building wheelchair ramps, widening doorways or adapting washrooms and toilet facilities to improve accessibility.

Because the availability of VAT relief depends on the specific facts of each purchase, charities should confirm their entitlement before claiming relief. The VAT People can review planned expenditure, advise on the evidence required and help ensure your organisation receives all of the VAT reliefs to which it is entitled while remaining fully compliant with HMRC requirements.

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.

FAQs about VAT advice for charities

Aren't all charities exempt from paying VAT?

Charitable status does not automatically exempt an organisation from paying VAT. Charities are subject to many of the same VAT rules as other organisations, although they may qualify for specific VAT reliefs or exemptions depending on the nature of their activities and purchases.

A charity may make taxable, exempt and non-business supplies at the same time, with each receiving different VAT treatment. Understanding these distinctions is essential because they affect VAT registration, VAT recovery and compliance. Assuming that all charity income or expenditure is VAT exempt can lead to costly mistakes.

What are common VAT mistakes to avoid for charities?

Some of the most common VAT mistakes charities make include:

• Assuming charitable status automatically removes VAT obligations.
• Failing to register for VAT when the registration threshold is exceeded.
• Incorrectly classifying income as taxable, exempt or outside the scope of VAT.
• Recovering VAT that is not eligible for recovery.
• Overlooking available VAT reliefs.
• Applying partial exemption rules incorrectly.
• Keeping inadequate VAT records to support VAT recovery.

Regular VAT reviews and specialist advice can help charities identify these issues before they result in HMRC enquiries or unnecessary costs.

Can charities be fined for making VAT mistakes?

If a charity fails to comply with its VAT obligations, HMRC may issue assessments for underpaid VAT, together with interest and financial penalties. The level of any penalty will depend on the nature of the error and whether HMRC considers the mistake to have been careless, deliberate or prompted by a failure to take reasonable care.

Reviewing VAT arrangements regularly and seeking specialist advice can help charities reduce the risk of errors. The VAT People can help charities identify compliance risks, correct VAT issues and ensure they are applying the correct VAT treatment while maximising legitimate VAT recovery.