Charity Income & VAT

Charities receive income from a variety of sources, some of which may be liable to VAT if the charity is or should be VAT registered. Here is everything you need to know about VAT on income generated by charities.

Table of contents

Taxable business activities

Business activities in the UK are taxable at the standard rate (currently 20%) unless specifically reduced-rated, zero-rated, or exempt from VAT as set out in the VAT Act 1994.

An organisation that is operated on a not-for-profit basis may still be regarded as carrying on a business activity for VAT purposes even if it is deemed to have only non-business activities for non-VAT purposes.

To establish whether an activity is business or non-business, HMRC recommend considering the following questions which are based on tribunal cases where business status has been disputed:

• Is the activity undertaken with a serious intent that is earnestly pursued?
• Is it pursued on a reasonably continuous basis?
• Does it have a reasonable measure of substance in terms of ongoing revenue?
• Is it conducted in a regular manner using recognised business principles?
• Is the predominant purpose to make supplies in exchange for consideration?
• Are the activities undertaken on a similar basis to those that would be undertaken by a business?

A business activity may have some but not all the features indicated but consideration of the questions is an aid to charities with activities which may not be easy to classify to enable comparison with features of activities that are clearly business.

When considering these questions, it is important to remember that exempt supplies as well as taxable supplies are business.

A charity with taxable business supplies exceeding £90,000 in a 12-month period must register for VAT.

Common sources of income for charities

Admission charges

Charities which admit visitors to places of interest such as historical monuments, gardens, exhibitions, concerts for a charge are conducting a business activity.

A VAT registered charity must usually account for VAT on admission charges at the standard rate. But there are 2 exceptions:

1. if the income received is for admittance to a fundraising event, then the income can be exempt from VAT subject to certain conditions.
2. if the income received is covered by the exemption for admission to cultural events such as museums, galleries, art exhibitions, zoos and theatrical, musical or choreographic performances.

Read more: VAT Refund Scheme for Museums & Galleries

Advertising

The sale of advertising space, by a charity, in their own brochures, programmes, annual reports or similar, is a business activity and will usually be standard rated. However, it may be possible to zero-rate advertisements provided to other charities.

If at least 50% of the total advertisements placed in a publication are placed by private individuals and, therefore, exempt, as a concession, a charity is entitled to treat all the sums received in respect of the adverts as donations and, therefore, outside the scope of VAT.

To qualify as a private advertisement, it must make no reference to a business.

Catering

Catering is a business activity and is normally liable to VAT at the standard rate.

However, there are some catering activities which are exempt from VAT when provided by a charity. For example, catering supplied as part of welfare services such as meals for residents of care homes and supplies of food and drink (but not alcohol) from trolleys, canteens, and shops to patients in hospitals or inmates in prisons.

Where catering is provided as part of an exempt fundraising event the proceeds of the catering are also exempt from VAT.

Sales by charity shops

The sale of donated and bought-in goods by charities and their trading subsidiaries is a business activity. The VAT treatment of the income from these sales depends on what is being sold and how the goods were acquired.

New goods purchased for resale by a charity are subject to VAT at the standard rate, zero rate or reduced rate under the normal rules. Most goods purchased for resale will be standard rated but some goods, for example, books, children’s clothes, and foodstuffs are zero rated. Children’s car seats and carry cots with restraint straps are reduced rated.

The sale or hire of donated goods is zero rated when sold by a charity or its trading subsidiary (where the subsidiary distributes its profits to the parent charity). Zero rating of the sale or hire of donated goods is subject to the following conditions:

• the goods have been donated to the charity or its trading subsidiary with the intention that they will be sold or hired
• the goods must be sold or hired in the condition that they are received – they may be cleaned or repaired but the structure of the goods cannot be altered
• the sale or hire takes place as a result of the goods having been made available for purchase or hire to the general public, to two or more disabled people or to people receiving means-tested benefits
• the charity has not used the goods for any other purpose, for example, its own use
• no arrangements relating to the goods was entered into by the parties to the sale before the goods were made available to the general public.

As a concession, certain goods, such as second-hand toys and electrical equipment, which are prevented under safety legislation from being sold to the general public, will still qualify for zero rating when sold to scrap merchants. The sale of scrap clothing to rag merchants also qualifies for zero rating under this concession.

Fundraising

Charities fundraise in a wide variety of different ways. Some of the more common types of fundraising are covered in the following sections:

Donations

A donation is outside the scope of VAT if it is freely given, with nothing supplied in return. VAT does not have to be accounted for on any monies received.

Fundraising events that qualify for exemption

To qualify for exemption, events must be organised and promoted primarily to raise money for the benefit of the charity. The exemption from VAT covers admission fees for the event and any other income generated at the event, for example, sale of commemorative items or food.

However, the exemption only applies to 15 or fewer events of the same kind in the same location held by a charity in a financial year. If there are 16 or more events of the same kind held during a financial year none of the events will qualify for exemption.

The following are examples of events which may qualify for exemption when held by a charity for fundraising purposes:

• balls, dances
• performance - concert, stage production and any other event which has a paying audience
• film showing
• fete, fair or festival
• horticultural show
• exhibition: art, history or science
• bazaar, jumble sale, car boot sale
• sporting participation (including spectators): sponsored walk or swim
• sporting performance
• game of skill, contest, or a quiz
• participation in an endurance event
• fireworks display
• dinner, afternoon tea or barbecue
• an auction of bought in goods - an auction of donated goods is zero rated

The normal trading activities of the charity are not covered by the exemption, and it does not apply to income generated after the event, for example, the sale of surplus commemorative items or video and audio recordings of the event sold after the event has taken place.

Sponsored events in the UK

Although some sponsored events organised by a charity will qualify for exemption from VAT, many events that individuals take part in to raise funds for charity will not fall within the fundraising exemption, for example a commercially organised sports event such as a marathon or triathlon. A charity will often pay for places within a commercially organised event, and then offer those places to individuals.

The VAT treatment of sponsored events differs according to the circumstances:

• If a charity allows individuals to take part in the event regardless of the amount they raise, and the individuals do not receive any benefits in return, the monies raised can be treated as donations and, therefore, outside the scope of VAT.
• If a charity requires individuals to pay a registration fee or insist that they raise a minimum amount of sponsorship before they can take part in the event they are in effect charging an entry fee and this is taxable at the standard rate. Any monies received which are in excess of the minimum amount can be treated as a donation and outside the scope of VAT.

Charities which offer participation in, ‘challenge’ events to raise funds are making a supply for VAT purposes if the charity insists that the participant makes a payment before allowing them to take part in the event. Examples of challenge events include climbing a mountain or cycling /trekking through inhospitable terrain.

The payment might consist of a: registration fee or deposit or a payment of a proportion of the sponsorship target figure or both but if it has to be paid upfront the charity is making a supply.

The supply may be of a package to the participant (if the charity acts as a principal or undisclosed agent) or of agency services to a specialist company which has put the package or holiday together if the charity acts as their agent in selling it.

If the charity is acting as a principal or undisclosed agent it will need to follow the guidance in Tour Operators Margin Scheme (VAT Notice 709/5) (TOMS) to calculate any VAT due. If the charity is acting as a disclosed agent, the participant contracts with the specialist company and the charity receives a commission from that company. VAT is due on the commission that the charity charges in its capacity as an agent.

Sponsorship

Charities may receive money, goods or services from sponsors. If the charity is obliged to provide the sponsor with a significant benefit in return for the sponsorship, this is a business activity and is taxable at the standard rate. However, if no significant benefits are provided the charity may be able to treat the income as non-business. HMRC accept that giving a flag or sticker to a donor, or naming a donor in a list of supporters is insignificant and does not prevent sponsorship being treated as non-business

Grant Funding

Grant funding, which is freely given, with nothing supplied in return, is not consideration for any supply and is, therefore, outside the scope of VAT. However, sometimes funding is given in return for particular goods or services supplied by the charity. Such funding is consideration for a supply and VAT may be due on the income if the goods or services supplied by the charity in return are taxable at either the standard or reduced rate. Whether a grant is paid for the provision of a specified service and, therefore, subject to VAT is not always easy to determine.

Hiring out buildings

The hiring out of a building for a fee is normally a business activity but normally exempt from VAT. However, if a charity (as landlord) has opted to tax the building the fees received are standard rated unless the person hiring the building (or part of a building) from the charity is either:

• intending to use it as a dwelling, such as a residential flat above a charity shop
• another charity who intends to use it for a non-business purpose or as a village hall or similar.
• intending to use it for a relevant residential purpose, such as a residential home for children or disabled people, or a hospice

If any of the above apply, the fees received revert to being exempt from VAT.

Membership subscriptions

The provision of membership benefits to members of a club or association is a business activity. The VAT liability of a membership subscription will depend on the benefits being supplied.

Membership subscriptions usually give the member a package of benefits. If there is one principal benefit, to which all the other benefits are incidental, the whole subscription is treated as a single supply and the VAT liability will follow that of the principal benefit.

However, as a concession, charities and non-profit making organisations can treat their single supplies of membership benefits as multiple supplies. This means that the VAT treatment of each benefit can be considered individually, and the subscription charge apportioned. This means that the supply of magazines or handbooks to members can normally be zero-rated.

If little or nothing is given in return for a subscription it may be possible for it to be classed as a donation and treated as outside the scope of VAT.

Some supplies in return for a subscription to certain non-profit making public interest bodies may be treated as exempt from VAT. Non-profit making bodies which qualify are those with aims that are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic, or civic nature.

• However, the exemption does not apply to the following:
  any supplies that are not referable to the aims of the organisation as set out in its articles of association
• the right of admission to any premises, event or performance for which non-members must pay, or
• any supplies which are not provided automatically as part of the membership benefits and for which an additional sum is charged.

Charity income sources are many and varied and professional advice should be sought if there is any uncertainty over whether a supply is a business activity and what the correct VAT treatment should be