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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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