VAT compliance for charities: 10 essential checks for trustees and finance managers

VAT is one of the more complex areas of compliance for charities, and one that increasingly attracts HMRC scrutiny. Trustees and finance managers have a shared responsibility to ensure that VAT risks are understood and managed effectively on an ongoing basis. From VAT registration thresholds to income classification and record keeping, the consequences of getting it wrong can be significant, both financially and reputationally.

We have outlined ten key VAT checks that should form part of your charity’s regular financial governance and risk review.

1. VAT registration status

Monitoring taxable turnover is fundamental. Charities must register for VAT if their taxable turnover exceeds or is expected to exceed £90,000. HMRC is paying close attention to organisations with taxable trading income near the threshold. A failure to register on time, or to monitor turnover accurately, can result in avoidable penalties and retrospective liabilities.

2. Business vs non-business activities

Understanding the distinction between business (taxable) and non-business (outside the scope) activities is critical. Grant income is a particular area of risk and HMRC now applies a strict two-stage test to determine whether income is a payment for a supply or a genuine grant. Trustees should ensure that funding agreements are reviewed carefully so the correct and that VAT treatment is applied and ensure the position is fully documented.

3. Input VAT recovery and partial exemption

Charities can only recover VAT on costs relating to taxable activities. Where business activities are mixed (i.e. both taxable and exempt supplies made), a partial exemption method – in some cases, approved by HMRC - must be used. Where charities have both business and non-business activities, this brings additional steps to determine VAT recovery. We would advise reviewing VAT recovery methods regularly to ensure they are up to date and reflect the charity’s current activities. 

4. VAT treatment of income streams

Income from sources such as ticket sales, sponsorships, retail, catering, room hire, property rental etc. must be correctly classified for VAT purposes. Recent case law has changed the criteria for exempt fundraising income, so trustees should ensure that events are promoted and documented appropriately as misclassification can lead to assessments and penalties.

5. Use of VAT reliefs

Charities benefit from a range of VAT reliefs, including zero-rating for advertising, medical equipment and certain construction services. However, eligibility conditions are strict and must be evidenced. Reliefs for fundraising events require clear proof that fundraising is the primary purpose as evidenced by how publicised and promoted. It is important you ensure that VAT claims are supported by documentation and reviewed periodically.

6. Trading subsidiary arrangements

If you operate a trading subsidiary, these entities are subject to normal VAT rules, and must register for VAT if the taxable turnover exceeds or is expected to exceed £90,000. Intercompany transactions must also be properly invoiced and documented, and HMRC is increasingly scrutinising such arrangements for VAT leakage. Trustees should ensure formal intercompany agreements are in place, that the implications of any potential VAT grouping options are considered and any VAT reporting obligations are clearly understood and being met.

7. Property transactions

VAT on property sales, lettings and developments is a complex area. and We would advise seeking external advice at an early stage to ensure that the associated VAT implications are fully understood, any options to tax are correctly exercised and that obligations under the Capital Goods Scheme are properly monitored. Missing documentation or failing to review and understand the impact of property transactions on your VAT positions before they happen can lead to costly irreversible VAT errors.

8. Imports, exports and international supplies

Charities involved in importing, exporting and/or international supplies must hold the correct evidence to support the VAT treatment applied. For example, the proper evidence of removal where exports from the UK are zero-rated, evidence to support the ownership position for goods which are imported where postponed VAT accounting is used, and details of services received from non-UK suppliers where the reverse charge procedure is applied. If you are involved in such activities, it is important to ensure you have the correct procedures and documentation in place and that the VAT accounting position (as well as any Customs Duty implications) are reviewed regularly.

9. VAT record keeping

HMRC expects charities to retain complete and accurate VAT accounting records (including VAT invoices, contracts and other supporting documents such as option to tax correspondence, bank statements etc) for at least six years. Trustees and Finance Directors should ensure that VAT record keeping policies are robust and that audit trails are maintained for all VAT adjustments and claims.

10. HMRC compliance readiness and disclosure

Periodic VAT health checks and internal audits will help you stay ahead of VAT changes and VAT compliance risks. Disclosing known VAT accounting errors to HMRC can reduce penalties and interest. Trustees and Finance Directors should encourage a proactive approach to VAT compliance and ensure that any correspondence with suppliers, customers and HMRC is properly managed and documented.

Need help?

Up-to-date VAT policies and regular staff training are essential to prevent misinterpretation, VAT errors and to ensure consistency across departments. With VAT rules and guidance constantly evolving, a proactive approach to VAT risk management is key.

If you would like support discussing and reviewing your VAT position, updating your policies or arranging a VAT health check, please get in touch with our specialist VAT team.