VAT, or Value Added Tax, is a tax you pay when you buy things. It is the extra cost that is added to the original cost of an item. For example, when you’re buying a new phone, if the phone costs £100 and has a standard rate of 20% VAT, you will pay £120 (the original price plus the VAT).
In the UK, VAT is an important tax because the money collected from VAT goes to the government and helps fund public services like schools, hospitals, and infrastructure. Yet, many people are not familiar with how VAT works, its rules and regulations.
For charities, understanding how VAT works is essential as they interact with VAT in different ways, and it affects many aspects of their organisational operations. In this blog, we highlight what charities should know about VAT in the UK, including whether charities are truly exempt from paying VAT.
Categories of VAT
To properly understand how VAT works in the UK, let’s look at how VAT interactions are categorised:
Types of VAT
Now, let’s delve a little bit deeper into the types of VAT that VAT-able activities or items are subject to:
Understanding the various types of VAT is important for navigating tax implications effectively, ensuring that the rules are followed, and costs are properly tracked.
Are Charities Truly Exempt from Paying VAT
The simple answer to the question is charities enjoy VAT relief or exemption on goods and services related to their charitable causes. If charities conduct non-charity activities, they pay the standard VAT rate.
Specific examples of VAT Relief for Charities
To get VAT relief, a charity must be recognised by HMRC. This involves being based in specific regions, having a charitable purpose, and being run by qualified individuals. Some of the VAT relief or exemptions available for charities that meet the aforementioned criteria include:
For a detailed list of VAT relief items for charities, click here. When in doubt, charities should contact His Majesty’s Revenue & Customs (HMRC) to find out if they qualify for VAT relief on a given activity or item.
It is also important to note that charities can reclaim VAT on eligible expenses incurred on goods and services directly related to the organisation’s charitable activities. However, the ability to reclaim VAT is dependent on the nature of the expense and its direct association with the charitable work, and the charity must be registered for VAT. Usually, a charity is expected to register for VAT if their sales exceed the VAT threshold of £85,000, but charities who are yet to exceed the threshold can register voluntarily and benefit from claiming VAT paid on eligible expenses.
Why We Charge VAT on Our Services
Sometimes, our clients (charities) wonder why we charge VAT on services we render to them. The answer is that according to UK VAT laws, the services we provide to charities qualify as a business activity; hence, it is not exempt from VAT. Our responsibilities as a VAT-registered business involve incorporating VAT into our service prices, maintaining precise VAT records for business purchases, and submitting quarterly VAT returns to HMRC). Even though we are bound by law to follow the VAT rules as a VAT-registered business, we still offer VAT-exempted services to our clients in certain areas where it is legally possible to do so, such as in our envelope sales. This is to say that we only charge VAT where it is absolutely necessary.
Finally, to gain a further understanding of your VAT responsibilities or registration status, we recommend you get in touch with HMRC for further clarification about VAT for your charity. Our Co-Founder, Des Stewart, has also shared in-depth insights on this topic from first-hand experience of helping churches and charities maximise their income for over 12 years. Click here to watch his 3-minute video on charities and VAT.