The rules and procedures relating to VAT (value added tax) can be complex and difficult to follow, particularly when it comes to charities and non-profits. We’ve produced this easy-to-follow guide to help you to get to grips with this topic. In it, we answer some of the most frequently asked questions when it comes to how VAT affects charities, such as ‘do charities have to pay VAT?’ and ‘can charities reclaim VAT?’ By the end of this post, you should know whether or not charities are exempt from VAT, how to tell whether your business qualifies for charity discounts, how charities can apply for VAT exemption and whether charity VAT claims can be backdated.
VAT exemption for charities and non-profits
Charities are not exempt from charging VAT. Charitable organisations that generate taxable sales that exceed the VAT registration threshold must register for VAT – just as any other business would. When a charity does this, they can charge VAT on the goods and services they provide. They are also responsible for submitting VAT returns, usually every three months.
Charities also have to pay this tax on standard-rated goods and services they purchase from businesses who are registered for VAT. However, unlike other businesses, charities are entitled to VAT relief on certain goods and services. This means that they pay VAT at a lower rate (five per cent) or at the ‘zero rate’ when making specific purchases.
What goods and services are taxed at the reduced rate (five per cent)?
VAT on electricity and gas is charged at the reduced rate of five per cent. However, in order to qualify for this discount, the fuel and power used must be for:
- residential accommodation, such as a nursing home or children’s home
- charitable, non-business activities, such as a soup kitchen cooking free meals for homeless people
- Use on a small-scale (no more than 1,000 kWh of electricity per month or 2,300 litres of gas oil).
If your energy supply is used for both charitable and business purposes, you will have to pay the standard rate on part of your bill if less than 60 per cent of the energy you consume qualifies. If more than 60 per cent qualifies, the reduced or single rate is chargeable on your whole bill.
What goods and services are taxed at the zero rate?
Charities do not have to pay VAT on a wide range of goods and services, including aids for disabled people, construction services, medicines and ambulances. For a full list of goods and services that qualify for the zero rate, see here.
Charitable organisations are also exempt from paying tax on goods from outside the European Union. However, in order to be eligible for this exemption, the goods must help people in need. Examples include basic necessities, equipment and office materials to keep your organisation running for the benefit of people in need, and disaster relief items for use in the EU.
Does your business qualify for charity discounts?
To get the VAT reductions that charities in the UK are entitled to, a business must be able to prove its charitable status and meet the following conditions:
- It must be based in the UK, Isle of Man, an EU member state, Iceland, Liechtenstein or Norway.
- It must be established for charitable purposes only.
- It must be registered with the Charity Commission or equivalent regulator if required.
- It must be run by ‘fit and proper persons’.
- It must be recognised by HMRC.
How to apply for VAT exemption for charities
To claim VAT relief on behalf of a charity, you must provide your supplier with evidence of your charitable status and a written statement or ‘certificate’ stating that you’re entitled to the discounted rates.
To prove your charitable status, you can provide either the Charity Commision registration number or a letter of recognition from HMRC. You can apply to HMRC for recognition online. Before you do this, make sure that you have your bank account details, details of financial accounts, officials’ details, charity registration number, charitable objective and governing document to hand.
The written declaration needs to be provided when purchasing goods at a zero rate. You can find declaration and certificate examples online.
Can charity VAT claims be backdated?
If a charity paid standard-rate VAT on certain goods and services, it may be entitled to a refund.
Firstly, you must ensure you meet the definition of a charity (see ‘Does your business qualify for charity discounts?’ above) and secondly, you must also be able to provide evidence that the organisation in question is a charity for tax purposes (i.e. that it is recognised by HMRC and is registered with the Charity Commission). Lastly, you must ensure that the goods or services purchased are ones that qualify for the reduced or zero rate.
As long as you meet these conditions, you can claim up to four years of back payment. The rebate you get would be the difference between the standard rate (at the time of payment) and the lower rate or zero rate. This could be great news for you if you didn’t know that you were entitled to a VAT discount and had been paying the standard rate.
On the other hand, charities should be aware that if they have been erroneously paying the lower or zero rate of VAT, HMRC can claim the amount you should have paid back from you retrospectively. This could mean a hefty tax bill. To avoid this, it’s important to make sure you are certain that you meet the criteria for charity VAT relief.
How Utility Bidder can help
Utility Bidder has helped many companies to secure refunds when they have paid the standard rate of VAT even though they were entitled to the reduced or zero rate. In this case study, you can find out how we helped a residential care home to secure a reimbursement when they had been unknowingly overpaying VAT. We also managed to correct their ongoing rates. After this, we helped the company to secure a new deal on their gas supply. This agreement saved them £17,000 on their previous contract.
To find out more about paying VAT on gas and electricity or to check whether you’re eligible for VAT relief on your energy bills, get in touch with our expert customer service team.
Our agents can also advise and guide charities of all sizes through the process of obtaining a tax rebate and help you to get an energy deal at a price that is right for you. Simply contact us using our online form or call 0800 007 4001. We’ll be happy to help.
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