Does my charity need to register for VAT?

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By Diana Sippel, VAT and Indirect Tax Manager, Armstrong Watson 

VAT is notoriously complex, and many businesses struggle to pay the correct amount. Charities, in particular, face even greater challenges, often making costly errors or missing out on benefits that could support their mission. It’s crucial for charitable organisations to understand VAT to avoid these common mistakes and make the most of their funds.

Charity sector VAT misconceptions

Misunderstanding your organisations VAT obligations can be extremely costly.

Engaging in charitable activities does not automatically exempt an organisation from VAT obligations. It is essential for charities to meticulously examine their operations and the procedures they employ to guarantee compliance with VAT regulations.

In our experience, many charities have wrongly assumed they do not have to register for VAT, when in fact the complete opposite is the case e.g. by incorrectly assuming grant income is non-business income rather than subject to VAT at the standard rate (20%). HMRC can go back 20 years to assess where there has been a failure to notify a VAT registration obligation, whether or not the failure was deliberate. Interest and penalties can also apply.

The potential impact of incorrectly assuming exemption or non-business treatment applies can be very costly, particular given how far back HMRC can go back even when the mistake was not deliberate.

VAT registration threshold

Any business (and this includes a charity or its trading subsidiary) that makes taxable sales in excess of £90,000 VAT registration threshold, in the previous 12 months (backward look test) or next 30 days alone (forward look test) must register for VAT.

Taxable sales are business transactions that are liable to VAT at the standard, reduced or zero rate.

Many charities make taxable sales and if your level of income from those sales exceeds the VAT registration threshold you will need to register for VAT. This is not optional and there are penalties if you fail to register on time.

But a charity that makes no taxable sales, either because it has no business activities or because its sales or income are exempt from VAT, cannot register for VAT.

Is being VAT registered always bad for charities?

Many charities, particularly smaller charities assume it is more advantageous to not be VAT registered, unless mandatorily required, due to the administrative burden of being VAT registered.

As long as taxable supplies are made, VAT registration (voluntary VAT registration) is allowed, even if the level of taxable supplies is below the VAT threshold.

Charities not required to be mandatorily VAT registered, often avoid VAT registering voluntarily. 

If the level of VAT recovery is greater than the cost of fulfilling VAT obligations, completing VAT returns etc, VAT registration can be financially beneficial even for small charities and maximise funds available.

Voluntary VAT registration can be especially advantageous where a charity’s customer can recover the VAT charged and where VAT is incurred on the costs in making taxable supplies. Many charities incorrectly assume their customers can’t recover VAT but this isn’t always the case.

What goods and services are subject to VAT?

Determining whether the goods and services provided by a charity are subject to VAT involves several considerations. Here’s a general overview of the steps you can take:

1. Identify if the activity is a business activity: VAT is applicable to taxable business activities. If your charity is providing goods or services in return for payment, it’s likely it could be considered a business activity.

2. Identify if there are non-business activities If grant funding is received, consider if the donor receives anything in return for the funding or if there are any conditions attached to it.

3. Understand the liability of the goods and services you supply: Some goods and services may qualify for reduced rating, zero-rating or exemption from VAT. Non-business activities are outside the scope of VAT.

It is important to note that in June 2022, HMRC changed its tests for assessing whether an activity was a business or non-business activity. It is essential you review your charity’s activities against HMRC’s updated, more restrictive tests.

4. Check the VAT registration threshold: If your charity’s taxable turnover exceeds the VAT registration threshold of £90,000, you must register for VAT.

 5. Review specific VAT reliefs for charities: Charities can access certain VAT reliefs on purchases, whether they are registered for VAT or not. This includes reduced rates on some goods and services, zero rates on others, and exemptions for specific items.

Specific VAT reliefs for charities include for example, certain advertisements, goods used for collecting donations, and some types of printed matter may be zero-rated when supplied to a charity. There are also some very beneficial reliefs in relation to the construction and charitable use of buildings by charities. If you are undertaking any large capital works getting, specific VAT advice is recommended to ensure VAT reliefs are maximised, where available.  We have saved our clients millions through ensuring charity VAT reliefs are effectively used and maximised.

Avoid costly errors

It’s important to navigate these steps carefully to avoid errors that could have financial implications for your charity. The above steps can be complex and, depending on the nature of your organisation, may present unique challenges.

We understand the complexities and evolving landscape of VAT laws and our dedicated team is committed to providing bespoke services tailored to the unique needs of your charity.