Charities’ trading activities – VAT implications

I frequently come across situations where a charity has trading income. Such income can have VAT implications. In a worst case scenario, modest trading activity can jeopardise zero rating for the construction of a building for the charity.

The first problem is that ‘business’ is not defined. Further, an activity may be treated differently under different areas of Law. For example, the sale of donated goods is not considered as trading when carried out by a charity; however, it is a supply in the course of business for VAT purposes, but may be zero rated, depending on fulfilling certain conditions.

VAT Law does provide that small-scale trading activities can be ignored in the situation where a charity is seeking zero rating or reduced rating on supplies it receives.

Once trading is more substantial, the charity will need to consider registering for VAT. Zero rating will also no longer apply, potentially adding to its costs. Further, the Charity Commissioners may require that the trading may not be carried on by the charity. In this case, a trading subsidiary will have to be incorporated. Guidance provides that ‘primary purpose trading’ may be retained within the charity. This is trading which contributes directly or indirectly to the successful furtherance of the purposes of the charity. Trading which is ‘non-primary purpose trading’ can also be retained within the charity as long as the trading does not involve a significant risk to the assets of the charity.

The charity may have to seek advice on whether its activities fall into the definition of ‘primary purpose trading.’

If the charity is a company limited by guarantee, then a VAT Group registration may be set up with its trading subsidiary. This can help maximise input tax recovery.