Value Added Tax (VAT), as contrasted with direct tax considerations, looks at whether an activity is ‘business’ or ‘economic activity’. ‘Business’ has a different definition from ‘trading’ for direct tax, and an activity could still be considered ‘business’ for VAT purposes but not be a ‘trading activity’ for direct tax purposes.

The main reason why there are so many differences between VAT and direct tax is that VAT has its roots as a European tax and for many years the UK had to comply with European Union law in respect of it. Following the UK’s exit from the EU this may be reviewed but it is likely that there will be alignment in many cases and existing laws will continue to apply until changed.

When VAT was enshrined in UK law, certain derogations were allowed by Brussels, the most important of which for charities is the zero rate. Without this derogation, the minimum VAT rate that would apply would be 5 per cent. The standard rate of VAT in the UK is currently 20 per cent.

HMRC VAT Notice 701/1 explains how VAT affects charities, how a charity’s income is treated for VAT purposes and what VAT reliefs a charity can obtain on its purchases.

CTG maintains a comprehensive list of recent and ongoing VAT cases relevant to charities.