Generally speaking, VAT is an additional cost for the majority of not-for-profit entities which must be factored into any planned spend. When capital expenditure is involved, devoting up to an additional 20% of charitable funds to a project can be particularly vexing. Consequently, it is advantageous if the imposition of VAT can be avoided on the upfront cost of a capital cost of a project, rather than having to rely on the complexities of a partial exemption or a business/non-business method, the capital goods scheme or tax planning in order to seek to mitigate the VAT cost.
Fortunately, there are a number of specific reliefs from standard-rated VAT included in the UK legislation which a not-for-profit entity may be entitled to use when incurring capital expenditure. Examples include:
The construction of buildings intended to be used solely for non-business/charitable purposes, as a village hall or for relevant residential purposes can be zero-rated subject to certain criteria being met.
Converting commercial buildings to residential use
The VAT liability of converting a building previously used for commercial purposes into a relevant residential purpose building is reduced rated (currently at 5%).
Relevant residential purposes includes a home or accommodation for children/students, personal care homes and hospices.
Fuel and power
A charity can pay VAT at the reduced rate on fuel and power that is used for non-business purposes. It can also pay reduced rate VAT on maintaining equipment connected with the supply.
The relief applies to non-registered charities, providing your charitable status is recognised by HMRC. There are certain rules on the apportionment of fuel and power used for non-business and business activities and whether relief can apply to the entire supply.
The relief extends to the installation of energy-saving materials, such as central heating and insulation in residential accommodation or in a building used solely for a relevant charitable purpose.
If your electricity or gas supply is used wholly or partly for charitable non-business purposes, you are also entitled to relief on Climate Change Levy (CCL) from standard to reduced rate.
A charity can zero rate the purchase or hire of certain vehicles for use in their charity. The rules are quite detailed on the prerequisites but include the following:
- specially designed or adapted motor vehicles that have between 7 and 50 seats, and
- are purchased or hired for use by a charity mainly for the transportation of blind, deaf, mentally handicapped or terminally ill people
- vehicles that have been substantially and permanently adapted to carry at least one disabled person in a wheelchair.
Advertising and goods connected with collecting donations
A charity can zero rate its advertising in whichever form, including a newspaper or television, providing the advert is placed on someone else's time or space. This means that if someone charges your charity for an advert, for example in their magazine or on a radio programme or for displaying a poster on their premises, they don’t have to charge you VAT.
Adverts qualifying for the relief can be on any subject, including staff recruitment. Charities can also purchase pre-printed collecting boxes, envelopes and appeal letters at the zero rate.