VAT & Charities – 23 October 2008 Alison Godfrey

Charities are exempt from VAT True or false?

FALSE! It is what you are doing that dictates the VAT position – NOT whether you are a charity or not. In fact charities often have far more complicated VAT situations than companies AND they are usually financially worse off as a result of VAT.

VAT – the basics VAT is a tax on the sale of goods and services You must register for VAT if your taxable turnover exceeds £67,000 in a 12 month period If you are registered for VAT you must charge VAT on your taxable activities but you can also recover VAT on your purchases If you are not registered for VAT you do not charge VAT but you cannot recover any VAT either

When to register? Must be undertaking business activities If no “business activities” then not eligible to register for VAT What are “business activities” in the context of charities? Supplying goods or services in exchange for payment – mutual benefit If no mutual benefit, then “non-business”

Examples of business activities? Selling advertising in magazine/newsletter Selling charity merchandise (xmas cards, t-shirts, etc) Commercial sponsorship Commission (charity affinity credit cards, etc) Contracts to provide services (subject to various exemptions)

When to register (cont’d) Undertaking “business activities” – yes! Must register when taxable turnover exceeds £67,000 (08-09) in any 12 months What does “in any 12 months mean”? Rolling total – not the same as financial year

What is “taxable turnover”? Income from standard-rated and zero-rated activities = taxable turnover Non-Business Activities ExemptTaxable Standard Rated Zero Rated Business Activities

Example Income TypeAmount (£)VAT status? Donations£150,000Non-business Sale of Xmas cards£5,000Standard-rated Advertising in magazine£50,000Standard-rated Fundraising from Marathon £35,000Non-business Sale of publications£20,000Zero-rated Total taxable turnover = £5,000 + £50,000 + £20,000 = £75,000 which exceeds VAT threshold of £67,000. So charity must register for VAT.

What types of activities are exempt? VAT legislation is complex – lots of specific exemptions Exemptions most likely to affect charities:  Education (vocational training, New Deal, youth clubs, research)  Health & Welfare (care homes, medical & health work, child protection, nurseries)  Cultural Services (admission charges to museums, galleries, zoos, theatrical & musical performances)  Fundraising Events (certain restrictions apply)

Mixed activities? What happens if my organisation has a mixture of business, non-business, taxable and exempt activities???? This is common scenario for many charities Only charge VAT on your taxable, business activities, BUT Can only reclaim VAT on purchases that relate to those activities

What VAT can I recover? Never reclaim non-business VAT (red) Always recover standard/zero rated VAT (green) Sometimes recover exempt VAT – subject to certain conditions (partial exemption) Non-Business Activities ExemptTaxable Standard Rated Zero Rated Business Activities

How do I account for VAT? Accounting software (Sage, QuickBooks, etc) is designed to account for VAT and produce VAT returns Cannot always cope with complex VAT (mixed activities, partial exemption) Need to plan how you will implement VAT accounting BEFORE you register and take professional advice if required

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