The complexity of the system and the penalties that can be levied in respect of even innocent errors make the subject of VAT a minefield for the charity sector.
This does not mean, however, that this topic should be avoided at all costs. More often than not charities pay more in VAT than they need to.
Therefore, while steering clear of penalties and possible administrative headaches, they also miss out on the chance to secure sometimes substantial refunds from HM Revenue and Customs.
This article does little more than scratch the surface of the subject, but it does deal with the basics. It also aims to provide an indication of those scenarios in which you ought to take further advice.
Value Added Tax (VAT) is a charge on the supply of those goods and services that are deemed to be "taxable" or, to put it more simply, those supplies which are not "exempt".
- Exempt supplies include
- insurance and other financial services;
- the leasing and selling of most land and buildings;
- welfare services provided otherwise than for profit;
- the provision of certain education and training services; and
- some fund raising events.
Supplies such as the sale of advertising space, the receipt of sponsorship and membership subscriptions, and income from affinity card schemes may be regarded as wholly or partly taxable in particular circumstances.
"Taxable supplies" fall into three categories:
- Standard rated supplies (taxed at 17.5%) - includes most goods and services
- Reduced rate supplies (taxed at 5%) - fuel and power used in the home and by charities
- Zero-rated (no VAT charged) - includes most food, books, newspapers and young persons’ clothing and the sale of donated goods by a charity or by another body that covenants its profits to charity
The total of your taxable supplies is known as your "taxable turnover".
Compulsory registration
All businesses, including charities, must register for VAT if:
- At the end of any month the total value of taxable supplies made in the past 12 months exceeds the VAT registration threshold (£68,000 from 01/05/09); or
- At any time they expect that the value of their taxable supplies in the next 30 days will exceed the VAT registration threshold.
Businesses that supply only zero rated goods may apply for exemption from registration.
Charities must therefore consider the extent to which their activities fall within the taxable categories and monitor on a continuing basis the associated turnover figures.
If they are obliged to register they should contact their local VAT office. Failure to register on time may lead to the imposition by HM Revenue and Customs of substantial penalties and interest.
Voluntary registration
The decision of whether to register for VAT is not one to be taken lightly. VAT registration imposes a high degree of administrative obligation. Further, understanding the technical complexities of the VAT legislation can be a daunting task. Nevertheless, registering for VAT could in the right circumstances give rise to substantial savings for a charity.
Certain supplies made to charities are specifically free from VAT – for example, goods donated for sale or export, certain construction services and certain supplies of medical and scientific goods. However, most charities will incur some VAT on services supplied to them that will be non-recoverable unless they choose to register.
Voluntary registration is permitted when a charity engages in some taxable activities but has a taxable turnover below the registration threshold. It may prove to be beneficial, particularly if the charity makes zero rated supplies (such as selling books and publications) and the related inputs are significant. This would most obviously be the case where the charity receives membership fees or subscriptions.
Note that, once registered, the charity will be obliged to charge tax on any standard or reduced rate supplies that it makes and this may have a knock-on effect on the purchasers of such goods or services.
The implications of registering
If you are registered (or ought to be registered), you must charge and account for VAT whenever you make any non-exempt supplies. These supplies are your outputs and the tax that you charge is your output tax. The VAT charged to you by suppliers in respect of your non-exempt purchases is your input tax.
In a simple situation, you deduct your input tax from your output tax and pay the balance to Customs & Excise. If your input tax is greater than your output tax, you can claim the difference back from Customs & Excise.
Unfortunately, the situation is rarely simple where VAT is concerned. A VAT-registered body will need to complete and submit returns on a regular and timely basis and will need to keep proper records available for inspection.
It is also likely to have to get to grips with notions such as partial exemption and the apportionment of input tax. While there are always pressures on the government to relax the VAT regime for charities, simply keeping up with any resulting changes can create an administrative burden in itself. This is why it is so important to obtain appropriate professional advice.
