Charities face some of the most complex rules whilst trying to adhere to the principle of minimising staff and professional advisory costs. This means they often do not have the knowledge needed in-house to understand the VAT charity rules impacting them
This article aims to provide a comprehensive overview of VAT and its impact on charities.
VAT Basics – Context for Charities
VAT operates on the principle of taxing the value added to a product or service at each stage of the supply chain and generally speaking businesses pay VAT on revenues and reclaim VAT on business costs. Consumers on the other hand pay VAT on goods and services they purchase but cannot get a credit for this VAT and therefore bear the burden of VAT. Not-for-profit organisations such as charities sit somewhere in between the two and in relation to most of their activities also bear the cost of VAT – this is because they generally aren’t required to account for VAT on their revenues as a result of applicable VAT reliefs for charities. For example they typically receive donations and funding. The downside of this is that a proportion of the VAT they incur on costs cannot be recovered. In this article we will set out some of the key VAT charity considerations.
Charity VAT Exemptions and Reliefs
Charities often benefit from VAT exemptions or reliefs on certain goods and services, both in terms of their revenues and the costs they incur. The logic here is that charities provide a benefit to society and as a result are granted relief from paying VAT on specific activities. However it is important to bear in mind that there is no blanket VAT relief for charities – the charity VAT reliefs are activity/cost specific, and therefore it is vital that charities understand the reliefs available to them and the eligibility criteria.
Charity VAT Reliefs – Eligibility Criteria
The conditions attached to VAT exemptions or reliefs vary and can be complex. In terms of basic conditions, these would include being a registered charitable organisation and using funds for charitable purposes to qualify for these reliefs. Beyond this the criteria are specific to the activity. For example there are conditions attached to VAT exempt fund raising events – a charity can only run 15 such events per financial year in the same location so as to prevent distortion of competition with commercial organisations. If there are more than 15 events in the same location, all of the events become subject to VAT rather than just the 16th and further events. Even within this prescriptive rule there are nuances to be understood. Smaller scale fundraising events such as coffee mornings can be exempt from the ‘15’ rule if they raise less than £1000 per week.
In addition to having charitable fund raising activities charities will also frequently have commercial activities such as selling goods and services (for example entrance to premises/gardens or the sale of Christmas cards). Where these are similar to goods and services offered by commercial organisations, the VAT treatment of these activities depends upon the nature of the goods or services provided. Having commercial activities may mean that the charity has to account for VAT on revenues but the upside is increased VAT recovery on costs. Charities often establish a trading subsidiary to carry out these activities as they may not be permitted to have such activities running through the charity under the terms of their charitable status. This adds a further layer of VAT complexity as the charity is then managing 2 separate organisations from a VAT perspective, although it may be possible to apply to have a VAT group so there is only one VAT registration, and more importantly VAT is not charged on charges between the two for staff or back office costs.
Charities undertake a range of fund raising activities with differing VAT treatments such as ticket sales for fundraising events, donations and other related revenue streams. As set out above, it is vital that the conditions attached to the VAT reliefs are understood by the charity so they can ensure that they take advantage of these wherever possible.
Donations and VAT
Donations are outside the scope of VAT (ie no VAT needs be accounted for on them) provided they are ‘freely given’. This means the donor does not receive anything from the charity in return for the donation. It is important that any publicity material/website narrative and associated processes are accurate in making it clear the donation is voluntary. For example for a charity fundraising event, if a charity chooses to request a voluntary donation rather than charge a fixed fee for entrance, the donation amount can still be treated as VAT free provided it is genuinely freely given. This means the donor is still able to gain entrance to the event regardless of whether they do in fact make a donation. If the process for obtaining entrance is by ticket and this is arranged online, it is important that the website allows the ‘donor’ to progress to obtaining a ticket even if they do not donate or if they only donate a nominal amount. This applies even if an appropriate donation value is suggested.
Charities operating internationally may encounter additional challenges related to VAT as each country may have its own rules and regulations. Cross-border transactions can trigger VAT obligations and charities need to navigate these complexities carefully so as to minimise the cost of VAT and of overseas VAT registrations
VAT and Charities – Best practice
Maintaining accurate records of income and expenses transactions is essential for proper VAT compliance. Valid VAT invoices in the name of the charity should be retained to support any VAT recovery permitted . In addition any supporting evidence relating to reliefs should be retained. Robust record keeping helps minimise the risk of errors being made in relation to VAT and also helps reduce challenges during HMRC VAT audits
Given the range of activities, charities need a way of determining how much VAT they can recover on costs. In simple terms, depending on the precise nature of the activities, this will likely involve firstly carrying out a ‘business/non-business’ calculation to determine how VAT recovery on cost is to be disallowed on the basis it relates to non business income such as donations. The remaining VAT is then carried forward to the partial exemption calculation where recoverable VAT is calculated based on the ratio of taxable to exempt revenues. This is a complex area.
Given the complexity of VAT rules for charities, seeking professional advice from VAT specialists can be invaluable for charities. Specialists with expertise in both VAT and the charity sector can provide tailored guidance and help ensure the VAT position of the charity is optimised, ultimately benefiting the amount of benefit the charity can generate for good causes. The VAT Consultancy can partner with charities on this journey and we are well placed to simplify the complexity for you.
Navigating the crossover between VAT and charitable activities requires a detailed understanding of VAT rules and also the associated compliance obligations. Charities must proactively manage their VAT responsibilities to ensure the efficient use of resources by staying informed, seeking professional VAT advice and implementing effective processes to manage VAT risk. Charities can then optimise their position and continue to make a positive impact on society without VAT negatively impacting their charitable aims.
The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces. We provide global VAT and customs duty advice and VAT compliance services. To discuss how we can help contact us today.