Charities ― recovering VAT and VAT reliefs

Produced by Tolley

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Charities ― recovering VAT and VAT reliefs
  • VAT recovery
  • Non-business expenditure and VAT recovery
  • Partial exemption
  • Combined business / non-business and partial exemption methods
  • VAT refunds on non-business activities for specific charities
  • VAT reliefs
  • Advertising and goods connected with donation collections
  • Aids for disabled persons
  • Drugs and chemicals
  • More...

Charities ― recovering VAT and VAT reliefs

IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marked the end of the Brexit transition / implementation period entered into following the UK’s withdrawal from the EU. At this point in time, key transitional arrangements came to an end and significant changes began to take effect across the UK’s VAT and customs regime. This document contains guidance on subjects potentially impacted by these changes. Before continuing your research, see the Brexit — overview guidance note.

This guidance note provides an overview of VAT recovery for charities and of the various VAT reliefs that are available to charities aimed at reducing the amount of irrecoverable VAT they incur. The note should be read in conjunction with the Charities ― overview guidance note.

VAT recovery

Charities may have a mixture of taxable, exempt and / or non-business activities as set out in the Charities ― overview guidance note. This can make their VAT recovery position particularly complex as VAT is normally only recoverable when it is used for making taxable supplies.

Broadly, charities with a mixture of all of these types of activities will determine how much VAT they can recover as follows:

StageProcessVAT treatment
1Identify VAT which can be treated as input taxVAT cannot generally be recovered on any costs incurred that relate to non-business activities as this is not properly input tax so the charity must first identify how much VAT relates to its business activities
2Undertake a partial exemption calculationVAT that relates to a charity’s business activities is input tax but still needs to be apportioned between taxable and exempt activities. Normally, VAT can only be recovered when used to make taxable supplies

However, charities may also agree a partial exemption special method (PESM) with HMRC which combines these two steps into a single calculation (see below).

Non-business expenditure and VAT recovery

For details of the non-business activities of charities, see the Charities ―

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