Many people ask if charities are exempt from VAT. There are many Community interest companies (CIC), charities and trusts sometimes forget that they are subject to more HMRC taxes than they though. The first one most people struggle with is VAT, and for good reason. The Rules on whether CICs need to be VAT registered is more complicated than you think
So does my CIC, charity or trust need to register for VAT?
For all entities the rules are if you make taxable supplies of £85,000 in a period of 12 months you are required to register for VAT in 30 days. At the same time you will have to register for Making Tax Digital, which will require you to download software and submit your VAT returns electronically. So does your social enterprise or charity need to register for VAT?
You first need to look at what qualifies as taxable supplies. For a charities, CICs and trusts this can be hard for the following reasons:
So lets try and break this down to determine if your social enterprise needs to register for VAT.
Are grants a taxable supply?
Charitable donations are not a taxable supply, they have no strings attached and are exactly what they say they are, donations.
Lots of people think that grants and restricted funding are exempt from corporation tax and VAT. This is NOT always the case. It depends on the substance of the agreement in place. A grant will fall within scope of VAT if there is a linked supply and consideration. If any of the following factors are missing then:
- Does the grantor receive anything in return for the payment? (e.g restricted funding – you have to provide a specific service and cannot spend on anything else)
- Are there any conditions attached to the payment that go beyond merely having to mention it in account statements? (e.g have to supply services)
- What will the payments be used for? (E.g specific purpose)
- If the funder does not benefit directly, does any third party receive a benefit? (e.g
- If this is to serve a specific social group)
- Is there a contract and what are the terms and conditions (e.g has all this been written down and agree)
Therefore restricted funding could be a taxable supply, if you are in doubt I would suggest ringing a professional.
Does my entity meet the £85,000 taxable supplies threshold?
So a taxable supply is anything which is not exempt. Here is a list of common charities, CIC and trust taxable supplies and their HMRC classification.
- Admission charges by charities- Exempt
- Advertising services for charities- 0%
- Certain goods sold at charitable fundraising events- 0%
- Charitable fundraising events- Exempt
- Charity shops – selling donated goods- 0%
- Construction and sale of new buildings for a relevant charitable purpose 0%
- Energy saving materials permanently installed in dwellings and buildings used for a relevant residential purpose- 5%
- Sponsored charitable events- exempt
- Voluntary donations to charity- Outside the scope of VAT
- Building services for disabled people- 0%
- Burial or cremation of dead people, or burial at sea- exempt
- Mobility aids for the elderly- 5%
- Equipment for blind or partially sighted people -0%
- Equipment for disabled people- 0%
- Funeral plans written under contracts of insurance- Exempt
- Smoking cessation products – nicotine patches and gum 5%
- Welfare services provided by charities at significantly below cost- Outside the scope of VAT
- So does this mean I need to register for VAT?
So for example you get a grant to provide specific mentoring to specific young people, the grant is taxable supply as it has conditions for their money. However, the actual service provided to the third party (young people) relates to education, vocation and other connected services by a non profit organisation and therefore this is an exempt supply. This means the grant and services are an exempt supply and will not count towards the £85,000 threshold, therefore there is no requirement to register for VAT.
These rules are not clear, and we advise you give professional advice if you are unsure in any way.