How Does VAT Relief Work for Charities?
There is no requirement for a charity to be VAT-registered to get VAT relief.
But, you must be able to prove that the charity qualifies for the relief to the person who is selling you the goods or the services.
HMRC VAT Registration for Charities
VAT registration becomes a requirement if the VAT taxable turnover of the charity goes above the current threshold.
Note: Taxable turnover refers to the total value of everything sold that is not exempt from Value Added Tax.
You may still decide to register even if you stay below the threshold. One of the benefits for doing so would be to reclaim VAT on your supplies.
You can get expert help about VAT and charities by contacting HM Revenue and Customs (HMRC). You can choose to ask questions about how VAT affects charities online or by post.
Note: The qualification criteria for tax relief for community amateur sports clubs (CASCs) is not the same as VAT reliefs for charities.
Qualifying for VAT Relief
Charities will pay VAT on any standard-rated goods and services bought from any businesses that are registered for VAT. But, they will pay a reduced rate (5%) or the ‘zero rate’ on certain goods and services.
Reduced Rate VAT for Charities
A charity would pay 5% Value Added Tax on fuel and power if they will be used for:
- Charitable non-business activities (e.g. providing free daycare for disabled people).
- Residential accommodation (e.g. a care home for the elderly or a children’s home).
- Small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil).
You would pay the reduced rate of VAT (5%) on the qualifying part, and the standard rate (20%) on the rest, if your charity uses less than 60% of the fuel and power for something that qualifies.
Note: Vehicle fuel does not qualify for the reduced rate. But, electricity, gases, oils, and solid fuels (e.g. coal) would meet the criteria of qualifying fuel and power.
Zero Rate VAT for Charities
There are conditions that charities need to meet to pay no VAT (at the zero rate). HMRC produce guidance notes that clarify what VAT reliefs charities can obtain on their purchases, such as:
- Advertising and goods connected with collecting donations
- Aids for disabled people
- Construction services and certain works done to protected buildings
- Drugs and chemicals
- Equipment used to produce ‘talking’ books and newspapers
- Goods for disabled people
- Lifeboats, slipways and launching and recovery equipment (including fuel)
- Medical, veterinary, and scientific equipment
- Medicinal products (including ingredients for medicine)
- Motor vehicles designed or adapted for a disability
- Rescue equipment
- Resuscitation training models (e.g. CPR manikins)
Buying VAT-Free Goods from Outside the EU
As a rule, charities would not pay VAT on goods that are imported from outside of the European Union. But, to qualify the goods must benefit people in need by providing:
- Basic necessities.
- Equipment and office materials that help with the running of the organisation for the benefit of the needy.
- Goods that will either be used or sold at charity events.
- Goods that will help people deal with disasters within the European Union (EU).
How Charities Claim VAT Relief
Suppliers will need evidence that the organisation is a charity along with a written declaration or ‘certificate’ that confirms qualification for the relief.
Evidence of Charitable Status Can Be:
- A letter of recognition from HM Revenue and Customs (HMRC)
- The Charity Commission registration number.
Note: If yours is a Scottish or Northern Irish charity, you must provide the letter of recognition from HM Revenue and Customs.
Written Declaration of Eligibility
If a supplier sells goods or services to you at zero rate VAT they will need an eligibility declaration or a certificate. You can review some examples of certificates used for zero rating goods or services under the VAT Act 1994.
There is a set format to follow if you are buying building or construction services at zero rate VAT. Read HMRC guidelines ‘VAT Notice 708: buildings and construction‘ for further details.
Note: The written declaration (or the certificate) should be separate entity to the order form or the invoice for the goods or services that the charity is buying.
Charities and VAT Registration
All charities would need to register for VAT with HMRC if they have a VAT taxable turnover above the current VAT registration threshold. It would also mean sending a VAT return every three (3) months.
Calculating Taxable Turnover
You should add up the total value of everything sold in a 12-month period, that is not exempt from VAT or outside the scope of VAT, to calculate VAT taxable turnover.
HM Revenue and Customs (HMRC) produce a list of goods and services that show which rates of VAT apply for charity activities and which items are exempt or outside the scope of Value Added Tax.
Exempt Goods and Services
As a charity, you cannot charge VAT on any exempt goods and services (e.g. the provision of welfare services). As a rule, you cannot reclaim VAT on goods and services purchased in relation to an exempt business activity.
Note: VAT registration is not possible if all the business activities fall into the range of exemptions.
‘Outside the Scope’ of VAT
You cannot charge (or reclaim) VAT on income from non-business activities because they are ‘outside the scope’. These types of activities include:
- Donations whereby nothing is given in return.
- Grant funding given to support charitable activities where nothing is given in return.
- Those whereby the organisation does not make a charge.
Charging and Reclaiming VAT
After registering for VAT you would need to charge the correct rate on everything that your charity supplies. In some cases, you would also be able to reclaim some amounts when filing VAT Returns. You can reclaim the VAT charged on goods and services that relate to taxable business activities.
Exports Outside of the European Union
You can treat any goods supplied free of charge outside the EU (e.g. as aid) as a zero-rate business activity (0% VAT). It would mean you can reclaim the VAT portion on any associated costs.