VAT treatment of charities and not-for-profit organisations can be a cloudy area for accountants.
At a recent UK200 Group charities training day, VAT partner at Haslers and director of UK VAT Advice Ltd Debra Dougal clarified key issues surrounding the topic.
What is a charity?
From a VAT perspective, there is no definition of a charity and for VAT purposes it does not require registration with the Charity Commission.
As there is no strict reference to ‘charity’ in legislation, being mixed with the term “not-for-profit organisation”, the definition of a charity rests on judicial interpretation.
According to this, a charity either:
- Relieves poverty
- Advances education
- Advances religion
- Is beneficial to the community
While Dougal says it isn’t difficult to persuade HMRC that a charity is a charity, it is difficult to determine whether it is in business or not.
Is a charity in business?
Determining this is dependent on activities, which include:
- A serious undertaking earnestly pursued
- Reasonable or recognisable continuity
- Measure of substance by quarterly or annual value of supplies
- Regular, sound and recognised business principals
- Predominantly concerned with the making of supplies for consideration
- Supplies commonly made by those who seek to profit by them
Dougal gave an example of a case where HMRC tried to argue that a charity, Three Counties Dog Rescue, which was re-homing dogs for a voluntary donation, was not in business.
Prospective owners are asked to make a minimum donation to the charity towards the cost of care and re-homing. This donation, the charity argued, meant that for VAT purposes it was making taxable supplies in return for consideration and entitled to reclaim VAT input tax and the charity won.
In Gables Farm Dogs and Cats Home, HMRC argued that dogs that were rescued or abandoned weren’t donated, but the tribunal did not agree.
Because the donation was found to be obligatory rather than voluntary, the tribunal held that in supplying dogs to new owners, a zero-rated taxable supply was made. This meant the taxpayer could register for VAT and recover its input tax of more than £66,000.
From the perspective of determining how much VAT a charity making both business and non-business supplies that is also partly exempt could reclaim, Dougal advised those with charities in this category with special partial exemptions to seek specialist advice.
This is because under changes to the partial exemption and Capital Goods Schemes in 2011, any changes in the methodology of charities and new special methods have to be approved.
Potential development in this area would come about if David Cameron followed through with his 2010 suggestion that charities should be treated the same way as government departments for VAT.
However, Dougal said that if that ever came to fruition, HMRC will seek every opportunity to restrict VAT loss through the business/non-business argument.
Here is a breakdown of charity elements and their business/non-business rating:
- Legacies: Non business
- Subscriptions: Business
- Investment income: Non business
- Goods sold in a charity shop: Business
- Credit card affinity scheme training payments: Both
- Education/training: Business
- Freely given donations: Non business
- Grant funding: Either
- Fundraising events: Both
- Welfare: Either
- Sale of advertising space: Either
- Admissions to museums and galleries: Either
- Supply of staff: Either
- Property rental: Both
VAT liability
The ultimate goal for any charity is to limit their VAT exposure, according to Dougal.
In this case, you need to examine a further set of elements of a charity and determine whether they’re liable for VAT or not - for example supplies.
Dougal looked at whether the following can be considered zero rated, outside the scope, exempt or standard rated in terms of VAT liability:
- Legacies: zero rated
- Investment income: zero rated
- Education/training: exempt
- Bought in goods sold in a charity shop: standard rated
- Donated goods sold in a charity shop: zero rated
- Credit card affinity scheme payments: standard rated and outside the scope
- Subscriptions: zero rated and exempt and standard rated
- Freely given donations: outside scope
- Grant funding with benefit to funder: standard rated
- Grant funding with no benefit to funder: outside scope
- Fundraising events: standard rated and exempt
- Welfare: outside scope and exempt
- Sale of advertising space: standard/zero rated and outside scope
- Admission to museums and galleries: exempt and outside the scope
- Supply of staff: exempt and outside the scope
- Property rental: standard rated and outside the scope
Dougal illustrated the ‘taxable-non-taxable’ debate with another case study: Hope in the Community v HMRC.
The Revenue brought the charity to a VAT tribunal over payments it received from public sector bodies.
The tribunal ruled that grants given to the charity, an umbrella body for religious organisations, from public sector bodies were contracts for services rather than grants for the charity’s own activities and therefore VATable.
This highlights the subtle but strict differences between taxable contracts and non-taxable grants.
Dougal said the case has been appealed, but in her opinion the taxpayer is unlikely to win, as unless the money is absolutely freely given, it will be seen as consideration for services
Cost sharing exemption
One of the final points Dougal highlighted was the cost sharing exemption, legislation that has been around since the inception of the EU, but which the UK had chosen to “ignore” until Finance Bill 2012.
According to HMRC:
This exemption applies when two or more organisations with exempt and/or non-business activities join together on a cooperative basis to form a separate, independent entity, a cost sharing group, to supply themselves with certain services at cost and exempt from VAT.
Therefore, a group of charities could come together under one of these groups to use the same HR, payroll and other services.
However, HMRC’s rules are far wider than the EU legislation and Dougal said that she expects there to be challenges where taxpayers have interpreted the EU rules differently to HMRC.
For further reading on VAT and charities, see:
Debra is a VAT lecturer, VAT partner at Haslers and director of UK VAT Advice. She has specialised in VAT for more than 25 years. As well as providing high level VAT consultancy to clients, she specialises in providing VAT specialist support to accountants and lawyers. Debra is also chair of the UK200 Group tax panel.