General VAT principles

Generally, if a charity provides taxable goods or services in the UK for consideration in the course or furtherance of a business, it will be entitled to or required to register for VAT. A requirement to register for VAT will arise if the value of taxable turnover exceeds the VAT registration threshold (£85,000 as of 2021). It is also possible to register for VAT if the taxable turnover is below the registration threshold, or if no taxable supplies have yet been made, but are expected to be made in the future.

Taxable supplies are subject to VAT at either the standard rate (20 per cent), the reduced rate (5 per cent) or the zero rate. Taxable turnover includes zero rated supplies but not exempt supplies. Exemption from registration is possible for a charity making largely zero rated supplies but the charity still needs to notify HMRC of the liability to register.

Like other organisations, at the end of every month a charity needs to look back over the previous twelve months to check if it has reached the registration threshold, especially if it is close to it. If it has, it is required to inform HMRC by the end of the month after that in which it reached the threshold. For example, if a charity exceeds the threshold in March 2021 it must notify HMRC by 30 April 2021 and registration will apply from 1 May 2021. Additionally, if there is an expectation that the threshold will be exceeded in the next 30 days alone, there is a liability to notify HMRC within 30 days of the expectation arising. Since April 2019, VAT registered charities have been required to comply with Making Tax Digital reporting requirements. read more here.

Interest and penalties can be payable in the event of late registration, as they can if VAT returns are submitted late. The time limit for correcting errors is four years – this applies both to the charity correcting errors and to VAT assessments from visiting VAT officers.

Once registered, the charity will need to establish the extent to which the VAT it incurs relates to its business activities and then the extent to which this VAT can be recovered as relating to taxable supplies.

A charity can choose to register voluntarily for VAT if it is ‘in business’ and below the registration threshold. Having done this, the charity would then have exactly the same responsibilities as a charity that is obliged to register. An example of when voluntarily registration might be beneficial is where a charity sells zero-rated items and buys standard-rated goods or services, because it would then – potentially – receive a VAT refund from HMRC. Any financial advantages of voluntary registration would need to be weighed against the administrative costs of submitting VAT returns and complying with the legislation.

There are certain goods and services on which VAT is never recoverable: for example, VAT incurred for the purpose of business entertainment to UK customers.

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.

VAT in the EU is set out in the Principal EU VAT Directive and the rules are brought into effect by domestic legislation in each Member State. Some parts of the Directive have direct effect irrespective of whether or not they have been introduced into UK legislation and taxpayers are entitled to rely on this direct effect in the event of a dispute with the tax authorities.

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