There is a common misconception that charities do not pay tax of any kind. It is true that they are exempt from many of the taxes administered by Her Majesty's Revenue and Customs (HMRC) except in the employment of staff where Pay As You Earn (PAYE) has to be operated. However, there is no exemption for charities from Value Added Tax (VAT) if the organisation's business income exceeds the threshold set at the Budget.

It is important for voluntary organisations to consider their VAT position and, if they believe it is either necessary or of benefit to them (or both), to register for VAT purposes - even in advance of the anticipated income from business activities exceeding the limit. Late registration can result in penalties.

Unlike a commercial operation which generates income through the actual provision and sale of goods or services, a charity has a complex variety of income sources.

Some of these sources such as donations, legacies and grants are freely given without the expectation of goods or services being given in return. In VAT terms, such income is derived from non-business activities and is therefore outside the scope of VAT.

On the other hand, the sale of goods produced by the beneficiaries of a charity or services provided to members could be construed as 'business activity' and therefore subject to VAT. 'Business' has a very wide meaning for VAT purposes. It is easier to define the activity as "business" unless it can be clearly defined as "outside the scope" of VAT.

VAT is applicable at various rates - at present there are three rates in the UK:

• standard 15%
• reduced 5%
• zero 0%

A voluntary organisation, having registered for VAT, must charge VAT on business supplies as appropriate. However, the voluntary organisation is then in a position to reclaim some or all VAT charged to it.

As the income of voluntary organisations is often very complex it is highly likely that there will be a mixture of business and non-business activities; taxable and exempt (non-taxable) supplies; standard and zero-rated taxable supplies. VAT charged on supplies relating to exempt activities is not reclaimable for example.

This mixture leads to many charities being in a VAT position known as partial exemption.

It is important to maintain records in such a way as to identify VAT on purchases as they directly relate to income in the different categories outlined above.

Specific Relief for Charities

Recognised charities are eligible for some special concessions which enable them to buy goods at zero rate, although they are normally standard rated. It is necessary to provide proof of charitable status to allow the supplier to waive the VAT charge to zero and it applies to:

• Aids for persons with disabilities
• Vehicles and ambulances
• Disabled access.

As all VAT regulations are subject to regular updating and change it is vital for voluntary organisations to constantly review their VAT position, possibly with the help of their professional advisers.

VAT is administered by Her Majesty's Revenue and Customs (HMRC, see link below).