Author Archives: Andrew Walls

About Andrew Walls

T +44 (0)20 7388 2444

Andrew is a VAT consultant with over 30 years’ experience.

His career in VAT started when he joined HM Customs & Excise as a visiting VAT officer in 1984.

Since then he has been helping businesses and charities to resolve their VAT issues.

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.

1. Property

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 "Glasgow, UK - March 31, 2013: British Red Cross offices in Hillington, Glasgow. Part of the UK branch of the International Red Cross and Red Crescent Movement, an international humanitarian organisation."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.

Renting Property

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.

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VAT is a tax on supplies made by businesses. Surely therefore VAT has nothing to do with charities because they are not in business but exist because of their charitable objectives. Whilst seemingly a sensible approach, charities do get involved in a very wide range of activities that could be seen as businesses for VAT purposes.
The fulfilment of charitable objectives will not normally constitute a business as such. Helping to provide relief and support to those in need in society is not a generally accepted business activity. But a lot of the activities a charity engages in in order to fund its charitable functions could cross the line.

Benefits to charities of being ‘in business’

One thing we come across many times is that charities don’t want to get involved with VAT and so deliberately try to avoid being seen to be in business. Whilst understandable because the compliance cost can be high and the potential for penalty worrying in the case of error, there can of course be advantages.
There are reliefs available which mean that some otherwise taxable activities are relieved and these can mean that even though there is a business being carried on, VAT registration can be avoided or even give rise to absolute gains.

What is a business?

Question mark heap on table concept for confusion,

So, if VAT is a tax on business supplies surely, this fairly fundamental concept “what is a business?” is set out in the legislation? Interestingly, it is not. In some ways this is disappointing as it leaves things unclear but in others it is useful as it gives room for interpretation and planning.
The law gives some guidance and states that the concept of business includes all trades, professions and vocations. It also includes supplies made by clubs and associations to members (no mutual trading relief or exemption here) and the grant of the right to enter premises.

Key tests

Not surprisingly this lack of definition has led to many Tribunal and court cases to test whether specific organisations were or were not in business. As a result of this we now have six key tests to consider.
1. Is the activity seriously and earnestly pursued?
2. Does it have reasonable and recognisable continuity?
3. Is there a degree of substance when looking at the values of supplies made?
4. Are activities undertaken in a regular manner and on recognised business principles?
5. Is it concerned primarily with making taxable supplies?
6. Is the activity something that would normally be done by businesses with a view to making a profit?

None of the indicia here are decisive on their own but all point one way or another. For example, where there are very high values involved there is likely to be a business but not necessarily so (indicator 3). Take the case of Wellcome Trust. It funded a lot of its activities through income derived from “profits” made from investment activities. It did this on a very significant sale. The case arose when the Trust sold a substantial part of its portfolio and realised a gain of £2.18bn. It was argued that this level of activity must be a business which would have allowed the Trust to recover a lot of input tax. However, the court ruled that value alone was not sufficient to create a business and that in realising the gain the Trust was not acting any differently to a private investor. This was not a business.
Similarly, an individual who collected old farm machinery as a hobby that he regularly sold items to fund new acquisitions into the collections was deemed not in business (indicator 2 was the only real one satisfied). But a car enthusiast who bought and sold regularly was ruled to be as he was deliberately seeking to make a profit and organised himself professionally using web sites etc. (indicators 6 and 1).

What does it mean for your charity?

Given the complexity of this area, seek the advice of a charity VAT specialist to assess if this could actually benefit your charity.

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“Is my income a grant or a fee?” is a common question we get asked. Clearly, a simple grant is outside the scope of VAT so there is no VAT to concern yourself with but where there is a fee, VAT may well be due.

Charity Savings Jar

What is a grant?

So what’s a grant? There is no statutory definition but the generally agreed position is that grant funding is freely given and does not give rise to any particular benefit or supply being provided to the grantor. VAT is a tax on supplies so if you don’t supply anything to your funder there can’t be any VAT. It is a donation by another name.
In some cases the matter is straight forward, you ask for donations and give nothing in return but the satisfaction that you have helped a good cause, no VAT. You sell Christmas cards through your shop, the customer is being supplied with goods on a commercial basis, so VAT is due.
But there are grey areas. The Local Council is happy to fund some of our activities but insists on putting a Service Level Agreement (SLA) in place which looks remarkably like a contract. Does this make a difference?

What is being supplied?

It all comes down to what, if anything is being supplied. The fact that there is a potentially lengthy document governing the relationship does not automatically mean that VAT is due.
An SLA is often simply a mechanism to allow the grantor to be satisfied that the funds they are providing are going to be used for the purpose they intended. It does not necessarily mean that there is a supply to the grantor.
So if you go to a potential funder saying that there is a charitable project you wish to undertake and they agree to fund but only on the condition that you sign up to an SLA which sets out how you will operate and report back to them that you have done it, there probably isn’t a supply of services.
Conversely, where a Health Authority identifies a particular welfare service that it wants to provide and puts it out to tender as it does not have the in house resources and you put in a bid to provide that service in return for a fee, VAT is more likely to be due (subject to any reliefs available).
And of course there are situations in between and those are the ones that are harder to judge. What happens if you have been funded by the Council for several projects on a grant basis and then it suggests another project to you and funds that on the same basis and with a similar SLA? The fact that the Council has suggested the project could mean that VAT should be due on that one even though it is not due on the others.
The wording of agreements will be very important. So too will be questions as to who benefits from the activity and the legal position. If a Council or other Authority is legally obliged to fulfil a function but chooses to contract it out, there is likely to be a supply to them rather than the payments being seen as grants. Conversely, if the supplies are made to individuals in the community but an authority simply pays for it then there is usually no VAT.

What does this mean for your charity?

You need to be sure of your VAT position and that your treatment of any grants is in line with HMRC. The impact of not doing so could lead to the subsequent recovery of missing VAT and have considerable negative impact on your available funds.

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