The information contained within this document has been collated by Urban Challenge
These notes are for guidance only and provide a summary of the many complex issues based on legislation as of 1st April 2011. For a full and comprehensive guide refer to the relevant legislation, regulations and case law made there under.
These notes apply to charities and social enterprises registered and operating in England & Wales.
Further Information & Contact Details
HM Revenue and Customs
VAT Helpline: 0845 010 9000
Open Monday to Friday only: 8.00 am to 6.00 pm
Prior to calling the helpline, you will need to have both your charity’s VAT registration number and postcode available. Should you not be VAT registered, then you will just need the postcode.
For people who are deaf or have a hearing or speech impairment, please contact using text phone: 0845 000 0200
VAT website: www.hmrc.gov.uk/vat
When on Home page enter in advanced word search on right hand side VAT Information and then select link; Value-added tax (VAT): overview
What is Value Added Tax (“VAT”)?
VAT is a tax which is sourced on consumer expenditure. It is collected on business transactions, imports (from non-EC countries) and acquisitions (from EC countries).
How does VAT affect Charities and Social Enterprises?
VAT will affect both Charities and Social Enterprises in a number of different ways:
- They may receive income from a variety of sources, some of which may be liable to VAT.
- If they are registered for VAT, they may be able to reclaim some of the VAT they are charged from HM Revenue & Customs.
- If a charity, they will be able to claim relief from VAT on some of the goods and services they buy, regardless of whether the charity is registered for VAT or not.
- Many of the goods and services they buy will be subject to VAT, regardless of whether they are registered for VAT.
Charities and Social Enterprises have no statutory exemption from VAT Registration.
It is important that Charities and Social Enterprises are aware of the nature of all their income and any planned activities so as to ensure that they do not breach the registration threshold.
If any Charity or Social Enterprise is undertaking any ‘business’ activities and making taxable supplies in excess of the VAT registration threshold, then it must register for VAT.
HMRC recognises charities that are registered with the Charity Commission or, if they are unable or not required to be registered, are accepted as charitable for income or corporation tax purposes.
Note: There are financial penalties issued for late VAT registrations.
VAT and Income
Business or Non Business?
If goods or services are provided for consideration, the likelihood is that the Income will fall into ‘business income’.
How can a Charity or Social Enterprise be a business?
Any organisation that is run on a charitable or not-for-profit basis may still be regarded as carrying on a ‘business activity’ for VAT purposes.
Whilst charities may not be seen as having any ‘business activities’ under charity and tax law, the definition of ‘business’ for VAT purposes is governed by specific rules and regulations based on European Community and United Kingdom VAT law.
A social enterprise is generally defined as being a business which is trading for social and environmental purposes. It ‘trades’ in the same way as any commercial business, but seeks to apply its ‘profits’ to further social or environmental purposes.
Consequently, even though a charitable or social enterprise activity may be carried out in the furtherance of charitable aims and objectives, it may still, and invariably is, deemed to be a ‘business activity’ for the purposes of VAT law.
Non-business (Outside the Scope of VAT)
This source of income does not fall into the VAT system because there is no element of `business’ in it – no goods or services are supplied for consideration.
For charities or social enterprises, examples of ‘non-business income’ would be donations or legacies.
Non-business income is not taken into account when considering whether a charity is liable for VAT registration.
If a charity or social enterprise is VAT registered, VAT is not chargeable on this income, but equally no VAT can be claimed on any costs incurred which relate to it.
All other income is ‘business income’ and falls within the scope of VAT.
However, ‘business income’ is then further categorised as being either taxable or exempt.
Taxable – A taxable supply is a supply of goods and services in the UK other than an exempt supply.
Exempt – Certain goods and services are exempt from VAT. This means that no VAT is chargeable when making the sale or supply, but equally no VAT can be recovered on any related costs eg: Leisure, Financial or Insurance services.
A ‘business’ must register for VAT within 30 days if:
(a) At the end of any month, the taxable supplies in the previous 12 months exceed the registration limit unless it does not anticipate that taxable supplies in the next 12 months will go above the de-registration limit.
(VAT will be charged from the date of registration.)
(b) In the next 30 days alone the taxable supplies are expected to go over the registration limit. In these circumstances, VAT registration will be backdated to the beginning of the month.
VAT Registration / Deregistration limits:
|Year up to||Registration||Deregistration limit|
- If all supplies are zero rated, a business can apply for exemption from VAT registration.
- If taxable supplies are below the registration threshold, a business can apply for voluntary VAT registration.
- However, if a charity’s or social enterprise’s income from its taxable supplies is below the registration threshold, and it does not want to register for VAT, the charity does not need to charge VAT on any of its income.
- If all supplies are exempt from / outside the scope of VAT, a ‘business’ cannot apply for VAT registration.
An entity cannot artificially split their activities in order to avoid VAT registration — HM Revenue & Customs has powers to treat such organisations as a single taxable person.
Common Types of Non Business Income
- Donations, where no tangible or material benefit is received in return, other than the recognition of the donation itself. The donations must be freely given.
- Grants which have been freely given
- Weddings and other Religious Activities
- Sponsorship, as long as there is nothing substantial received in return.
- The provision of any catering to distressed people which is consistently below cost
- Investment returns and similar activities
Common Types of Exempt Supplies
- Admission charges to museums, art galleries and concerts if undertaken by a charity that is run and administered on a voluntary basis by persons with no direct or indirect financial interest in the activities. Furthermore, it must not be run in conjunction with another organisation that would not attract the VAT exemption and it applies any profits from the charges to the continuance or improvement of the facility. Free access to a museum or gallery is a non-business activity, and any VAT on goods and services purchased in respect of this activity is normally irrecoverable. The museum or gallery may have other business activities, for example catering and the sale of books and postcards, for which normal VAT recovery rules will apply.
- The supply of transport services for sick and injured people in vehicles specially designed for that purpose to or from a place of medical treatment.
- The provision of education services in schools, higher or further education or vocational training establishments.
- The hire of buildings, but the charity can ‘opt to tax’, subject to certain restrictions.
- Events which are clearly organised primarily to raise money for the benefit of the charity or a qualifying body. Social events that incidentally make a profit are not covered by this exemption.
An ‘Event’ is classed as an incident with an outcome or result. Items of a regular or continuous nature cannot be an Event. However, up to 15 similar but separate Events can be held at the same location within a financial year and be covered by this exemption. If this limit is breached then ALL Events are excluded from exemption.
The 15 event limit does not apply to small scale events where gross takings from all similar events are no more than £1,000 per week. However, care must be taken that these do not, in fact, amount to trading.
The following events will fall within the exemption:
- Ball, dinner dance, disco
- Performance, concert, stage production, film showing (Note each performance etc. is an event)
- Fete, fair or festival
- Horticultural show
- Bazaar, jumble sale, car boot sale
- Sponsored walk or swim, endurance event
- Game of skill, contest, quiz
- Firework display
As a general rule, if the event is exempt, all associated income will also be exempt including admission charges, sale of bought-in goods, advertising in programmes, sponsorship etc.
Common Types of Zero Rated Supplies
Sale of donated goods provided that the goods were donated to the charity or trading subsidiary
- The goods must be made available to the general public, or to two or more persons who are disabled and/or receiving certain benefits
- Sale of second hand toys and electrical equipment, or scrap material to rag merchants is also zero rated.
- The sale of purchased goods are always standard rated unless zero rated by statute (e.g. children’s clothes).
Common Types of Reduced Rated Supplies
- Installation of energy saving equipment
Common Types of Standard Rated Supplies
- All other supplies will be standard rated
Charities often receive funding to support their charitable activities. If funding is freely given, and nothing is supplied in return, then no VAT is due as the funding is not consideration for any supply and therefore is outside the scope of VAT. However, some funding may be given in return for goods or services supplied by the charity. Such funding is consideration for a supply and VAT may be due on the income if the goods and/or services supplied by the charity in return are taxable at either the standard or reduced rate. Often funding is given subject to the provisions of a contract or agreement, the terms of which may be indicative of the nature of the funding.
Attaching restrictions to the payment of grants to ensure that the money is spent correctly does not in itself turn it into consideration for a supply. Additionally certain ‘benefits’ to the funder, for example copies of reports, may arise as a result of necessary safeguards to ensure the money is spent correctly and that the end product is put to proper use. Usually where these are incidental to the primary purpose of the project and are minimal in relation to the amount of funding, the funding is not seen as consideration for a supply.
How does a Charity decide whether Funding is a Consideration for Supply?
To decide whether funding is consideration for a supply, a charity must ask:
(a) Does the donor receive anything in return for the funding?
(b) If the donor does not benefit, does a third party benefit instead? And if so, is there a direct link between the money paid by the funder and the supply received by the third party?
(c) Are any conditions attached to the funding, which go beyond the requirement to account for the funds?
If the answer to any of the questions above is ‘yes’, it indicates that the funding may not be freely given and may be consideration for a supply.
Having established that income is within the scope of VAT, the next step is to determine if it is taxable or exempt.
Does the use of the Funding have any VAT Implications?
Yes, if a charity or social enterprise is supported by ‘outside the scope’ funding, it does not necessarily determine the VAT nature of any supplies it makes. In other words, it does not automatically follow that ‘outside the scope’ income means that the charity will only have non-business activities.
A charity needs to establish what activities it will be spending the funding on and whether those activities are ‘business activities’ for the purposes of VAT law.
1. Extracts and References have been sourced from HMSO publications.