VAT

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 is a European tax and the UK has to comply with European Union law in respect of it. 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.

 

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