Charities and VAT
It is a fairly common misconception that charities are relieved from paying VAT. In reality, charities are subject to the same VAT rules as any commercial organisation, although there are a number of specific reliefs for certain supplies made to and by charities. For many years, charities and associated groups have made representations to the government to allow charities to reclaim the irrecoverable VAT which they incur. This has so far been unsuccessful. Therefore, if a charity’s taxable business income breaches the VAT registration threshold, it has to register and account for VAT in the normal way.
Charities will normally have a complex VAT position as they will be receiving a mixture of business income (taxable and exempt) and non business income. They may also set up a trading subsidiary to carry out any significant trading activity. This can lead to a complicated VAT recovery position, as VAT incurred on costs has to be attributed to the relevant income stream and will either be fully recoverable, irrecoverable or partly recoverable. There are a number of different ways of undertaking the VAT recovery calculations, with scope for improving VAT recovery rates by adopting the most advantageous method. However, the benefit of implementing a “special method” has to be weighed against the cost of implementing and undertaking the calculations for such a method. The use of a special method also has to be agreed in advance with HMRC. Methods have to produce a fair result and be easily checked.
Charities do benefit from certain VAT reliefs, including advertising, donated goods, aids for the disabled/handicapped and certain types of buildings. The charity will have to certify that zero rating applies. Again the conditions/rules are very precise and advice should be always be sought in cases of doubt.
Charities are increasingly finding new ways to raise funds and as a result, it is more likely that they will enter into activities/transactions which may have VAT consequences. For example, two charities working together in “partnership” may inadvertently create a VAT cost when recharging each other for services. Advice should always be taken when entering into new contracts or amending existing contracts. Unfortunately HMRC do not take a lenient approach to charities which make errors in their VAT returns and penalties/interest may be imposed.
