Do Charities Pay VAT?

As with many areas of tax, VAT can be confusing at the best of times, but when it comes to charities and VAT, the rules can be even more complex. While charities are not exempt from paying VAT, they can claim various reliefs and concessions that greatly benefit them. 

Does your Organisation Qualify as a Charity? 

First things first, though, what exactly counts as a charity? The organisation must either provide poverty relief, advance education, advance religion, or provide community benefits to qualify. It must also either be registered with the Charity Commission or be recognised as a charity for tax purposes by HMRC. It’s important to note that community amateur sports clubs don’t qualify for the same VAT reliefs and exemptions as charities.

Once it’s confirmed that you’re operating as a charity, it’s a case of normal rules apply when it comes to registering for VAT. So, if the charity’s VAT-taxable turnover is more than the £85,000 threshold, it must register for VAT with HMRC.

Even if a charity’s Vatable sales are below £85,000, it can choose to register for VAT voluntarily to reclaim VAT on its costs from purchasing supplies. Once registered, you’ll need to send a return every three months, at which point you’ll be able to reclaim the VAT you were charged on goods and services relating to your taxable business activities.

VAT Relief for Charities

Whether the charity is registered for VAT or not, it will still be able to ask suppliers to charge the reduced VAT rate of 5% – or even the zero rate on certain goods and services – rather than the usual 20%.

For example, a charity will pay 5% VAT on fuel and power if they provide residential accommodation (such as a children’s home or care home); charitable non-business activities (for example, free daycare for disabled people); or for small-scale use (up to 1,000 kilowatt-hours of electricity a month or a delivery of 2,300 litres of gas oil).

If less than 60% of the fuel and power is for something that qualifies, it will pay the reduced rate of VAT on the qualifying part and the standard rate (20%) on the rest.

It should be noted that while qualifying fuel and power includes gases, electricity, oils and solid fuels such as coal, it does not include vehicle fuel.

There are also several goods and services that qualify for the zero rate of VAT. This includes advertising, equipment for producing ‘talking’ books and newspapers, and rescue equipment. Construction services and specific works to protected buildings intended to be used solely for non-business purposes or as a village hall or similar can be zero-rated subject to certain criteria being met, as can drugs and chemicals directly used for testing for those charities engaged in medical or veterinary research.

HMRC has a full list of qualifying items and any criteria that apply.

VAT on Goods from Outside the UK

When a company imports goods into the UK, VAT is normally due at the place of entry to the UK. Once again, though, charities may be able to claim relief from VAT on some imports if they’re registered with the Charities Commission or the Office of the Scottish Charities Regulator, or if the organisation is dedicated to the welfare of people in need, such as a youth organisation, children’s home or hospital.   Relief is available on basic necessities such as food, medicines, clothing and blankets, and goods intended to be sold or used at charity events. Equipment and office materials that are solely for the use of a charitable organisation for the benefit of those in need would also be exempt.

It is generally not possible to claim relief on items such as vehicles, although you can claim relief on ambulances, items associated solely with worship, or goods and equipment used to rebuild disaster areas. The charity will need to have the necessary supporting documentation or evidence to show it’s entitled to this relief, and you should claim relief at the time of import. Documentation will vary depending on how you import the items. HMRC provides full details here.

If you supply goods outside the UK free of charge (for example, as aid), you can treat this as a zero-rate business activity (0% VAT) so VAT can be reclaimed on any associated costs.

How to Claim VAT Relief

Charities wishing to take advantage of these reliefs must provide their suppliers with evidence of their status. This includes an eligibility declaration certifying that the conditions have been met for that relief and a letter of recognition from HMRC or a Charity Commission registration number for charities in England and Wales. It’s the supplier’s responsibility to make sure that the correct VAT rate is applied, but should they require more evidence, the charity must supply what’s requested before VAT relief can be given.

Can Claims be Backdated?

If a charity paid the standard VAT rate on goods and services available at the lower or zero rates, it might be possible to claim up to four years of back payments. The rebate would be the difference between the standard rate (at the time of payment) and the lower or zero rate. You can claim a refund by submitting a VAT return, and HMRC will refund the amount, usually within ten days.

It should, however, be noted that if charities have incorrectly been paying the lower or zero rate of VAT, HMRC can also claim the amount you should have paid back from you retrospectively. This could mean a hefty tax bill, so it’s essential to speak to your accountant and make sure you meet the criteria for charity VAT relief.