Can Charities Claim Back VAT?

VAT can be a significant cost for charities, especially when delivering services that are exempt or non-business related. While some believe charities are automatically exempt from VAT, the reality is more complex. Whether or not a charity can claim back VAT depends on its activities, VAT registration status, and the nature of its purchases.

This guide explains what a charity is, when it must register for VAT, which VAT reliefs apply, and how a charity can reclaim or avoid paying VAT on certain goods and services.

What Is a Charity in the Eyes of HMRC?

A charity is an organisation established for charitable purposes only, recognised as such by HMRC. To qualify for VAT reliefs or exemptions, a charity must:

• Be registered with the Charity Commission (in England and Wales), OSCR (in Scotland), or the Charity Commission for Northern Ireland

• Be formally recognised by HMRC for tax purposes

Not all not-for-profits qualify as charities under VAT law. Social enterprises and community interest companies may not benefit from the same VAT treatment unless they meet HMRC’s charity criteria.

Do Charities Need to Register for VAT?

Yes, if a charity’s VAT-taxable turnover exceeds £90,000 (the current VAT threshold), it must register for VAT like any other business. This includes taxable income from:

• Trading activities (e.g. charity shops)

• Sponsorship deals

• Sale of goods or services to the public

A charity with turnover below the threshold can register voluntarily if it wants to reclaim VAT on certain purchases.

Are All Charities VAT Exempt?

No. Charities are not automatically VAT-exempt. VAT exemptions only apply to certain supplies made by charities, such as:

• Education or training

• Fundraising events

• Cultural admission fees

These are treated as exempt supplies, meaning VAT isn’t charged, but also VAT on related costs cannot usually be reclaimed.

Charities that make exempt or non-business supplies can’t reclaim VAT on the associated costs unless they are partially exempt or qualify under special schemes.

Can Charities Claim Back VAT on Purchases?

Charities can only reclaim VAT if they are:

• VAT registered, and

• The purchases relate to taxable business activities

VAT cannot be reclaimed on purchases related to VAT-exempt or purely charitable (non-business) activities unless they qualify for specific reliefs or refunds.

For example, a charity running a café open to the public (a taxable activity) could reclaim VAT on food stock and equipment. But it couldn't reclaim VAT on items used purely for running a free advice helpline (a non-business activity), unless certain conditions are met.

Are Registered Charities Exempt from VAT?

Not entirely. Some goods and services supplied to charities can be zero-rated or VAT exempt, but only if:

• The charity meets HMRC’s definition

• The goods or services qualify under specific reliefs

• The supplier holds evidence of the charity’s eligibility

Zero rating is different from exemption. If something is zero-rated, the supplier charges 0% VAT, but the supply still counts as taxable, allowing the supplier to reclaim input VAT.

Qualifying for the Zero Rate

Certain goods and services can be supplied at 0% VAT to eligible charities. These include:

• Advertising provided to the general public

• Medical and scientific equipment

• Goods for disabled people

• Building works for charitable use (under strict conditions)

To benefit, charities must provide an eligibility declaration to the supplier. Suppliers must keep this on record to justify charging 0% VAT.

How to Claim VAT Relief

Charities do not claim VAT relief directly from HMRC. Instead, they give a written declaration to the supplier stating that the goods or services are for charitable use and qualify for relief.

HMRC provides templates for eligibility declarations, and charities should keep records of:

• Supplier invoices

• VAT relief declarations

• How the goods or services will be used

This helps in the event of an HMRC audit.

VAT Refund Schemes for Charities

There are special schemes that allow some charities to reclaim VAT even on exempt or non-business activities:

Section 33 VAT Refund Scheme (Public Bodies)

This applies to government-funded bodies like museums or local authorities.

Section 33B VAT Refund Scheme (Hospices)

Allows hospices to recover VAT on most non-business activity costs.

Grant-Funded Buildings Scheme

Charities constructing certain buildings for non-business use can reclaim VAT on construction costs if they meet the conditions.

These schemes have strict eligibility requirements and are not available to all charities.

Final Thoughts

Charities can’t automatically reclaim VAT. Whether they can do so depends on their VAT registration, the nature of their activities, and whether special VAT reliefs apply. Zero-rated supplies and refund schemes offer some relief, but the rules can be complex.

It’s worth seeking advice from a tax specialist or contacting HMRC directly if your charity incurs a lot of VAT on purchases. Careful planning and documentation can lead to substantial savings and better compliance.