In order to establish whether the charity should register for VAT or not, you need to go through the sources of income and identify the VAT category they belong to.

• Non-business or outside the scope
• Exempt
• Taxable

Taxable income further sub-divides into:

• Taxable at zero-rate
• Taxable at standard-rated

Non-business supplies

These will usually be “one-way” transactions where something is given, without an expectation that something is given in return and broadly includes all voluntary donations and grants.

Non-business supplies are not subject to VAT and do not count towards the registration threshold.

Exempt supplies

These are all activities that are specified as exempt by VAT legislation and include broad categories such as health and education, including many of the activities of charities. Broadly, the following activities will be exempt for VAT purposes:

• medical care by recognised professionals
• education in schools, universities, colleges
• vocational training courses run by eligible bodies, which includes charities and some other not-for-profit bodies (vocational meaning that the training should help people in their work or voluntary work and can include educational conferences)
• nursing homes, registered care homes, hospices
• registered nurseries, crèches and playgroups, the activities of youth clubs
• renting out residential accommodation
• welfare services
• fundraising events run by charities

There are further specific exemptions for certain activities and the above list is not exhaustive. In addition, there are often specific definitions and conditions which apply before exempt status is achieved, so you should check further to determine the status of these activities.

Exempt supplies are not subject to VAT and do not count towards the registration threshold.

Zero-rated supplies

Some activities are taxable, but at zero rate. These are listed in a schedule to the VAT legislation, which is amended form time to time. There are some broad areas, which apply to everyone, such as unprepared food and children’s clothing. There are also some activities that are zero-rated when undertaken by charities.

The following activities are zero-rated supplies:

• sales of publications, including magazines and newsletters
• sales of children’s clothes and shoes
• sales of some food (not take-ways)
• exports
• sales of donated goods by a charity or its subsidiary

These are broad definitions; if you believe that any apply to you, you should examine carefully the specific parameters which apply to each category. The turnover on these activities will count towards the VAT threshold when considering the need for registration. It also means that charities with some of these activities can voluntarily register for VAT.

Most sales of goods and services will be standard-rated, even if they are supplied by a charity. This includes many fund-raising activities that involve merchandising or sales of some sort. It is safest to assume that an activity will be standard-rated unless you can establish that it is non-business, exempt or zero-rated.

Standard-rated and zero-rated supplies together count towards the threshold for VAT registration. Voluntary registration (where you register for VAT without being required to do so through turnover levels) will be an option for charities with some standard-rated supplies. Although this would mean that they would also have to charge VAT on the standard-rated activity, it may also offer an opportunity to recover some of the VAT it has paid on its purchases.

Welfare services cover the following supplies:

• care, treatment or instruction designed to promote physical or mental welfare of elderly, sick, distressed or disabled people
• care and protection of children or young people
• spiritual welfare provided by a religious institution as part of a course of instruction or a retreat, not being designed primarily to provide recreation or a holiday

Charities that provide welfare services at significantly below cost may treat these supplies as non-business and therefore outside the scope of VAT. “Significantly below cost” means subsidised by at least 15% and the subsidy must be available to everyone. The charity must be providing the service to distressed individuals and not a local authority. “Distressed” means someone who is suffering pain, grief, anguish, severe poverty etc.

Welfare services will be exempt if they are regulated under care standards or in a similar way. The activities and services caught by this are:

• Registered care homes
• Domiciliary care – home helps
• Registered nurseries and crèches
• Foster and adoption agencies

Admission charges and cultural activities

Admission charges to museums, galleries, art exhibitions and zoos and theatrical, musical or choreographic performances of a cultural nature are exempt from VAT when provided by a public authority or eligible body. To qualify as an eligible body an organisation must satisfy three tests:

• It must be a non-profit making organisation
• It must apply any profits made from exempt admission fees to the continuance or improvement of the facilities made available by means of the supplies
• It must be managed and administered on an essentially voluntary basis by people who have no direct or indirect financial interest in the activities of the body

Membership subscriptions

Subscriptions are presumed to be exempt where the only benefits are those such as the right to vote at the AGM and to receive the annual report. This applies to non-profit making organisations whose aims are in the public domain and are of a political, religious, patriotic, philosophical, philanthropic or civic nature. Such bodies may or may not be charitable.

Membership schemes that are just a means of raising donations will be classified as non-business and therefore outside the scope of VAT. There will be no benefits in this situation.

The VAT treatment depends on the VAT status of the benefits of membership. An extra-statutory concession allows not-for-profit organisations to agree with HM Revenue and Customs (HMRC) an apportionment of the subscription to treat it as a multiple supply of the various benefits, with each benefit carrying its applicable VAT or exempt status. You have to value the benefits based on the cost to your organisation of providing the benefit. So, for example, if you provide a magazine, then you have to work out the cost of producing and sending the magazine. The method HMRC requires you to follow is to find the cost of zero-rated and standard-rated benefits and then to assume everything else is exempt. The apportionment basis has to be agreed in advance with your local VAT office before it can be applied.

Sponsorship

There is a significant difference between a corporate donation and corporate sponsorship. If a donation is being received, then nothing should be given to the company in return. Sponsorship, on the other hand, is a reciprocal arrangement. The company receives advertising or promotional services in return for the cash given to the charity. Sponsorship is therefore a business arrangement and is standard-rated. It is also potentially liable to corporation tax because it is trading income.

Alternatively, the company could give a donation to the charity, possibly under gift aid, and receive no benefits in return. The charity may simply acknowledge the gift in the annual report and this would be outside the scope of VAT.