Generally charities are subject to the same VAT rules as everyone else for most purposes. However, there are a series of reliefs available to them enabling them to pay less or even no VAT. This can assist with cash flow for those charities which can recover the VAT they incur since they don’t have to pay the VAT and then wait to get it back again later on. For those charities that cannot recover VAT, this can be an absolute gain.
There are numerous reliefs, many of which are applicable only to specific types of charities e.g. those working with handicapped or blind persons or operating life boats. But also some which can apply to all. Here we look only at three common areas.
Most charities inevitably have to occupy property. They could do this by owning their own property or renting premises.
Owning through purchase of a property
Many non-residential buildings are subject to VAT because the owner has exercised something called the ‘option- to- tax’. In simple terms this means that the sale falls outside of the normal exemption for such buildings and VAT becomes due. However, where the purchaser is a charity the exemption continues to apply as long as it will use the building for non-business purposes and not for office purposes.
There are a couple of key points here. Firstly, the charity needs to communicate this intention to the vendor in order to gain relief. Secondly, it has to be able to demonstrate non-business use if asked to by HMRC. Finally, it must ensure that the office use test is passed.
Both the non-business and office use test have a degree of scope for flexibility if the vendor and the charity agree (through discussion/negotiation) and the non-qualifying use is no more than 5% of total use.
A charity might chose to have its property specifically built. Whilst construction services in the course of a new non-residential building are usually standard rated, there is a zero rating available where the construction is for a charity which will use that building for non-business purpose. The charity needs to issue a certificate to the contractor to achieve this and that certificate should be given before the works commence.
Similarly to the comments above relating to the purchase of a property, many landlords have also opted to tax non-residential buildings and charge VAT on rents. Again, a charity occupying the building for non-business use can escape this VAT charge.
Again, the use must be non-business and not as an office, though the 5% tolerance is also available here.
2. Reduced rating – fuel and power
The 5% reduced rate applies to many supplies and charities can benefit from all of these. Specific to charities is an extension to the usual relief for supplies of fuel and power (gas, electricity etc). Where a charity can demonstrate that it is purchasing the fuel and power for non-business purposes, it should only pay 5%.
Are you paying 20% or 5% on your fuel and power?
3. Zero rating of advertising
Advertising is generally standard rated but supplies to charities can be zero rated. Historically, there have been many restrictions on the type and form of advertising covered by the relief but it now covers almost all media advertising.
Care needs to be taken on distinguishing between media advertising and the supply of other items with an advertising content e.g. branded merchandise and advertising on own web sites and other platforms.
Are you paying 20% on your advertising?
Review your charity’s VAT position
A review of your VAT position may well lead to revealing reliefs that are available to you.
Seek advice from a specialist charity VAT expert to ensure your organisation isn’t missing out.