Do Charities Pay Vat? Charging VAT to Charities

Charging VAT to charities

VAT or Value Added Tax is charged on goods and services. There are some exemptions to this tax, but there is no such thing as absolute relief from the VAT. It is common to believe that charities do not have to pay VAT. Although charities are exempt from some kinds of taxes and do enjoy some tax relief, charities to have to pay taxes for many things.

Main Facets of VAT for Charities

It is hard to get the correct computation for VAT for a charity. However, the VAT taxability system for charities is divided into four broad categories given under:

• Property Acquisition and Development
• Requirements for VAT registration
• Charity VAT Recovery
• Charity VAT – Obtaining VAT reliefs

There are many activities that a charity is exempt from paying taxes on, but there are other activities that a charity will have to file a VAT return anyhow.

Eligibility Criteria

Hard evidence needs to be provided before the charity can move ahead to VAT and its computation. To make sure that the charity is actually a charity, here is what the charity needs to prove:

• Hard proof that the charity is actually registered and working as a charity.
• A written stamen by the charity that it affirms and meets all the rules and regulations regarding VAT.

What do Charities not pay tax on?

Charities, as specified earlier, are exempt from some taxes. Here is a list of things Charities do not pay taxes on:

• Profits out of activities carrying out the preliminary purpose of the charity’s incorporation.
• Profits arising out of the activities carried out by the charity’s beneficiaries for the main aim or the purpose of the charity.
• Sale of donated goods.
• Profits arising out of gifts, donations and certain fundraising events.

When ascertaining the liability of taxes to be imposed on charities, it must be remembered that the purpose or the aim of the charity must be kept in mind. As long as an activity promotes what the charity stands for, such activity’s profits will not be charged any tax.

What do Charities pay taxes for?

There are a number of things a charity can be charged taxes for. Here is a brief list:

• Gains from land development made by the charity are applicable for the relevant taxes.
• Sponsorship deals that require advertisements, where the charity is to put up its name and its logo.
• The sale of new goods by the charity which is not covered under the primary goal or aim of the charity is liable to be taxed.

Are there ways to evade taxes?

As for taxes, they are straightforward, and there are many legitimate ways of avoiding the burden of the tax. HMRC accepts ethical evasion of taxes, which is applicable even to charities. Most charities, themselves, do not perform any activities that are liable for VAT or any other kind of taxation.

The best and the easiest way of not paying such taxes and keeping the entire sum of profits is to trade or sell and perform the taxable activities through an owned subsidiary. All the taxable activities are performed by the subsidiary company, and at the end, all the profits are transferred as a donation or as a gift to the parent company. And this is how there is no tax liability at the end of the subsidiary company or the charity, which is the parent company.

What are the rules for Charities and VAT liability on them?

VAT for charities is more complex than for other organizations. For the computation of VAT for charities, charities are treated as any other organization. However, that does not eliminate the problems of computation. With charities, there are many unpaid and paid volunteers, which makes it hard to calculate the amount of VAT to be filed.

The filing of the VAT is done to the HMRC and under the EU regulations. At present, the threshold for not filing for VAT is £68,000 turnover over a 12-month period. If the profits for the charity are anything above the threshold, the charity will have to file for VAT returns.

Are there penalties?

There may be penalties arising out of the misuse of various data and details. However, it is safe to say that the penalties for Charities are no different than the penalties imposed on individuals and other organizations. Here is a list of some basic malpractices that lead to penalties:

• Misrepresentation of actual facts.
• Inaccurate numbers
• Evasion of tax
• Failure to file a return on time
• Failure to pay the amount owed to the government

The government may impose some more penalties as per the ambit of the current law or the case for the charity.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.