In some cases, when charities buy certain goods and services, they don’t have to pay VAT. This article will outline, what exactly a charity is and what VAT means for charities. Learn how a charity treats their income and if they can get VAT relief.
- What a Charity is
- How VAT Affects Charities
- How to Treat a Charity’s Income for VAT
- What VAT Relief a Charity can Get on What it Buys
What a Charity is
If a body has a charitable status it is considered to be a charity. Non-profit bodies are not automatically considered to be a charity. When it comes to proving that a body has charitable status they must be based in:
- An EU member state
- The Isle of Man
- The UK
They must also be established for charitable purposes and should be registered with the Charity Commission or a corresponding regulator. The body should also be run by fit and proper people and recognised by HMRC. If HMRC does not recognise the charity, recognition can be applied for online.
How VAT Affects Charities
Any business that makes taxable sales are liable for VAT either at the standard rate, a reduced rate, or zero rate. A lot of charities make taxable sales. If the level of income exceeds the VAT threshold you’ll need to register for VAT. A charity that has business activities that take place outside the UK are entitled to register for VAT. This is only the case if the activities are taxable if they took place in the UK.
If the income that a charity generates is lower than the VAT threshold they can still register for VAT. However, if it’s lower than the threshold and they choose not to register for VAT they don’t need to charge VAT to any of its income.
A charity that does not make any taxable sale because they have no business activities or they are exempt cannot register for VAT.
How to Treat a Charity’s Income for VAT
Admission to Places of Interest
If a charity were to admit its visitors to a place of interest for a charge it is considered to be a business activity. If a charity is registered for VAT they will be charged at the standard rate. However, if the fee is for a fundraising event it’s exempt from VAT. If the income that a charity received is covered by VAT exemption for the admission to cultural events they are exempt from VAT.
Donations in return for admission
A donation must be given freely for it to be VAT exempt. If making a donation means you can enter the premises then the standard rate of VAT has to be paid. If a charity were to suggest an admission fee but doesn’t insist that it is paid the money is treated as a donation. However, this may not be the case if the premises is a gallery or museum.
Some charities sell advertising space in the media they produce (Such as brochures). Advertising space is considered to be a business activity. VAT for charities who sell advertising space should pay the standard rate. However, if the space is used to promote another charity, the activity is zero-rated. If there are more than 50% of advertisements in a brochure that have been placed by individuals, all of the money can be treated as a donation.
Fundraising and advertising
If a charity were to produce media such as a brochure any space that is used to advertise a fundraising event will be exempt from VAT.
Money from banks
If a charity were to receive money from a bank or any other financial institution in return for endorsement of the institution’s credit card, this is considered a business activity. The payment will be considered as a standard VAT rate. If some of the payment has been made towards charitable funds, HMRC allows this part to be VAT-free.
Acting as an intermediary
If a charity arranges a contract between a credit card provider and its members it is acting as an intermediary any payment received will be exempt from VAT.
If transport is provided for injured or sick people it is VAT exempt. However, this will only be the case if:
- The passengers are injured or sick
- The transportation is provided for part of the journey to a place where medical treatment is received
- The vehicle has been specially designed for the use of providing such transportation
If the charity provides transportation other than in an ambulance VAT is charged at the standard rate. This is the case if the vehicle has not been specially designed. Any vehicle that’s ideal for carrying 10 or more people might be VAT-free.
What VAT Relief a Charity can Get on What it Buys
When a charity sells donated goods the goods are zero-rated for VAT. This also applies to the goods they hire out or export. In order to qualify for zero-rating the goods should:
- Be donated to the charity or its trading subsidiary
- Be made widely available to the public or to 2 or more people who are receiving means-tested benefits or are disabled.
Second-hand toys and electrical equipment that cannot be sold to the public are zero-rated for VAT. This is the case when they are sold to rag or scrap merchants.
The zero rating will not apply if the goods are exported, sold, or hired as a result of an arrangement between the charity and the donor. This is also the case if an arrangement is made between the buyer or the trading subsidiary before the goods are put up for sale to the public. In addition to this, the zero rating will not apply if the goods have been donated to the charity but are instead used by a charity in its office.
Buying goods to sell
If a charity chooses to buy goods to sell the goods will be rated at the standard rate of VAT. This is not the case for goods that have a zero rating of VAT such as books or children’s clothes. Goods that have been purchased so they can be sold at fundraising events are VAT exempt. If a charity chooses to reclaim VAT that it has been charged on specific goods it purchased they will not be VAT exempt if they are sold as being VAT-free.