Rules on VAT for charities

Charities still face a lot of confusion over how VAT should be applied following various changes to the system. Key issues include how to identify what should be classified as a business activity and how much input tax a charity is entitled to recover. The issue is that both HMRC and the taxpayer have questions about any particular charity’s activities, and recent court cases and rulings haven’t provided as much clarity as hoped. In a case such as sponsorship, differentiation must be made between commercial sponsorship, such as the use of the charity’s logo, which is subject to VAT and a donation from an organisation, which is not.

One of the areas that the HMRC appears to be focused on is the issuing of zero-rate certificates for buildings used for a relevant charitable purpose. There have been cases where HMRC has disputed a charity’s claims that no business activity was taking place, which caused an issue after the zero-rate had been claimed.

Making Tax Digital (MTD) is also causing some issues following its implementation in April last year. Towards the end of last year, HMRC announced that businesses could apply for extra time to prepare for the requirements of MTD. VAT Notice 700/22, section 4.2.1.3. states that any organisation with a complex or legacy system may be granted extra time – but it’s an issue worth addressing sooner rather than later because the grace period will not run indefinitely.

As VAT continues to be an issue that challenges charities and has ever-shifting rules, it’s worth working with an expert to ensure that the organisation is compliant with the latest guidelines.

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