Everyone pays tax, including charities. While this may seem unfair for charities and not for profit organisations, this is the reality. In this blog, we set out some simple considerations to help manage tax risk and facilitate governance.
We are very aware how the third sector is struggling to deliver charitable objectives amid increasing demand, while struggling to secure and maintain income.
On top of that, if VAT errors are made, then this results in unexpected costs, penalties and interest. There is no exception or special rule for charities – we have seen HMRC apply the rules without fear or favour.
Registration obligation
Charities must register for VAT if income is derived from any supply of goods or services, and this exceeds £90,000 (2025 threshold). This includes income from sharing office space and sponsorship, among others.
If any income is generated from outside the UK, VAT registration needs to be considered for both UK and non-UK territories. Some countries have a nil registration threshold, meaning even minimal overseas income could trigger compliance obligations. One of the key risk indicators is where is the counter party based – are they outside of the UK? Then there is a tax consideration.
VAT reliefs
By VAT reliefs, we mean no VAT is chargeable on income or purchases. There are some reliefs for charity fundraising activities. These are valuable, but they need to be carefully applied. The reliefs in respect of construction expenditure are very valuable, but subject to a ten-year adjustment period and have been litigated by HMRC. One charity faced a potential £20m adjustment risk, leading to ongoing monitoring and restricted asset use.
Case study: charging incorrect VAT
It is important to note that VAT reliefs on income can be mandatory. We recently encountered a charity charging VAT when it should not have, and recovering VAT on its costs, based on the VAT charge.
This resulted in the following consequences:
- HMRC required VAT to be accounted for on income until any VAT invoices are cancelled
- The charity’s VAT recovery was denied as they had not made qualifying (taxable) supplies, and
- The charity’s clients were unable to reclaim VAT as it had not been properly charged
- HMRC considered charging all parties interest and applying penalties, typically at 30%.
What does this mean for my charity?
To manage VAT risk effectively, all income streams need to be considered to establish their VAT treatment, which dictates which registration obligations apply. The registration threshold also needs to be considered in respect of supplies received from outside the UK as there is a deemed supply – meaning this procurement counts to you registration threshold.
Once registered, you need to establish the amount of recoverable VAT. For charities, this is likely to be low. If business and non-business income is received, then this calculation can be complicated.
Key points
While we cannot cover everything in this blog, it is important to note that VAT will be an issue for most charities and therefore requires consideration. There is a basic tax expectation for the exercise of reasonable care, and a governance requirement. If compliance and cost is not managed, this can lead to significant risks.
How we can help
At UHY Hacker Young, we provide compliance and advisory services, including a fixed fee support service, for our charity clients. We have considerable experience working with trustees, management and HMRC. For further guidance, please get in touch with Sean Glancy or one of our expert VAT advisers.
