VAT
Value Added Tax (VAT) is a sales tax charged by businesses on the goods and services they supply.
For charities and voluntary organisations, the issue of VAT can be very complicated. While we generally think that voluntary and community organisations are exempt from paying VAT, they do actually tend to pay VAT on goods and services they buy just as we do when making purchases as individuals.
Voluntary and community organisations are generally not registered for VAT - because they are not undertaking business activities. In this situation, they may not charge VAT, nor may they recover VAT from Her Majesty’s Revenue and Customs (formerly the Inland Revenue). Activities such as collecting donations or undertaking grant-funded work are regarded as non-business activities and outside the scope of VAT.
However, where a voluntary organisation carries out other activities (as it may do if it takes on an income-generating sports resource) it may find itself having to get involved in VAT – particularly if it begins selling goods and services. Just being a voluntary organisation or charity does not automatically mean your activities are outside the scope of VAT.
There are also likely to be significant VAT implications involved in the costs of building or refurbishing an asset or facility. Your architect should be able to give you some preliminary advice, but you should also seek specialist advice where necessary.
Trading
Under the law of England and Wales, charities may engage in some types of trading. Compared to ordinary commercial companies, charities enjoy considerable advantages in the tax treatment they receive in relation to trading and trading profits. For example, in terms of VAT, certain sales and purchases are exempt or zero-rated. In terms of direct tax, there are a number of benefits – for example:
- a charity’s trading profits are, in certain circumstances, exempt from tax. This includes profits from primary purpose trading, and profits made from lotteries and from certain types of fund raising event. Exemption is subject to conditions relating to the application of the profits received by the charity;
- income received by a charity from the sale of goods that have been donated to it is not generally regarded as trading profits, and is not taxable.
Where trading (other than trading in pursuit of its charitable objects) involves significant risk to a charity’s assets, it must be undertaken by a trading subsidiary. But even where it is not essential for the trading to be undertaken by a trading subsidiary, the use of trading subsidiaries may produce benefits, for example in reducing tax liabilities.
You should always seek professional advice before developing new areas of business – particularly if it involves trading or developing a social enterprise.
Charities, Trading and Tax – how charities may lawfully trade
Finance Hub