A common misconception amongst trustees and charity managers for charities is that because they are a charity they are exempt from VAT. In truth, charities very often find VAT is a further cost and only recoverable in specific circumstances.
As with so much that is VAT-related, the situation is complex and challenging – perhaps more so for charities than for commercial businesses, where it can sometimes be clearer what is taxable and what is not. For charities, both the input side (purchases) and the output side (revenue) have a whole range of convoluted regulations.
Let’s look first at the input side. There are several areas where VAT can be zero, or reduced-rated for charities. These include advertising, some utility costs for residential or non-business activities, and the construction of a relevant charitable purpose building, such as a village hall.
The situation when it comes to purchasing buildings is further complicated by the fact that the vendors often have the choice whether to opt to tax the site to recover their VAT costs. For charities which are not registered for VAT or which are not making any taxable supplies, this can be a challenge and can represent a significant extra 20% cost on what could already be a large item of expenditure.
However, with property purchases there may be options, such as issuing a certificate to revoke the option to tax being charged by the seller where the property will be put to a relevant charitable purpose. However, this has consequences for the seller and would need to be explored further.
On the revenue (output) side, the situation is equally complicated. One benefit for charities is that they are able to sell donated goods at the zero rate of VAT. Crucially zero-rated income is still taxable for VAT purposes, meaning charities can in those cases register for VAT to reclaim their directly associated VAT costs back – and still benefit from not paying VAT when selling donated goods.
In broad terms, income received by charities could be taxable or exempt from VAT and in some cases outside the scope of VAT or non-business income. For example, if the income is deemed to be grant funding, very careful consideration will need to be taken to determine whether the funding constitutes a provision of services - and if it does whether those services are taxable or exempt for VAT purposes.
Any entity that generates taxable income of £90k or more in a rolling 12 month period must currently register for UK VAT – and charitable status does not mean an organisation is exempt from this requirement.
However, for charities that figure refers to VAT-taxable turnover (i.e. sales of non-exempt goods or services); non-business income, such as donations, fundraising income and grants – subject to the caveat mentioned above – are generally outside the scope of VAT and therefore do not count towards the taxable income threshold.
Some charities, such as air ambulance, search and rescue, medical couriers and hospices are in a unique position in that they can reclaim VAT costs incurred in relation to their non-business activities. If they are not registered for VAT, they can submit a separate claim; VAT-registered charities meeting this definition can reclaim the tax on their VAT return in the normal way.
Community interest companies (CICs), community amateur sports clubs (CASCs) and charities are not necessarily the same when looking at the VAT rules. For example, a CIC can only reclaim VAT costs incurred in the course of making taxable supplies, which can be zero-, reduced-or standard-rated. CICs and CASCs do not benefit from the same kind of input VAT reliefs that charities do, such as advertising.
Because each charity, CASC or CIC is different and has different income and expenditure streams, it is vital that they consider the VAT rules and implications according to their business and non-business activities. Those organisations with VAT exempt income and expenditure will also need to consider the partial exemption rules as well.
It is a complex and sometimes confusing picture, which can be costly if a charity gets it wrong. This is why expert advice is always needed, both to ensure that a charity is benefitting from all of the relevant exemptions, and also to ensure it is not breaching VAT legislation, with all of the legal, regulatory and potentially expensive consequences that could incur.