October 28, 2022


As many of you reading this will be aware, VAT can be a minefield for charities, particularly around whether the charity is carrying out a business activity for VAT purposes. HMRC has recently issued revised guidance on this matter, but on its own the guidance is not entirely clear and can appear self-contradictory.

Steve Chamberlain, Head of VAT at AG, writes to add some clarification.


Quite a bit of caselaw on the subject arises because a charity can claim relief from VAT for the construction or purchase of premises it will use solely for a non-business purpose.

HMRC lost several cases where the UK tribunals were willing to allow zero-rating for, for example, the construction of a new charitable creche building.

It was clear that the UK tribunals were taking a more generous line than HMRC thought appropriate. The key issue was, if a charity charges for the goods or services it provides, at what point does this become a business activity?

HMRC persisted until it achieved judgements in the Higher Courts that would set binding precedents.

Latest guidance

HMRC says in its VAT notice 701/1 that a 2-stage test should be undertaken.

Stage 1 – the activity results in a supply of goods or services for consideration.

The supplier (the charity) and the recipient have entered into a legal relationship whereby the charity has agreed to provide something, in return for payment. There is a direct link between the provision of the good/service, and the payment made.

This part clearly reflects the caselaw, although of course in particular cases, determining whether money received from a funder is a grant, or is consideration for a good or service rendered to the funder (or someone it nominates) can be quite involved.

HMRC’s stage 2 is less clearly articulated:-

Stage 2: The supply is made for the purpose of obtaining income (remuneration)

An activity is not economic just because a payment is received. It must also be carried out for the purpose of obtaining income (remuneration), even if the charge is below cost.

The phrase “for the purpose of obtaining income” isn’t made clear, particularly as the Courts have held that the motive of the supplier in making charges isn’t generally relevant. If fees are charged then whether or not the fee is below cost, if stage 1 is met, the activity is business for VAT purposes, except in exceptional cases.

There are some exceptions by concession, for example charities providing welfare services at below cost, or certain charges by academies to pupils at or below cost.

Other exceptional cases could include those where the fee is notional (e.g. a peppercorn), and charged simply to create a binding contract. Or where the payment is a purely token amount so that the beneficiary feels (s)he has made a contribution.

Further developments

Sometimes, of course, a charity wants to be seen as in business for VAT purposes, particularly where it provides services to corporates or public sector bodies who can recover VAT charged. Each activity of the charity should be considered separately, and as I blogged on here, a recent case involving The Towards Zero Foundation is interesting in that regard.

The charity initially provided services without charge, on the basis that this would establish a market for its paid for service. On the facts, the Tribunal agreed that the free tests were an integral part of its business model, and there was a single activity that should be treated as business for VAT purposes, thereby entitling the charity to reclaim input VAT on all of its costs.


What does this mean in practice?

Charities should have a VAT strategy, taking account whether VAT registration is compulsory or desirable, and should be clear on what is necessary to achieve that.

Identifying whether its activities are by way of business or not is part of that.

Charities relying on old guidance for the meaning of non-business, whether for VAT registration purposes or because they are hoping for zero-rating for a property project, should consider the new interpretation.

If you think this change could affect you, please feel free to get in touch.


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