The concept of VAT is quite often incredibly difficult to navigate, and businesses can often find themselves knowing very little when it comes to ensuring they are paying the right amount. For charities, however, the situation is even more complicated, and this type of organisation is regularly found to make mistakes in this important area, which can have serious implications on their operations.
Over the years, we have dealt with hundreds of clients in the charity sector who have quite simply got the notion of VAT completely wrong. They are either failing to pay the correct sum – which can prove to be even more costly in the long run – or they are missing out on a number of benefits that could help to ensure more of their money is being used for their cause.
Here we shall take a closer look at VAT for charitable organisations, putting the spotlight on common mistakes and pitfalls made by charities, and how to overcome them.
Never make assumptions
It may sound surprising, but the number of charities of varying sizes that are unaware they should be paying VAT is considerable. Many charities are largely under the impression that the levy does not affect them due to the nature of their work. However, just because an activity is charitable does not mean that it falls outside the VAT system. It is essential that charities look very carefully at what they do, and the methods they use to do it, to ensure they are in keeping with their VAT obligations.
Time and time again, we deal with charities who have wrongly assumed they do not have to register for VAT, which again, is completely false – and the complete opposite is the case. Charities, more than regular companies, need to be aware of the VAT status of each of their income streams and activities. This could include any proceeds earned in a charity shop, should they run one. While they may not be subject to pay 20% VAT, they definitely still need to register.
The sale of goods, however small and whatever they are, can create VATable income for a charity. For this reason, such organisations must be aware of the potential to pay this on each of their funding and income streams.
Failure to recognise benefits
Another common mistake made by charitable organisations is their failure to recognise the reliefs and benefits that are available to them. There are a number of reduced VAT rates, such as the 5% rate, as well as certain payments that are exempt to VAT.
Charities are able to enjoy lower rates on a number of payments, including fuel and power. However, very often they are not aware of this. Suppliers will charge 20% VAT as standard, meaning the charity has to go back to them to explain they have been charged this additional cost in error – but without that knowledge, they could find themselves paying over the odds.
Another area where charities could inadvertently be paying too much VAT is advertising. However, in order to enjoy the benefit of not paying VAT, they need to provide a certificate to the supplier of the advertising, as exemption will not happen automatically. Eight times out of ten, charities are unaware they should not be paying VAT on advertising, highlighting a considerable lack of awareness in this area.
While there are stark contrasts regarding the ways VAT is paid by charities and regular businesses, the sanctions they face if they fail to adhere to regulations are largely the same. If mistakes are made, such as failing to register on time, or registering but not declaring, HMRC will usually impose a penalty if they believe the charity has been careless.
The bigger picture
The level of knowledge that charities have regarding VAT is undoubtedly low, and this issue spans across small and large organisations. In order to avoid issues, charities simply must engage with VAT, and not bury their head in the sand in a bid to avoid this significant aspect of their financial dealings.
There are a number of benefits and exemptions in place to ensure that charities can dedicate the majority of their work to the worthy causes they support, and so, by discovering ways to accurately monitor their income streams, such organisations can ensure they are well equipped to deal with any problems further down the line.
Rob McCann is Director at The VAT People.
Get free email updates
Keep up to date with fundraising news, ideas and inspiration with a weekly or daily email. [Privacy]