HM Revenue & Customs (HMRC) is sending “educational” emails to charities to remind them that they might not be able to recover all of the VAT that they incur on expenditure.

These “educational” emails should be taken seriously. They often indicate that HMRC has identified failings in a particular sector and wants to give that sector the chance to rectify them (influencing any penalty rate applied) before perhaps taking a harder line.

HMRC is tackling a common misconception that a VAT registered entity can recover VAT on all expenditure.

HMRC is specifically commenting on the fact that VAT can only be recovered to the extent that it relates to a ‘Taxable’, ‘Business’ activity.

The emails sent by HMRC’s “One to Many” Team remind charities that many of the activities that a charity undertakes are ‘Non-Business’ activities.

Identifying whether activities are ‘Business; or ‘Non-Business activities’ from a VAT perspective can be complex.  An oversimplified rule of thumb is that if the charity provides goods or services in return for payment, the activity is a ‘Business’ activity.

HMRC will also send a help sheet to help charities indemnify ‘Non-Business’ activities.

VAT cannot be recovered in respect of such activities and VAT incurred on overhead costs need to be apportioned. 

Such a method of apportionment needs to be “fair and reasonable”.  This can be subjective, and it may be a method implemented by a charity is more beneficial than one imposed by HMRC.

Unfortunately, HMRC’s email also over-simplifies a charity’s VAT position as it may be that some of the Charity’s ‘Business’ activities are ‘VAT Exempt’ rather than ‘Taxable’.  This may be the case if the charity has educational, welfare or healthcare aims. 

This may mean that additional ‘Partial Exemption’ apportionments are also required to ensure that charities are correctly recovering VAT incurred on expenditure.  It may be that a charity takes the simple decision to only recover VAT on expenditure relating directly to its ’Taxable’ activities.  Whether it is worthwhile implementing complex apportionment, calculations may depend on the VAT at stake on overhead costs.

Milsted Langdon’s VAT Team can assist any charities with this or with any other concerns that they are not meeting their complex VAT obligations.

If you receive a letter and would like guidance from our VAT team, please speak to them today.