Are charities VAT exempt?

VAT is a complicated area that can be particularly complex for charitable organisations. VAT rules will apply to charitable activities, just like they do for other businesses. However, you could qualify for certain VAT exemptions and reliefs as a charity. 

This guide will cover:

• What VAT is, and when you need to register
• Charities and VAT exemption
• Products and services qualified for VAT relief
• Claiming VAT relief for charities
• Reclaiming VAT from HMRC

VAT is a consumption tax on goods, services and other taxable supplies (explained below). It plays a crucial role in business as it can be charged on a range of the products or services you offer.

VAT is not a tax on individual businesses since your customers pay the VAT when buying your product or service. However, VAT is still considered an indirect business tax since you’re responsible for reporting it to HMRC (HM Revenue & Customs).

Businesses have to register for VAT if their annual turnover is above £85,000. Once registered, companies must charge VAT on all services or goods they offer. Registering also allows businesses to reclaim VAT on goods or services they purchase. We’ll explain more about reclaiming VAT in a later section. 

The standard VAT rate of 20% applies to most businesses, goods and services, but some areas fall into different tax brackets, as listed below:

• Reduced rate (5%) – Some goods and services, like children’s car seats and home energy
• Zero rate (0%) – Zero-rated goods and services, including children’s clothes and most food products

Charities are not VAT exempt and must register for VAT with HMRC if their turnover exceeds the VAT threshold, just like any other business. 

Once you register your charity, you can charge VAT on products and services and will need to submit a VAT return every three months. You can use the government’s online VAT calculator to work out how much you should charge.

Even if your charity’s VAT taxable sales are below £85,000, you can choose to register for VAT voluntarily to be able to reclaim VAT on your own purchasing costs.

When running a charity business, you pay VAT on goods and services you buy from VAT-registered companies, the same as non-charitable businesses. You either pay the standard rate, reduced rate, or zero rate, depending on the product or service type.

Charities pay 5% VAT on fuel and power if they’re for:

• residential accommodation (like a children’s home or care home for the elderly)
• charitable non-business activities (like free daycare for disabled people)
• small-scale use (up to 1,000-kilowatt-hours of electricity a month or a delivery of 2,300 litres of gas oil)

If less than 60% of the fuel and power is for a qualifying purpose, you pay the reduced VAT rate on the qualifying portion and the standard rate (20%) on the rest.

Qualifying fuel and power include gas, electricity, oil and solid fuels like coal. However, vehicle fuel does not qualify for tax at the reduced rate.

Your charity might also qualify for zero-rated goods or services, meaning you pay 0% VAT on them. These include:

• Medical supplies and equipment
• Products and aids for disabled people
• Rescue equipment and vehicles (i.e. ambulances and lifeboats)
• Scientific equipment
• Advertising
• Construction and building work

Companies, goods and services must meet a range of criteria to qualify for zero rate VAT. You can find a complete list of zero-rated goods and services for charities and information on the qualifying criteria for each one on this HMRC page.

If your charity purchases goods imported from outside the UK, you don’t pay VAT as long as they benefit people in need, including: 

• Basic necessities (such as food, clothing, medicine, blankets)
• Equipment and office materials to help run your organisation to benefit people in need
• Goods to be used or sold at charity events

HMRC has more information about claiming VAT relief on goods from outside the UK here.

To purchase the goods and services at a reduced or zero rate of VAT, your charity must provide your suppliers with evidence of your charitable status, such as:

• Your Charity Commission registration number
• Your letter of recognition from HM Revenue and Customs (HMRC)

Scottish and Northern Irish charities must provide their HMRC letter of recognition.

Charities must also give their supplier an eligibility declaration or certificate when purchasing goods or services at zero-rate VAT. However, different services require separate forms. 

For example, the certificate must be in a specific format if you purchase building or construction services at zero VAT.

Your written declaration or certificate should be separate from the order form or invoice for the goods or services your charity buys.

HMRC has a list of declarations and certificates for different goods to help you find the correct one for your purchase and purpose.

When filing their tax returns, registered companies may be able to reclaim VAT they were charged on goods and services relating to their taxable business activities.

You claim your refund by submitting your VAT tax return to HMRC. You’ll need to share your account details even if you’ve already set up a direct debit for VAT returns. 

It’s also possible to use your online account to add or change your details and to view any refund you’re owed –– unless you’ve signed up for ‘Making Tax Digital for VAT’. Read our guide on Making Tax Digital to find out more on the subject.

You usually get your refund within ten days of HMRC receiving your return. However, it can take longer, so only contact HMRC if you haven’t heard anything after 30 days.

When you sign up for a Countingup business current account, you get free built-in accounting software that allows you, or your accountant, to keep track of your books with ease. 

We’ve automated the time-consuming aspects of bookkeeping and tax planning, so you can focus on running your business. You also receive updates about profit and loss statements, cash flow insights, tax estimates and instant invoicing. 

Keep your finances running like clockwork. Download the Countingup app today.