How charities can register VAT

There’s a common misconception that charities don’t pay tax. Certainly they are exempt from some taxes – such as capital gains tax, for example – but just about every charity has to pay value added tax (VAT) on the things it buys.

 

But that’s not the end of your charity’s possible involvement with VAT. That’s because if your charity’s VAT-taxable turnover exceeded a set threshold (currently £85,000) over the last twelve months then it is obliged to register for VAT with HM Revenue and Customs (HMRC).

 

There are financial penalties for failing to do this.  If your charity has a VAT taxable turnover below this threshold then you can choose to register it for VAT if you wish, and we will look at why this might be a good idea below.

 

 

What does VAT taxable turnover mean?

 

That’s a great question. It means the total value of everything your charity sells in a 12-month period, not including anything that is exempt from VAT (such as the provision of welfare services) or is outside the scope of VAT (such as donations or grant funding given to support your charity’s activities, when nothing is given in return.)

 

 

What do you have to do if your charity is VAT registered

 

The most important obligations your charity faces once it is VAT registered are to charge VAT at the appropriate rate on sales and income from a variety of sources, and to submit a VAT return to HMRC, usually on a three-monthly or monthly basis.

 

Confusingly, some income that charities may generate – such as admission charges, sales in charity shops of donated goods, and certain goods sold at fundraising events – incur VAT at the rate of 0%. That means that the sales have to be recorded for VAT return purposes, but no VAT is charged.

 

Other sources of income for charities may be subject to VAT at a reduced rate of 5%. Otherwise the standard rate (currently 20%) applies. HMRC has a more detailed guide to VAT rates as they apply to charities.

 

 

Why would a charity register for VAT voluntarily?

 

One of the key benefits of registering your charity for VAT is that it potentially enables you to receive a VAT refund from HMRC for some of the items that your charity has paid for.

 

This can be particularly beneficial if your charity sells zero-rated items (such as donated goods in a charity shop) but has to buy standard-rated goods or services on which VAT at 20% was paid.

 

It’s worth bearing in mind, however, that some VAT – such as that incurred for the purpose of business entertainment for UK customers – can never be reclaimed.

 

 

Benefits and costs

 

Clearly then, being registered for VAT has some costs in terms of the administrative burden of compiling and submitting accurate VAT returns and complying with all the VAT legislation, but also considerable potential benefits in terms of cash refunds from HMRC for VAT paid for supplies and other services.

 

 

So how do you go about registering your charity for VAT?

 

Registering your charity for VAT is something that you can do yourself, or you can ask your charity’s accountant (or another accountant) to handle the registration on your behalf.  (You can also appoint an accountant (or agent) to submit your VAT Returns and deal with HMRC on your behalf.)

 

When you register you create a VAT online account (also known as a Government Gateway account), and you can use this account for submitting VAT returns.

 

To get started, head to the government’s Register for VAT web page

 

 

Things to know during registration

 

During the registration process you will be asked to choose a VAT accounting scheme. Options include:

• Standard VAT accounting – this is the most common scheme, and it is likely that your charity will want to choose this
• Annual VAT accounting - this involves an annual VAT return, but quarterly VAT payments (or refunds)
• Flat rate VAT accounting – certain industries can skip all the VAT accounting and simply pay a percentage of turnover as VAT.
• Cash accounting – this assumes that you have collected or paid VAT as soon as a transaction occurs rather than when an invoice is raised.

You may wish to consult an accountant to confirm which scheme is appropriate for your charity.

 

 

What happens when your charity is VAT registered?

 

Once registered your charity will get a VAT registration number which needs to be included on any invoices that your charity issues.

 

In addition you will have to:

• Add VAT to your prices at the appropriate rate (including the 0% rate)
• Provide customers with VAT invoices (which include your VAT number)
• File your VAT returns on time and pay any VAT due
• Keep digital VAT records (see below)

 

What are digital VAT records?

 

As a VAT registered charity you have to keep VAT records which involves:

• Keeping records of all your charity’s sales and purchases
• Keeping a separate summary of VAT, which is known as a VAT account

 

Is there anything else my charity has to do?

 

Once your charity is VAT registered then by law it needs to keep these records accurate, complete and readable for at least six years.

 

Disclaimer: This guide is for informational purposes only and should not be relied on or considered tax or accounting advice. Consult a qualified accountant or other professional for up-to-date and accurate advice relating to VAT and your charity