All you Need to Know About VAT Reclaim on Charity
The tax that charities are required to pay
All standard-rated or reduced-rate goods and services sold by VAT-registered businesses are eligible for the charity’s purchasing card, which has a VAT exemption.
Certain goods and services sold by VAT-registered businesses may be sold to charity at a reduced or zero rate. To learn more, see section 6.
Taxes that charities are able to reclaim
The charity must account for the value-added tax (VAT) on all of its expenses in three steps.
Stage 1: For the Public
To the extent that a charity pays tax on purchases that are unrelated to business (non-business), the charity can reclaim the tax from the government.
Further advice on how to identify a charity’s non-business activities is provided to you by cheap accountants in London. Get in touch with us today to learn more
The charity must also figure out how much of the VAT on its general expenses (for things like telephone and electricity) relates to the non-business activities the charity chooses. Non-business activities will reduce the organization’s ability to recoup the percentage of VAT associated with these activities. It is possible to calculate this percentage using a number of methods.
Stage 2: Taxable Sales
A charity registered for Value-Added Tax (VAT) can reclaim all the input tax it pays for items related to goods or services it sells.
Non-registered charities won’t be able to get the VAT they pay on goods bought from VAT-registered businesses.
Stage 3: We are Exempt
Charities registered for Value Added Tax (VAT) can only reclaim the input tax they have been charged on purchases that are for exempt activities if the amounts are below a specified threshold (known as the de minimis limit).
To see if a charity is below the de minimis limit, the first thing to do is examine their books.
- Calculate the input tax for exempt activities that pertain to the calculations.
- After adjusting for non-business activities, determine the percentage of the input tax on general expenses (such as phone and electricity) that relate to exempt activities.
Combine the two values.
The charity is able to reclaim any exempt input tax that is equal to or below the de minimis limit. De minimis limit: For further information.
Adding in the value-added tax
When a VAT-registered charity undertakes a VAT Return at set intervals, it does so normally every three months. This identifies the VAT charged on standard-rated and reduced-rated sales, as well as the VAT paid on purchases that relate to taxable sales.
If the charity’s sales tax exceeds its purchases tax, the charity must remit the difference to the government. However, if the value-added tax (VAT) charged on the purchases is greater than the VAT payable on the sales, the charity will be able to reclaim the difference from HMRC.
In addition to monthly accounting, there are cash accounting and annual accounting methods that VAT-registered businesses can utilise.
It may be possible, under certain conditions, for a charity and its trading subsidiaries to register as a VAT group.
