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What are Charities

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A charity is an institution that is established for charitable purposes and public benefit only.  It can't be set up for both charitable and non charitable purposes and also be considered a charity.

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A charity’s purpose is usually set out in the ‘objects clause’ of its governing document (the legal document that creates a charity and says how it should be run).

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For a charity to be legal, it must be registered with the Charities Commission and HMRC (if it wants to benefit from reduce rates of VAT and Zero Rating)

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Charities can carry out trading activities, provided they are for raising money for their charitable cause.

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Non charitable purposes are as follows:

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• Political Purposes

• Non charitable purposes

• Unlawful purposes

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Examples of charitable purposes:

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• The prevention or relief of poverty

• The advancement of education

• The advancement of religion

• The advancement of the arts, culture, heritage or science

• Environmental protection

• Development of sport

• Animal Welfare

• Womens rights

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​Charities and VAT

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Charities that trade and make taxable supplies will be required like any other business to register for VAT where their turnover exceeds £90,000. Similar to other enterprises, charities can register for VAT volunarily if they want to claim back VAT from HMRC on their purchases. Note - this is only benificial if the charity is making taxable supplies (standard, reduced or zero rated).  If the charity is making purely exempt supplies, then any input VAT incurred will be irrecoverable. 

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Like many normal businesses, charities can make either Standard Rated, Reduced rate, Zero Rated or Exempt sales or supplies. In addition to these a charity can make non business related supplies which are deemed outside the scope of VAT. 

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VAT Recovery

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Similar to other businesses, the level of VAT recovery by charities is determined by the nature of the supplies it makes. If it makes wholey taxable sales, then it will be able to recover all of the input VAT on its business related activities. If it makes solely exempt sales, then it will not be able to recover input VAT in relation to the business portion of these sales. If it makes a mixture of exempt, standard, reduced and zero rated supplies then it will be able to recover a portion of the input VAT it has incurred on business related activities. In this case, the proportion of VAT recovery on its business expenses is determined using a formula normally based on 

 

Taxable Sales (including zero rated and reduced rate)  /  Total Sales (Std, Zero, RR, Exempt) = VAT Recovery Rate Percentage

                                              

Types of Income normally Generated by Charities and the VAT liability​

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• Revenue from Admission to Buildings such as museums, art galleries etc  = Standard Rated 20% ( unless admission fee is for fund raising event or is covered under the cultural events exemption)

• Revenue in the form of Donations in exchange for admission to the event = 20 %

• Revenue from Advertising in Brouchures = Standard Rated 20% (unless advertising on behalf of another charity) The sale of advertising space in brochures or programmes for a fundraising event is exempt from VAT. But the sale of such space to another charity can be zero-rated.  The sale of advertising space in brochures or programmes for a fundraising event is exempt from VAT. But the sale of such space to another charity can be zero-rated. 

• Revenue from affinity credit cards where the charity allows a card provider, bank or other financial institution to access to the charity’s membership or mailing lists or mailing of the card provider’s promotional literature to members, endorsement of the card and marketing of the card by the charity to its members or supporters, the right to use the charity’s name and logo on the card and on the card provider’s promotional literature = Outside the Scope of VAT 80 % and Standard Rated 20%  If the charity is acting as an intermediary and engaging with members to take up services from the card provider, bank etc then the services are likely to be Exempt from VAT

• Sale of donated items in a charity shop = Zero Rated (conditions apply)

• Sale of donated items at a fund raising event = Zero Rated

• Goods purchased for resale by a charity = Standard Rated 20 %, Zero Rated if childrens clothes or books

• Catering at a fund raising event = Exempt

• Education and Training =  Exempt

• Sponsorship = Standard Rated (where the charity provides something in return) If nothing iss provided in return then maybe able to treat as non business expense and outside the scope of VAT

• Grant Funding = Outside the Scope of VAT (provide nothing is supplied by the charity in return)

• Hiring out of Buildings and Halls = Exempt (unless opted to tax and this standard rated)

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Note: the above Revenue streams are not exhaustive and or the conditions that apply. For more detailed information, please read the below HMRC notice in the link attached.

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VAT Relief on Purchases made by Charities​

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Certain goods and services are zero-rated or reduced-rated when bought by charities, regardless of whether the charities are registered for VAT or not.

For each of these reliefs specific conditions have to be met. Charities wishing to take advantage of these reliefs must provide their suppliers with eligibility declarations certifying that the conditions have been met for that relief.

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• Advertising services provided to charities = Zero Rated

• Fuel and Power used for qualifying purposes such as heating a childrens home or home for the elderly = Reduced Rate 5%

• The construction of buildings, and certain works to protected buildings, intended to be used solely for non-business purposes can be zero-rated subject to certain criteria being met. 

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VAT for charities: What qualifies for VAT relief - GOV.UK

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-Contains public sector information licensed under the Open Government Licence v3.0.

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