One of the things that many charity clients can get prickly about is being called a ‘business’ – many will seek to avoid that description given their laudable aims of helping those in need and clearly not seeking to profit from that in the traditional business sense.
In the world of VAT though, ‘business’ has a particular meaning and can impact on the treatment of both income and expenditure, giving charities plenty to think about when compiling their regular VAT returns (or deciding if they even need to be VAT registered).
Given that VAT can only be due on business activities, it’s particularly important to consider in detail the nature of charity income from a VAT point of view and then consider what that means for the charity’s VAT profile.
Business activities in this context means any trade, profession or vocation, carried out with reasonable or recognisable continuity, with reasonable substance in terms of supplies made, where the supplies are made for a consideration. The last of these points is particularly important – there needs to be a linked reciprocation – what do we get for our money – if anything? Typically, where there is a clear link between supplies (goods or services supplied) and payment (in money or money’s worth (eg barter)), you’ll be in Business.
Are Business Supplies Subject to VAT?
But being in business is only step 1. The next step is to consider if the business supplies are subject to VAT and if so at what rate. The VAT Act 1994 approaches that question almost in reverse; if you are making business supplies, these will be subject to VAT at the standard rate (currently 20%), unless the supplies fall into the exceptions;
- The VAT Zero Rate – taxable supplies but where the 0% VAT rate applies – this includes things like some foodstuffs, books, some building works – e.g. new dwellings, some transport – e.g. buses and trains and specified supplies by charities (e.g. sales of donated goods, advertising and supplies of medical equipment)*
- The VAT Reduced Rate – taxable supplies but where the 5% VAT reduced rate applies – this applies to things like domestic fuel and power, energy-saving materials, welfare services and residential conversions for example.*
The key corollary to making these taxable supplies (at 0%, 5% or 20% VAT rates) is that any VAT incurred on costs related to making them (e.g. cost of goods for sale and related overheads) is fully recoverable. There is a further category of business supplies that is excepted from bearing VAT;
- Exempt supplies – exempt supplies carry no VAT on the charge but differ from zero rate supplies insofar as since they are not taxable, there is not a corresponding entitlement to reclaim VAT incurred on related costs. Exemption covers things like land, insurance & banking, education, health, culture and charity fundraising.*
How do I identify Non-Business Supplies / activities?
Practically, the most straightforward way to identify non-business supplies is that there will be a lack of reciprocation between the two parties – generally in the context of charities, a charity will supply goods or services to a recipient for no consideration (free). The charity may simply fund that activity from its reserves, grant funding or donations (see below). That activity is then regarded as a Non-Business supply and the consequence of that is that any VAT on related costs is irrecoverable. In many instances it’s better to make a nominal charge for these services if it allows recovery of VAT on related costs but each charity will make its own judgement on the pros & cons of a charging approach, operationally and financially.
How do we treat grants and donations?
These are not business supplies / activities because there is no reciprocation or linkage between what is done and money received. In the case of grants**, grant-givers typically allocate a sum to a charity to do good things for third parties (i.e. the donor does not benefit) and in the case of donations, these are sums freely given, for nothing in return and with no strings attached.
The important point to remember is that no VAT is due on grants & donations because these are sources of non-business income, rather than being non-business activities. That means you can use non-business income to support or subsidise taxable business activities with no impact on the recovery of VAT on the costs associated with the taxable activities.
- Ensure you are able to identify & distinguish your charity’s business and non-business activities
- Consider Grants / SLA / Funding agreements and critically consider if they are business supplies (supplies for a consideration to the funder) and ensure VAT can be added if appropriate
- Consider if any VAT is incurred in generating non-business income (e.g. fundraising costs) – it may not be recoverable
Our VAT team have extensive experience advising charity clients – please get in touch if you have questions.
*There are detailed regulations for each of the exceptions from VAT and further detail is available from our VAT team.
**grants and similar receipts can be complicated and we’d always recommend a review of any agreements between parties to confirm the VAT status of sums involved