Business, charities and VAT

Charities and ‘business’ – why does it matter? How to decide? 

Charities often have to decide whether an activity is ‘business’, but why is this an important question, and how do you answer it in a VAT context?

Are you in the VAT club?

A charity’s activities are not within the scope of VAT unless they are carried on “in the course or furtherance” of a business. There can be no obligation or entitlement to register for VAT in the absence of business activities.

Imported services

A VAT-registered charity that buys services from overseas must always account for VAT under the reverse charge if the services are subject to the general B2B rule (see HMRC’s Notice 741A). This applies even if the charity is buying the services for a non-business activity. For example, a charity buys search engine optimisation (“SEO”) services from an Irish supplier. If the Irish supplier knows the charity is UK VAT-registered, it will not charge Irish VAT and the charity must apply the reverse charge, whatever the purpose of the expenditure.

On the other hand, if a charity is not already VAT-registered, the import of services, as in the above example, would only count towards the registration threshold if purchased for business purposes.

Can you recover VAT incurred?

A VAT-registered charity will only be able to recover input tax incurred in making taxable supplies. But VAT is only “input tax” if it is incurred for business purposes. VAT incurred for non-business purposes can never be recovered. Where input tax is incurred in making exempt business supplies, it may sometimes be recovered if the amounts fall below certain specified de minimis limits.

Where VAT is incurred for both business and non-business purposes, an apportionment may be required. In the example above, this could apply if the charity used its website to publicise both its business and non-business activities.

Zero- and reduced-rating available to charities

A charity can commission the construction of a new building or annex that it intends to use solely for a non-business purpose. HMRC accepts that 95% or more non-business meets the “solely” test.

A charity can purchase fuel and power bought for non-business purposes at the reduced rate. The reduced rate also applies where at least 60% of the use is non-business.

How to decide?

This is a very broad question. Almost any activity carried on for consideration on a continuing basis may be ‘business’ for VAT purposes. Funding for services outsourced by central and local government can give rise to some very borderline cases; the wording of service level agreements (“SLAs”) is often inconclusive. The Tribunal has said an activity is less likely to be business where the following apply:

  • Is the activity one the charity would do anyway?
  • Did the charity apply for a grant?
  • Does the SLA stipulate behaviours that simply amount to ‘good housekeeping’?

Conversely, the following point to business:

  • Would the public body otherwise have had to carry out the activity itself?
  • Does the public body derive a direct benefit from the arrangement?
  • Was there negotiation on terms and conditions?


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To discuss how this may affect your clients or your business, or to talk about a VAT issue in general, please get in touch.
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