VAT & Charities – 23 October 2008 Alison Godfrey alison@godfreywilson.co.uk

VAT & Charities – 23 October 2008

Alison Godfreyalison@godfreywilson.co.ukwww.godfreywilson.co.uk

Charities are exempt from VAT

True or false?

FALSE!

It is what you are doing that dictates the VAT position – NOT whether you

are a charity or not.

In fact charities often have far more complicated VAT situations than companies AND they are usually

financially worse off as a result of VAT.

VAT – the basics• VAT is a tax on the sale of goods and

services• You must register for VAT if your taxable

turnover exceeds £67,000 in a 12 month period

• If you are registered for VAT you must charge VAT on your taxable activities but you can also recover VAT on your purchases

• If you are not registered for VAT you do not charge VAT but you cannot recover any VAT either

When to register?

• Must be undertaking business activities• If no “business activities” then not

eligible to register for VAT• What are “business activities” in the

context of charities?• Supplying goods or services in

exchange for payment – mutual benefit• If no mutual benefit, then “non-

business”

Examples of business activities?

• Selling advertising in magazine/newsletter

• Selling charity merchandise (xmas cards, t-shirts, etc)

• Commercial sponsorship• Commission (charity affinity credit

cards, etc)• Contracts to provide services (subject

to various exemptions)

When to register (cont’d)

• Undertaking “business activities” – yes!• Must register when taxable turnover exceeds

£67,000 (08-09) in any 12 months• What does “in any 12 months mean”?• Rolling total – not the same as financial year

What is “taxable turnover”?

• Income from standard-rated and zero-rated activities = taxable turnover

Non-Business Activities

Exempt Taxable

Standard Rated

Zero Rated

Business Activities

Example

Income Type Amount (£) VAT status?

Donations £150,000 Non-business

Sale of Xmas cards £5,000 Standard-rated

Advertising in magazine

£50,000 Standard-rated

Fundraising from Marathon

£35,000 Non-business

Sale of publications £20,000 Zero-rated

Total taxable turnover = £5,000 + £50,000 + £20,000 = £75,000 which exceeds VAT threshold of £67,000. So charity must register for VAT.

What types of activities are exempt?

• VAT legislation is complex – lots of specific exemptions

• Exemptions most likely to affect charities:Education (vocational training, New Deal,

youth clubs, research)Health & Welfare (care homes, medical &

health work, child protection, nurseries)Cultural Services (admission charges to

museums, galleries, zoos, theatrical & musical performances)

Fundraising Events (certain restrictions apply)

Mixed activities?

• What happens if my organisation has a mixture of business, non-business, taxable and exempt activities????

• This is common scenario for many charities

• Only charge VAT on your taxable, business activities, BUT

• Can only reclaim VAT on purchases that relate to those activities

What VAT can I recover?• Never reclaim non-business VAT

(red)• Always recover standard/zero rated

VAT (green)• Sometimes recover exempt VAT –

subject to certain conditions (partial exemption)

Non-Business Activities

Exempt Taxable

Standard Rated

Zero Rated

Business Activities

How do I account for VAT?

• Accounting software (Sage, QuickBooks, etc) is designed to account for VAT and produce VAT returns

• Cannot always cope with complex VAT (mixed activities, partial exemption)

• Need to plan how you will implement VAT accounting BEFORE you register and take professional advice if required

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