It may be a common misconception that charities do not have to pay any VAT. On the contrary, charities do have to pay VAT in certain instances and it may not be as straightforward as you think. We have put together an easy guide, which will shed some light on VAT and charity expenses.
Charities are not treated any differently when it comes to standard-rated goods and services. Charities have to pay VAT when they buy from VAT-registered businesses. They can only claim the VAT back on their purchases if they themselves are registered for VAT. There are however some goods and services that qualify for VAT relief, whereby charities are entitled to pay VAT at the reduced rate of 5% and a zero rate.
What can charities get VAT relief from?
There are some goods and services that qualify for a reduced VAT rate of 5%. For example, charities can enjoy this VAT relief on their energy bills. However, as always with HMRC there are stipulations. This is only applicable if it is for residential accommodation, small-scale use (1000 kilowatt hours/month or 2,300 litres of gas oil), or charitable non-business activities. Charities can only receive the 5% rate for fuel and power on the proportion of their overall spend that qualifies (i.e. meets one of the criteria), and this must also be less than 60% of the overall spend.
Charities can also qualify for a zero VAT rate on a wealth of different expenditures. It is very important however to make sure that your charity meets the conditions needed for this. To understand the conditions you need to meet you should refer to HMRC directly.
How do charities qualify for VAT relief?
As a charity you can get VAT relief directly from your suppliers. In order to do so you would have to provide proof that you are a charity. Evidence provided can be in the form of a Charity Commission registration number or a letter of recognition from HMRC.
When should a charity apply to be VAT registered?
Just like any other business, charities need to register for VAT if their taxable turnover is greater than £83,000 in a 12-month period. Once they are registered they can claim back VAT on their purchases. However, they must also charge VAT on the goods and services they sell (only where VAT is applicable).
Charities can voluntarily register for VAT even if their taxable turnover is less than £83,000. It is worth weighing up the pros and cons of registering at this level though. To understand if it is worth registering, charities should consider the amount that can be claimed back against lost revenue for higher prices, extra admin for administering correct VAT and penalties for getting it wrong.