Does my charity need to charge VAT?

Charities can find a useful guide published by HMRC on what VAT rate to charge on common goods and services. There is also a guide published by HMRC on How VAT affects charities which covers common income streams for charities at section 5.

When do charities not charge VAT?

Many charities receive income which is VAT free. This includes exempt income from activities such as providing care, education, sporting facilities, fund raising events and income from rents. Charities also receive income in the form of grants and donations which are usually outside the scope of VAT.

Grants vs contracts and VAT

It can sometimes be difficult for charities to determine whether the income they receive is a donation or grant which is outside the scope of VAT or is a contract to provide goods or services.

For income to be a donation or grant, the money must be freely given without any benefits being given either to the funder or to third parties in return for the payment.

A contract for goods or services will normally specify what is being provided in return for what payment.

Confusion arises because funding bodies, particularly government bodies and local authorities, often place requirements on how money is to be spent by the recipient so that they can ensure that their funding is used for the intended purpose. This blurs the lines between grant funding and contracts for delivery of goods or services as it becomes difficult to identify whether the conditions placed on the funding amount to a benefit being provided to the funding body and/or a third party.

You can find more guidance on whether an activity is a contract for service or a non-business activity for VAT here.

HMRC guidance

HMRC guidance on VAT rates on different goods and services can be found here.

HMRC VAT notice 701/1 How VAT affects charities can be found here

HMRC guidance for their own staff on grant income can be found in VATSC06310.