Charities to complete 2 stage test to assess VAT liability
September 22, 2022
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Non-VAT registered charities paying zero VAT
Non-VAT registered charities paying zero VAT
Being a charity does not automatically make you VAT-exempt—and it does not automatically let you reclaim VAT either. If your charity is VAT-registered, you can generally reclaim input VAT on costs that relate to your taxable (VATable) business activities.
You cannot reclaim VAT on costs that relate to VAT-exempt activities or non-business (primary charitable) activities, except in limited circumstances. Some special zero-rates and exemptions apply to charities on what they buy and what they sell (e.g., advertising purchased by charities may be zero-rated; properly structured fundraising events can be VAT-exempt). (GOV.UK)
Registration threshold. If your charity’s VAT-taxable turnover (everything you sell that isn’t VAT-exempt) exceeds £90,000 in a rolling 12-month period, you must register for VAT. (You can also voluntarily register below this if it helps you recover VAT on costs.) (GOV.UK)
Business vs non-business. Charities do a mix of activities. Some are business supplies (e.g., selling tickets or goods), some are VAT-exempt supplies (e.g., certain education, welfare or cultural admissions by “eligible bodies”), and some are non-business charitable activities (purely grant-funded services). The distinction drives whether you charge VAT and whether you can recover VAT on costs. (GOV.UK)
Input VAT recovery. If registered, you can reclaim VAT on costs to the extent they relate to taxable business supplies. You cannot reclaim VAT linked to exempt or non-business activities; instead, you apply partial exemption and business/non-business apportionment methods to work out how much is recoverable. (GOV.UK)
Your charity is VAT-registered and the cost relates to taxable business activities (e.g., charging for room hire with VAT, selling new goods, admission to non-exempt events). You reclaim via the VAT Return. (GOV.UK)
Partial exemption: where you have both taxable and exempt activities, you can still reclaim a proportion of VAT using HMRC-accepted methods (standard, special methods), but exempt-related VAT is blocked. (GOV.UK)
Non-business vs business apportionment: costs supporting your wider charitable/non-business work are not recoverable, so you must split use carefully. (GOV.UK)
Practical tip: build a cost-coding map (taxable, exempt, non-business) and review quarterly to protect recovery and avoid assessments.
Charities can sometimes pay less or no VAT on certain purchases when strict conditions are met. Highlights:
Advertising & closely-related goods supplied to a charity can be zero-rated (but targeted advertising to selected individuals/businesses is excluded). Check the detail for digital channels. (GOV.UK)
Buildings & construction: first grant/long lease and **construction of buildings to be used solely for a relevant charitable purpose may be zero-rated; evidence and certificates are essential. (GOV.UK)
Fuel & power: supplies for non-business use by a charity (or domestic/residential use) qualify for the 5% rate; if ≥60% of the energy at a site is for non-business use, the whole supply can be at 5%. (GOV.UK)
Aids for use by disabled people: many items can be zero-rated when supplied to charities (and to individuals meeting conditions), under specific groups in Schedule 8 and Notice 701/7. (GOV.UK)
Energy-saving materials installations: often zero-rated or reduced-rated under Notice 708/6 (helpful for community buildings/charity premises where conditions fit). (GOV.UK)
Always obtain and retain the correct certificates (e.g., zero-rating declarations for buildings or disability reliefs) before applying relief. (GOV.UK)
Fundraising events (bazaars, dinners, auctions): can be VAT-exempt if they meet HMRC’s conditions—primarily to raise money, promoted as such, and not continuous trading (with thresholds like the 15-events-per-location rule, subject to specific relaxations). HMRC updated its position in June 2025 after the Yorkshire Agricultural Society case. (GOV.UK)
Cultural admissions (museums, galleries, etc.) by an eligible body can be VAT-exempt. Eligibility criteria matter. (GOV.UK)
Education/welfare supplies: some exemptions exist when delivered by eligible bodies; get the status right or the income may be standard-rated. (Charity Tax Group)
Room hire, catering, admissions, advertising you sell, retail sales: often taxable, unless a specific exemption applies. Correct VAT treatment and pricing are essential. (Croneri Library)
In June 2025, HMRC issued Revenue & Customs Brief 3 (2025) following the Upper Tribunal’s January 2025 decision. The Brief clarifies when the fundraising events exemption applies—stressing that events must be primarily for raising money and promoted as such, and that not every event qualifies. Review your event policies, marketing copy and VAT position before launching campaigns. (GOV.UK)
Grant-funded service provider
Lots of non-business work (grant income), maybe some exempt supplies (welfare/education).
Low input VAT recovery; pursue zero-rates on purchases (energy at 5%, qualifying advertising/building works). (GOV.UK)
Museum or arts charity
Exempt cultural admissions if an eligible body; cafés/shops usually taxable.
Partial exemption critical; use a fair special method if standard method is distortive. (GOV.UK)
Fundraising-heavy charity
Structure events to meet exemption tests; keep to HMRC criteria and promotional wording.
Watch sponsorship vs donation and auction lots—VAT can bite. Follow the 2025 Brief. (GOV.UK)
Education/independent school charities
Complex interactions of exempt education, taxable commercial activities, and land & property. Registration rules continue to apply; check GOV.UK’s school-specific notes. (GOV.UK)
Governance & controls: how to stay compliant (and save money)
Map activities into taxable / exempt / non-business buckets; maintain a VAT treatment matrix for common income streams. (GOV.UK)
Adopt/refresh your partial exemption method; consider a special method if the standard method gives unfair results. (GOV.UK)
Use reliefs deliberately: build zero-rating into procurement (e.g., briefing agencies for non-targeted ad buys), and capture certificates before invoices are raised. (GOV.UK)
Energy: submit the 5% VAT declaration to your supplier if ≥60% non-business use applies at a site. (GOV.UK)
Events: ensure event pages/tickets state the fundraising purpose and retain evidence for HMRC. Align with RCB 3 (2025). (GOV.UK)
Major projects: for new buildings or significant works, plan use tests, certificates and contracts early; mistakes are expensive to unwind. (GOV.UK)
Common pitfalls we see
Treating grant-funded work as “VAT-exempt” (it’s usually non-business instead). Recovery rules differ. (GOV.UK)
Assuming all digital advertising is zero-rated. Targeted ads (to selected individuals or lists) generally don’t qualify. (GOV.UK)
Assuming all fundraising events are VAT-exempt. The primary purpose and promotion tests matter—see 2025 updates. (GOV.UK)
Forgetting the 5% energy rate for eligible sites, or failing to lodge the declaration with the supplier. (GOV.UK)
Non-VAT-registered charities cannot normally reclaim VAT on their expenses. Only charities that are registered for VAT can recover input VAT on costs directly related to their taxable business activities. If a charity’s income comes mainly from donations, grants, or exempt supplies—and it remains below the £90,000 VAT registration threshold—it will not be VAT-registered and therefore cannot reclaim any VAT paid on purchases or expenses.
In such cases, the VAT incurred simply becomes part of the charity’s overall cost base, though certain zero-rated reliefs (e.g. on advertising, building works, or energy for charitable use) may still reduce VAT costs without needing registration.
Here’s a detailed and practical list of zero-rated VAT reliefs that non-VAT-registered charities can still benefit from — straight from HMRC Notices (particularly 701 series, 708, and 708/6).
Even if your charity isn’t VAT-registered, you can still pay 0% VAT at source on certain goods and services if you meet HMRC’s conditions and provide the correct certificate or declaration.
Reference: VAT Notice 701/58: Charity advertising and goods connected with collecting donations
What’s covered
Advertising aimed at the general public, such as newspaper ads, billboards, posters, radio, TV, and non-targeted online ads.
Design and production of those ads and related printed materials for donation campaigns.
Distribution costs for leaflets or inserts in general publications.
Conditions
The advertisement must be to the public at large, not targeted at specific individuals or groups (for example, “sponsor emails” or paid-targeted social media campaigns don’t qualify).
The supplier must know you are a charity and hold a zero-rating declaration from you.
Reference: VAT Notice 708: Buildings and construction – section 17
What’s covered
Construction of a new building that will be used solely for a “relevant charitable purpose” (RCP).
RCP means use either for non-business charitable activities or as a village hall/community centre available to the public.
Includes associated building materials and services supplied as part of the contract.
Conditions
The building must be intended for qualifying charitable use only (no significant business or commercial activity).
You must give the builder a certificate of use for charitable purposes before work starts.
The relief usually covers new builds, not extensions or refurbishments (though see below).
Reference: VAT Notice 708, section 18
What’s covered
Construction of an annexe to an existing building used for charitable purposes.
The annexe must be self-contained, with a separate entrance, and used solely for charitable/non-business purposes.
Conditions
Provide a zero-rating certificate confirming qualifying use.
The annexe must not be used commercially or let for profit.
Reference: VAT Notice 701/19: Fuel and power
What’s covered
Gas, electricity, heating oil, solid fuel etc. supplied to a charity for non-business use can be charged at 5% VAT (reduced rate).
If 60% or more of the site’s energy use is for non-business charitable activities, the whole supply can qualify for the 5% rate.
Conditions
You must give your energy supplier a charity declaration form confirming the percentage of non-business use.
Domestic/residential parts (care homes, hostels) also qualify automatically for the 5% rate.
Reference: VAT Notice 701/7: VAT reliefs for disabled people
What’s covered
Certain medical or disability aids, such as wheelchairs, specialist equipment, adjustable beds, and vehicles adapted for disabled people.
Charities buying these for donation to, or use by, disabled persons can claim zero-rating.
Conditions
The item must be specifically designed for disabled use, and you must complete the supplier’s zero-rating declaration confirming charitable use.
Reference: VAT Notice 701/31: Health institutions, nursing homes, and charities
What’s covered
Purchase or construction of lifeboats, rescue boats, associated equipment, and spare parts by qualifying charities (e.g., RNLI-type organisations).
Includes repair and maintenance services.
Conditions
Must be for charitable rescue purposes only.
Provide a zero-rating certificate to your supplier.
Reference: VAT Notice 701/10: Or 701/7, depending on format
What’s covered
Production, duplication, or supply of talking books, Braille books, newspapers, and related materials for blind or severely visually impaired people.
Charities working in this field can acquire them zero-rated.
Conditions
Goods must be solely for use by blind/severely visually impaired persons and not for resale.
Declaration required.
Reference: VAT Notice 701/6: Charity-funded equipment for medical, veterinary, and rescue use
What’s covered
Equipment used solely for medical, veterinary, or rescue purposes, e.g. defibrillators, X-ray machines, ambulances, blood analysers.
Applies when supplied to charities or funded entirely by charitable donations.
Conditions
Must be used only for the qualifying medical/veterinary/rescue purpose.
Must be donated or used directly by a charity—not sold commercially.
Supplier must hold the zero-rating certificate.
Reference: VAT Notice 708/6: Energy-saving materials
What’s covered
Supply and installation of energy-saving materials (e.g. insulation, solar panels, heat pumps) in buildings used solely for relevant charitable purposes.
Conditions
The building must meet the “relevant charitable purpose” definition (non-business or community use).
You must give the supplier a zero-rating declaration.
Applies to installation work and materials together (not standalone material purchases).
Reference: VAT Act 1994, Schedule 8, Group 12
What’s covered
Sales of donated goods through charity shops are zero-rated (not just exempt), allowing the charity to avoid charging VAT even if registered.
Even non-registered charities enjoy the 0% VAT rate on the goods they sell.
Conditions
The goods must have been freely donated to the charity.
Must be sold to raise funds for the charity’s purposes.
The charity must retain proper records showing the donations and sales.
Even though your charity doesn’t submit VAT returns:
Tell the supplier in advance that you are a charity and intend to claim zero-rating.
Provide the correct certificate or declaration (templates in each relevant HMRC Notice).
Keep a copy of every declaration and supporting evidence for your records.
Check invoices — they must show 0% VAT applied.
If VAT is charged in error, ask the supplier to reissue a corrected zero-rated invoice.
|
Relief Area |
VAT Rate |
Key Conditions |
HMRC Reference |
|
Advertising to general public |
0% |
Non-targeted, general audience, declaration needed |
Notice 701/58 |
|
New charitable buildings |
0% |
Solely for charitable/non-business use |
Notice 708, s.17 |
|
Charitable annexes |
0% |
Self-contained, solely charitable use |
Notice 708, s.18 |
|
Fuel & power for charitable use |
5% |
≥60% non-business use, declaration needed |
Notice 701/19 |
|
Aids for disabled people |
0% |
For use by or donation to disabled persons |
Notice 701/7 |
|
Medical/rescue equipment |
0% |
Solely for medical/veterinary/rescue purposes |
Notice 701/6 |
|
Energy-saving materials |
0% |
For relevant charitable buildings |
Notice 708/6 |
|
Talking books/media for the blind |
0% |
Solely for blind/visually impaired use |
Notice 701/10 |
|
Lifeboats/rescue boats |
0% |
For charitable rescue operations |
Notice 701/31 |
|
Sale of donated goods |
0% |
Goods freely donated, sold to raise funds |
VATA 1994, Sch.8, Group 12 |
Even without VAT registration, charities can still legally reduce VAT costs by claiming zero-rated treatment at source — but only if they follow HMRC’s certification rules precisely. Always check the relevant VAT Notice, keep documentation, and get professional advice before starting large building or procurement projects.
HMRC VAT for Charities (overview, registration, reliefs): core GOV.UK pages including VAT Notice 701/1. (GOV.UK)
Charity advertising & zero-rate (VAT Notice 701/58) and HMRC clarification on digital ads. (GOV.UK)
Fundraising events exemption (guidance & Revenue & Customs Brief 3 (2025)). (GOV.UK)
Buildings & construction (Notice 708) and energy-saving materials (Notice 708/6). (GOV.UK)
Fuel & power (5% rate) (Notice 701/19) and GOV.UK VAT rates list. (GOV.UK)
Independent sector commentary & technical summaries (Charity Tax Group; ICAEW; Crowe). (Charity Tax Group)
No. VAT depends on your activities, not your status. You may need to register and charge VAT on taxable income over £90,000 in 12 months. (GOV.UK)
Exempt is still business (just no VAT charged); non-business is outside the scope entirely (e.g., grant-funded charitable outputs). This distinction drives recovery. (GOV.UK)
Only if they’re not targeted at selected individuals/groups. Much digital advertising is targeted and therefore standard-rated. Get a line-by-line media plan from your agency. (GOV.UK)
Yes, if the energy is for non-business charitable use (or domestic/residential). If ≥60% of site use is non-business, the whole supply can be at 5%—tell your supplier. (GOV.UK)
Sometimes—if you’re an eligible body and you meet the conditions in Notice 701/47. (GOV.UK)
Yes. Even if a charity is not VAT-registered, it can still receive certain goods and services at 0% VAT where HMRC zero-rating reliefs apply. Examples include charitable building projects, non-targeted advertising, aids for disabled people, and energy-saving installations for charitable use. The supplier must be given a valid charity declaration certificate confirming that the goods or services are for qualifying charitable purposes.
If VAT is charged incorrectly on a purchase that qualifies for zero-rating, the charity should ask the supplier to issue a corrected invoice showing 0% VAT. HMRC does not refund VAT directly to non-registered charities — only the supplier can amend it. Therefore, it’s crucial to confirm eligibility and provide the zero-rating certificate before the transaction.
Generally no (except in rare, specific refund schemes not covered here). Registration is usually required to reclaim input VAT. (GOV.UK)
You calculate the portion of VAT on shared costs that relates to taxable income—using HMRC’s standard method or an agreed special method. (GOV.UK)
If primarily to raise money, promoted as such, and not continuous trading. Check HMRC’s 2025 Brief after the Upper Tribunal case. (GOV.UK)
Possibly zero-rating for construction/first grant if the building is used solely for a relevant charitable purpose and you hold the right certificates. Plan this before contracts are signed. (GOV.UK)
If you have meaningful taxable income and significant VAT-bearing costs, voluntary registration can improve recovery—run the numbers first. (GOV.UK)
A non-VAT-registered charity doesn’t “claim” VAT back through returns — instead, it ensures that no VAT is charged in the first place. To do this, the charity must provide the supplier with a written declaration (using HMRC’s prescribed wording) before invoicing. If the supplier accepts the declaration, they can legally invoice at 0% VAT, saving the charity the cost up front.
Not automatically. Being a charity does not by itself make all supplies zero-rated or VAT-free. Zero-rating applies only to specific goods and services listed in HMRC VAT Notices (such as 701/58 for advertising or 708 for charitable buildings). The supplier must verify that the conditions are met and hold the correct charity declaration — otherwise VAT must still be charged at the normal rate.
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