Charities only need to account for VAT on those parts of its activities that are within the scope of VAT. A quick checklist follows:
- Sale of donated goods from a charity shop – zero rated supply
- Investment income, bank interest etc – outside the scope of VAT
- Donations from general public – outside the scope of VAT
- Fundraising events – exempt from VAT
- Grants, see below
The VAT status of the charity shops is advantageous. Even if the zero rated sales are below the current registration limit of £73,000, it would be worthwhile registering the trade voluntarily as any associated costs that include VAT can be reclaimed.
Although most grants received by a charity are outside the scope of VAT, occasionally grant providers will require the charity to provide services to individuals or groups as a direct condition of grants made. If this is the case the grant is a standard rated transaction. In most cases this will not cause difficulties as most grant providers are Local Authorities that are VAT registered and can claim back any VAT charged.
Nevertheless charities should take care to seek advice and ensure that they charge VAT on grant income when appropriate.