21 Oct VAT for Charities: What you Need to Know
VAT treatment for not-for-profit organisations and charities can be a challenging area for both accountants and the organisations. Below, we clarify some key issues related to the topic.
What is Charity?
Charities are often mixed with the term not-for-profit organisation, although there is no strict reference to charity in legislation. For VAT purposes, a charity does not have to register with the Charity Commission. In general, a charity either (1) is beneficial to the community, (2) advances education, (3) relieves poverty, or (4) advances religion.
In Charity a Business?
The most difficult part is to persuade HMRC that a charity is not a business. This is dependent on the activities the charity is engaged in, which include:
- Supplies made usually by people that want to profit by them.
- Recognised business principles (regular and sound).
- Mainly preoccupied with the making of supplies for consideration.
- Reasonable continuity (or recognisable).
- Measure of substance by annual or quarterly value of supplies.
For charities that make both non-business and business supplies, exemptions and special partial exemptions apply. To determine how much VAT your charity can reclaim, it is best to seek specialist advice, because the Capital Goods Scheme (2011) and partial exemption regulations have changed, and new methods have to be approved.
Here is a comprehensive table of the various charity elements, their rating, and VAT liability scheme.
|Charity Element||Rating||VAT Liability|
|Donations (freely given)||Non-business||Outside scope|
|Goods sold in charity shop||Business||Standard-rated|
|Grant funding||Either||Standard-rated (with benefit to funder) or outside scope (no benefit)|
|Sale of advertising space||Either||Outside scope/zero-rated/standard-rated|
|Supply of staff||Either||Outside scope/exempt|
|Admissions to galleries and museums||Either||Outside scope/exempt|
|Property rental||Both||Outside scope/standard rated|
|Credit card affinity scheme training payments||Both||Standard-rated or outside the scope|
As for the debate over non-taxable and taxable charities, here is the case of Hope in the Community vs. HMRC that will, hopefully, shed some light. The charity was brought to a VAT tribunal due to some payments it had received from bodies of the public sector. The ruling of the tribunal was that the charity was given grants from public sector bodies that were considered contracts for services and not for the charity’s own activities. Therefore, they were VATable. Clearly, there is a strict difference between non-taxable and taxable grants. However, the case is appealed although the taxpayer is most likely to lose this battle considering that the money was not absolutely freely given, hence are regarded as consideration for services.
Cost sharing exemption
Legislation around cost sharing exemption has been around since the inception of the European Union. Nevertheless, the UK took it into consideration with the Finance Bill introduced in 2012. According to HMRC, this exemption is applicable when 2 (or more) organisations with exempt or/and non-business activities form an independent entity (separate, of course) – a cost sharing group – so that they can supply themselves with particular services at costs and exempt from VAT. In this case, the group can use the same payroll, HR, and other services.
However, the HMRC’s regulations regarding cost sharing exemption are much wider than the legislation of the European Union, which can cause serious misunderstanding and misapplications of the rules by taxpayers that interpret the HMRC regulations differently to the EU. To avoid such unwanted and potentially costly mistakes, it is always advised to consult a professional accountant and law expert.