The myths associated with VAT and charities can see charities taking either a too conservative, or too liberal approach.

If your charity generates large amounts of income from a specific activity or incurs large amounts of VAT on expenditure (particularly in respect of land and property) then VAT should certainly be considered in more detail.

Donations and grants

Many activities that charities engage in are not subject to VAT.  However, assuming that all activities are VAT free (a common myth) can prove dangerous – particularly where the income associated with a particular activity is significant.

The risk is where a charity provides either ‘Goods’ or ‘Services’ in return for a payment.  If this is the case, then the charity is likely to be engaged in a ‘Business’ activity and will need to determine whether its ‘Supply’ could also be subject to VAT.

This is particularly the case in respect of payments of donations and grants.  These can often be “VAT free” if the donor does not itself receive any direct benefit.  However, sometimes the donor sets stipulations for its payment or seeks to sub-contract an activity to a charity which could mean that there is a ‘Business’ activity and that VAT is due.

The distinction between a genuine donation and a payment for services can be very slim.

Recovery of VAT on expenditure

VAT registration and charging VAT may in fact be beneficial to some charities (this is particularly the case where an organisation providing funding can recover any VAT that is charged – and so is less concerned about the VAT charge).

Some charities fall foul to another myth that VAT registration provides the opportunity to recover VAT on all of their expenditure.

However, VAT can only be recovered to the extent that expenditure relates to ‘Taxable’ ‘Business’ activities.  ‘Taxable’ activities are those subject to the 20% ‘Standard’ 5% ‘Lower’ and 0% ‘Zero Rate’ of VAT. 

However, some ‘Business’ activities that charities are involved in are ‘VAT Exempt’ such as some healthcare, welfare and educational activities.  The only difference between ‘VAT Exempt’ and ‘Zero-Rated’ activity is in respect to the recovery of VAT on costs.

Further, many activities are provided free to a recipient by a charity and are therefore viewed as ‘Non-Business’ activities.  HMRC have recently written to some charities to say that in their opinion many VAT registered charities are aware of the VAT recovery restriction relating to ‘VAT Exempt’

activities but they are not aware that VAT cannot be recovered in respect of ‘Non-Business’ activities. 

These letters suggest that HMRC may well be checking the VAT recovery made by charities in the near future.

However, the flip-side of this coin is that some VAT registered charities take too conservative an approach to VAT recovery, and do not recover all of the VAT that they are actually entitled to.

VAT reliefs available to charities

Another myth that charities can frequently fall foul to is that suppliers should not charge them VAT.

In reality, the reliefs available to charities are limited.

There are reliefs, for example, for types of advertising and some medical and scientific equipment.

However, where a charity is seeking to rent, buy or construct a building, then VAT advice is always recommended – not least because of the value of the expenditure.  It would be a shame to be charged VAT on this type of expenditure if it is not necessary.

For expert guidance and support in respect to all charity matters, speak to our specialist VAT advisors.