VAT for Charities: A Beginner's Guide
-This article was last updated on 19 July 2022-
It’s a common misconception that charities do not have to pay any VAT. Charities actually do have to pay VAT in certain instances and it may not be as straightforward as you think.
In this in-depth guide, we reveal everything you need to know about VAT relief for charities and answer some of the most frequent questions about this topic.
- Why Do Charities Pay VAT?
- VAT Relief for Charities: What qualifies?
- What Doesn’t Qualify as VAT Relief for Charities?
- How Can a Charity Claim Back VAT?
- Do Charities Have to Register for VAT?
- Can VAT Relief for Charities be Backdated?
Why Do Charities Pay VAT?
Charities are not treated any differently when it comes to standard-rated goods and services.
As such, charities have to pay VAT when they buy from VAT-registered businesses. They can only claim the VAT back on their purchases if they themselves are registered for VAT. There are, however, some goods and services that qualify for VAT relief. In this scenario, charities are entitled to pay VAT at the reduced rate of 5% or a zero rate.
VAT Relief for Charities: What qualifies?
There are some goods and services that qualify for a reduced VAT rate of 5%. For example, charities can enjoy this VAT relief on their fuel and electricity costs. However, as always with HMRC, there are stipulations. This reduced rate is only applicable if the gas and electricity has been used for residential accommodation, small-scale use (1000 kilowatt hours/month or 2,300 litres of gas oil), or charitable non-business activities.
Charities can only receive the 5% rate for fuel and power on the proportion of their overall spend that qualifies (i.e., meets one of the criteria), and this must also be less than 60% of the overall spend.
It’s important to point out that this ‘fuel and power’ refers to electricity, gas, oil, and solid fuels. It doesn’t include vehicle fuel, however.
Some goods and services are also taxed at the zero rate for charities, thus preventing them from paying VAT on these items. According to the UK Government website, charities may qualify for the zero rate when buying any of the following:
Advertising or items related to collecting donations
Equipment for medical, veterinary, and scientific use
Aids or goods for assisting disabled people, including motor vehicles which have been designed or modified for this purpose
Medicine or medicinal ingredients
Rescue equipment, including lifeboats or associated equipment
Resuscitation training models
Charities are also exempt from paying VAT on items imported from outside the UK if they support persons in need by providing:
Basic needs, such as food, medicine, clothing, and blankets
Equipment and office supplies to assist you in running your organisation for the benefit of those in need
Items for use or sale at charity events
What Doesn’t Qualify as VAT Relief for Charities?
Now that you have a thorough understanding of the goods and services that qualify for VAT relief, it’s also vital that you learn which items are exempt from this.
Charities cannot claim VAT relief on the following:
Products containing alcohol, including alcohol-based perfume
Tobacco and associated products
Tea and coffee
Vehicles, excluding ambulances
Artifacts linked only with worship, such as statues and pulpits
Any items whose importation would result in abuse or significant distortion of competition (this is why the government can limit the quantity or types of goods that you can import)
Items and equipment used for rebuilding areas struck by disaster
How Can a Charity Claim Back VAT?
To claim back VAT, charities in the UK must first be able to prove their status as a charity. In order to do this, they must meet the following criteria:
Be situated in the United Kingdom, the Isle of Man, an EU member state, Iceland, Liechtenstein, or Norway
Be created only for charitable reasons
Be registered with the Charity Commission or a similar body, if necessary
Be operated by ‘fit and proper persons’
Be recognised by HMRC
As a charity, you can get VAT relief directly from your suppliers. In order to do so, you would have to provide proof that you are a charity. Evidence provided can be in the form of a Charity Commission registration number or a letter of recognition from HMRC.
How to Obtain a Letter of Recognition from HMRC
You can apply for recognition with HMRC online. Before you begin, make sure you have important information relating to your bank account, financial account, and officials on-hand. You’ll also need to have your charity registration number, charitable aim, and governing document easily accessible.
When acquiring items at a zero rate, a formal declaration must be presented. Examples of declarations and certificates can be found on the UK Government website.
Do Charities Have to Register for VAT?
Just like any other business, charities need to register for VAT if their taxable turnover is greater than £85,000 in a 12-month period. Once they are registered, they can claim back VAT on their purchases. However, they must also charge VAT on the goods and services they sell (only where VAT is applicable).
Charities can voluntarily register for VAT even if their taxable turnover is less than £85,000. It is worth weighing up the pros and cons of registering at this level though. To understand if it is worth registering, charities should consider the amount that can be claimed back against lost revenue for higher prices, extra admin for administering correct VAT, and penalties for getting it wrong.
Can VAT Relief for Charities be Backdated?
If a charity paid the ordinary VAT rate on products and services that were available at 5% or zero rates, it may be possible to recover up to four years of back payments. The difference between the regular rate (at the time of payment) and the reduced or zero rate would be the rebate. You can request a refund by completing a VAT return, and HMRC will reimburse you within ten days on average.
If charities have been wrongfully paying the reduced rates of VAT, however, then HMRC may recover back the money you should have paid. This could result in a significant tax bill. Therefore, always check with your accountant to verify you fit the conditions for charity VAT relief.