Charity VAT: What You Pay and Reclaim

Charities are not exempt from VAT. This is the single most common misunderstanding in small charity finance, and it costs money in both directions — charities paying VAT they could have avoided, and charities failing to register when they should have.

The accurate position is narrower and more useful. A charity pays VAT on most of what it buys, like anyone else. It gets specific reliefs on a defined list of goods and services. And it must register for VAT once its taxable turnover crosses the threshold, at which point it charges VAT on its taxable supplies and can reclaim VAT on related purchases. Being a charity changes the details, not the framework.

When your charity has to register

HMRC's guidance is direct: "As a charity, you must register for VAT with HM Revenue and Customs (HMRC) if your VAT taxable turnover is more than £90,000."

The word doing the work there is taxable. Most small charities never approach the threshold, because most of their income is not taxable turnover at all. Income from "non-business activities is 'outside the scope' of VAT" and that includes "donations where nothing is given in return" and "grant funding given to support your charitable activities where nothing is given in return."

So a charity with £300,000 of grant income and £20,000 of taxable trading income has taxable turnover of £20,000, not £320,000, and has no obligation to register.

What counts towards the threshold is narrower than "everything you charge for", and getting there takes two steps rather than one.

Step one: is it a supply at all? A donor who receives nothing has made a donation; a person who buys a ticket has bought a supply. Ticketed events, sales of goods, training delivered for a fee and consultancy are all supplies made in return for payment. Grants and donations where nothing is given in return are not.

Step two: is that supply taxable? This is the step that gets missed. VAT Notice 701/1 defines the term exactly: "Taxable sales are business transactions that are liable to VAT at the standard, reduced or zero rate." A supply that is VAT-exempt is still a business supply, but it is not a taxable one — and exempt supplies do not count towards the registration threshold.

Hiring out a hall or rooms is the case where those two steps come apart. The same notice says: "The hiring out of a building for a fee is normally a business activity and the fees received are normally exempt from VAT." Normally is doing real work in that sentence. If the charity has opted to tax the building, the hire fees become standard-rated instead. Rooms hired as sports facilities are treated separately again: the notice says that "Where rooms are hired as facilities for playing sport for a period exceeding 24 hours or for a series of 10 or more sessions the supply may be exempt, subject to certain conditions" — so sports lets need checking against those conditions rather than being assumed either way. Hall hire is therefore something to check against your own facts rather than assume in either direction.

Worked example. A community charity takes £180,000 in grants, £45,000 in unrestricted donations, £38,000 from hiring out its hall, and £15,000 from a small café. The grants and donations are outside the scope of VAT. The hall hire is a business activity, but on the normal treatment it is an exempt one, so it is not taxable turnover. The café takings are catering, which is normally standard-rated. Taxable turnover is therefore £15,000, not £53,000 and not £278,000 — comfortably below £90,000, and no obligation to register. Change one fact and the answer moves: if the charity had opted to tax the hall, the £38,000 would become standard-rated and would count. That is one reason an option to tax is a board decision taken with advice rather than one drifted into.

Voluntary registration is also possible below the threshold. HMRC notes a charity "can choose to register if it's below this, for example to reclaim VAT on your supplies." That is worth considering if you are about to spend heavily on something on which you would be charging VAT onward — but it commits you to charging VAT on your taxable supplies and filing returns, so it is a decision for the whole board, not just the treasurer.

What you pay 5% on instead of 20%

The most valuable everyday relief for a small charity is on fuel and power. HMRC's guidance sets out that "Your charity pays 5% VAT on fuel and power if they're for: residential accommodation... charitable non-business activities... small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil)."

Two practical points follow.

First, this is not applied automatically. Your energy supplier charges 20% until you tell them otherwise, and you generally have to complete a declaration confirming the qualifying use. If nobody has ever done this at your charity, it is worth checking your last bill — the difference between 5% and 20% on a hall's heating is not trivial.

Second, mixed use is tested on the fuel and power itself rather than on the building, and there is a 60% de minimis before any split is needed at all. VAT Notice 701/19 puts it directly: "If 60% or more of the fuel or power is for qualifying use, you should treat the whole supply as for qualifying use and charge tax at the reduced rate." Apportionment only bites below that line, and HMRC's charity guidance says the same on the page setting out the relief: "If less than 60% of the fuel and power is for something that qualifies, you'll pay the reduced rate of VAT on the qualifying part and the standard rate (20%) on the rest." So a church hall used mainly for worship with a commercially let nursery in one room is likely to be over 60% qualifying, in which case the whole supply goes at 5% rather than being split. Work the proportion out on paper before you make the declaration — the point of the exercise is to establish which side of 60% you are on, not to assume a split.

What you pay nothing on

A defined list of goods and services is zero-rated when supplied to a charity. HMRC's list includes:

• advertising and items for collecting donations
• aids for disabled people
• construction services
• drugs and chemicals
• equipment for making "talking" books and newspapers
• lifeboats and associated equipment, including fuel
• medicine or ingredients for medicine
• resuscitation training models
• medical, veterinary and scientific equipment
• ambulances
• goods for disabled people
• motor vehicles designed or adapted for a disability
• rescue equipment

The advertising relief is the one most small charities can actually use and most often miss. It covers advertising in someone else's medium — press, broadcast and poster sites are the clear cases. It does not cover advertising on your own website or in your own newsletter. VAT Notice 701/58 puts it directly: "Information, whether or not in the form of advertising, placed in, on or through a charity’s own internet site, does not qualify for zero rating. This is because it is not a supply of someone else’s time or space."

Digital advertising is the part to be careful with, because it splits. Notice 701/58 §3.7 records that "In 2020, HMRC reviewed a range of digital advertising situations and accepted that some, though not all of those considered are eligible for the zero rate." The notice then lists as standard rated: "email advertisement, natural hits, social media and subscription website accounts". The zero-rated list is the targeted placements — among them "pay-per click advertising", "direct placements on third party websites", and the targeting methods (audience, behavioural, channel, content, daypart, demographic, device, location, lookalike and retargeting). Social media is the digital channel a small charity is most likely to be buying, and it sits on the standard-rated side of that line — so do not read "digital" as a synonym for "zero-rated". Check the specific supply against §3.7 before you claim anything.

The reliefs are not automatic here either. You claim them by giving the supplier an eligibility declaration at the point of purchase. A supplier who has already charged 20% will usually correct it, but it is far easier to declare up front.

Where charities routinely get this wrong

Assuming grants are always outside the scope. Some grants are, in substance, payment for a service the funder wants delivered. If the funder specifies deliverables and receives a defined benefit, HMRC may treat it as consideration for a supply rather than a grant. The label on the agreement is not decisive.

Missing the fuel relief for years. Nobody at the charity ever made the declaration, and it never came up because the bill just says "VAT". Worth an afternoon's check.

Confusing VAT relief with Gift Aid. They are separate schemes with separate rules and separate paperwork. Gift Aid recovers income tax on donations; VAT relief reduces what you are charged on purchases. Our Gift Aid claim guide covers the former.

Registering voluntarily without modelling it. If most of your income is outside the scope of VAT, or is exempt rather than taxable, registering means you can only reclaim input VAT attributable to your taxable activities — not all of it. Exempt income is the case that catches people out: a charity with substantial hall hire is not "outside the scope", it is making exempt business supplies, and that is exactly the position where partial exemption bites. Partial exemption calculations are genuinely fiddly and are the point at which most charities need an accountant.

What to do this year

If your charity is not registered and never approaches £90,000 of taxable turnover, your VAT job is small but not zero:

1. Check your energy bills for the 5% rate and make the declaration if it is missing.
2. Declare eligibility when buying anything on the zero-rate list. For advertising, check the supply against Notice 701/58 §3.7 first — press, broadcast and poster advertising are straightforward, but email advertisements, social media accounts and subscription website accounts are standard rated, and giving a supplier an eligibility declaration on a standard-rated supply is not a saving, it is an error you may have to unwind.
3. Track your income in three buckets, not two: outside the scope (grants and donations where nothing is given in return), exempt business income (hall hire on the normal treatment, for example), and taxable income. Only the third counts towards the £90,000 threshold, and keeping the three apart is what lets you see the threshold coming rather than discovering you crossed it eight months ago. Any system that does proper fund accounting will do this — see our guide to choosing charity accounting software for what that involves.
4. Review any grant agreement where the funder specifies deliverables, and ask whether it is really a grant.

If you are near the threshold, get advice before you cross it rather than after. You have to register within 30 days of the end of the month in which you went over, and registering late does not reset the clock: HMRC is explicit that "If you register late, you must pay VAT on any sales you've made since the date you should have registered" — whether or not you charged it to your customers. Our compliance checklist generator covers where VAT sits alongside your other reporting obligations, and the charity accounts guide explains how taxable trading income is presented in your accounts.

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This guide covers charities registered in England and Wales, though VAT is a UK-wide tax and the registration rules apply equally across the UK. This is general guidance based on published HMRC guidance — VAT treatment depends heavily on the specific facts of each supply, and partial exemption in particular needs professional advice. Confirm your charity's position with HMRC or a qualified accountant.

Sources

• GOV.UK: VAT for charities — overview
• GOV.UK: Charities and VAT registration
• GOV.UK: What qualifies for VAT relief
• HMRC: How VAT affects charities (VAT Notice 701/1)
• HMRC: Goods or services supplied to charities (VAT Notice 701/58) — advertising relief scope
• GOV.UK: Register for VAT — when to register and late registration