HMRC are writing to small charities to remind them to be wary about reclaiming input VAT on non-business activities. Tax compliance, especially for VAT, can be a complicated problem for many charities as there is a general tendency amongst trustees and managers to assume that they operate 'tax-free'.
In its letter, aimed at small companies (turnover up to £2 million), HMRC recommends that charities seek guidance in VAT Notice 700 and consider their Non-business activities.
- Where there are business and non-business activities, Input VAT claims will often need to be restricted under the Partial exemption rules.
- It can be quite difficult in some cases to decide what is a non-business activity in the context of a charity. This is an area where specialist support is recommended.
Charity managers might be better directed to a specific notice for charities: Notice 701/1 - 'How VAT affects charities' too.
The letter has been shared by HMRC with the Chartered Institute of Taxation (CIOT).
In October 2024, the government responded to the previous government's consultation on Charity Tax Compliance, Its outcome, 'Next Steps', indicates changes will be brought in from 2026. That will be of interest to trustees too.
Useful guides on this topic
Charity Tax Compliance, the outcome, 'Next Steps''
We review the government plans for tax reform
Finance Acts 2024-25 What's New & Rolling Planner > Charities
What's hot or not in the sector this year.
Input VAT: how to make a valid claim
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
VAT & Partial Exemption
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?
External links
Useful VAT guides: VAT notice 701/1
