V6.185 VAT recovery and other practical points for charities
VAT recovery for charities
From the description of the liability of supplies and activities of charities in V6.184 it can be seen that charities may have a mixture of taxable, exempt and/or non-business activities. As VAT can only normally be recovered on costs attributable to taxable supplies charities can hence have a complex VAT recovery position.
Non-business expenditure and VAT recovery
VAT cannot normally be recovered on expenditure which is used for a charity's non-business activities (only VAT incurred for business purposes can be 'input tax'). However, the question of whether expenditure is used for business purposes will not always be straight forward. For consideration of a business purpose in the context of input tax recovery, see V3.405A–V3.410. Some expenditure may be used for both business and non-business purposes and it will be necessary to apportion between the two. Principles of apportionment are described at V3.408.
For many charities, an income based method of apportionment (see V3.406) may not be appropriate as it may not reflect the use of VAT-bearing resources and may also not result in a very favourable VAT recovery entitlement. A charity will clearly wish to find an apportionment method which, whilst fair, maximises its entitlement to VAT recovery. A wide variety of methods are possible, some examples of which are set out by HMRC in VBNB33000, including:
• fixed apportionment
• expenditure based methods
• time based methods
• transaction based methods
Whether a given method is appropriate for a
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