Nonprofits and the Value-Added Tax in the United Kingdom
Her Majesty’s Revenue and Customs (HMRC), the taxing authority for the United Kingdom (UK), requires that a value-added tax (VAT) be charged on most goods and services that registered businesses (and some charities and nonprofits) provide in the UK. The VAT is also charged on goods and some services that are imported from countries outside of the European Union (EU).
Understanding when and how the VAT may apply to your organization when it is operating in the UK begins with a look at the value of the goods and services you sell during a specific period. You may have to register your organization, and collect and remit the tax to the government. Or you may be eligible for an exemption.
How a value-added tax works
A value-added tax is a consumption tax on goods and services that is collected at every step of production, from raw material to a consumer’s shopping bag. By contrast, a sales tax, which most states and many municipalities levy, is paid only by the consumer at the end of the production/sales chain. Most industrialized countries other than the United States have some form of value-added tax.
The concept is best understood with an example showing how a tax is collected on each transaction in the production process. The full amount is not remitted by any of those buyers or sellers, but the government ultimately collects all of the tax.
Registering for VAT
The first step in addressing how the VAT applies to your nonprofit is determining whether it is required to register for the tax. You only register for the VAT if you are involved in a business, which HMRC defines as a continuing activity involving getting paid for providing goods and services. Payment can be in the form of money or something else, such as in-kind or barter. Charities and associations are considered businesses that must register for the VAT.
The UK does not consider charities and nonprofit organizations to be the same thing. All charities are nonprofits, but not all nonprofits are considered charities. Charities can claim tax relief on income and gains, and claim tax refunds on income that has already been taxed, such as bank interest.
Applying for an “exception”
If your organization is located in the UK you can apply for an “exception” from registration if you are required to register for VAT when your VAT taxable turnover, which is the total value of everything you sell that is not exempt from VAT, has exceeded the registration threshold of £81,000 (approximately $129,600) in the previous 12 months. This amount includes the value of the supplies of a VAT-registered business that you have taken over.
You must also register for VAT if the value of your organization’s distance sales into the UK during a calendar year goes over the distance selling threshold. Therefore proper records of your distance sales to the UK must be kept. Since December 1, 2012, the registration threshold does not apply if your organization is located outside of the UK. However, you will need to register when you acquire or you expect to acquire any taxable supplies in the UK in the next 30 days. In this case, you must register your organization as a non-established taxable person (NETP).
You may also want to appoint a tax representative or agent to keep VAT records and accounts on your behalf. This is not required, but recommended by HMRC.
Relief for some charities
Charities are generally subject to the same VAT rules as any other business; however, your charity may be subject to certain conditions and restrictions for a number of VAT reliefs. Before you can take advantage of these reliefs and make tax repayment claims, your charity needs to be formally recognized by HMRC for tax purposes.
To apply for recognition by HMRC as a charity, you must complete Form ChA1. Trustees of the charity and anyone involved in the day-to-day operations of the organization should read the HMRC guidance on “fit and proper persons” to ensure they are suitable for their positions (i.e., that they have not been involved in tax fraud or disqualified to be a trustee).
Once your charity is established under the HMRC guidance, you can only claim specific tax exemptions and reliefs if your group uses or spends the money it receives for the public benefit. Money that you spend while carrying out your mission is called “charitable expenditures.” Any money that is not spent in line with the purpose of your organization will not qualify for tax relief, so you will have to pay some tax.
Tax rates vary
If you are VAT registered, you will need to charge established rates VAT on taxable business supplies you sell. Depending on your product or service, the applicable rate will generally be the standard 20 percent or a reduced rate of 5 percent. On some items there is no tax charged or collected. When analyzing the effect of the tax, always keep in mind the UK currency conversions.
VAT-registered organizations must also send an online VAT return to HMRC, generally every three months. The return must show the tax your organization charged on taxable supplies sold, and the amount it is reclaiming on your purchases. The difference between the VAT your organization charged and the VAT it is reclaiming is the amount of VAT that must be remitted to HMRC, or the amount HMRC must pay you, depending on which amount is greater.
Some donated goods are exempt
Charities and other nonprofit organizations can import certain donated goods from outside the EU free of VAT. The goods may be any of the following:
- Basic necessities for the needy and vulnerable
- Goods to be used or sold at charity events for the benefit of the needy and vulnerable
- Equipment and office materials to help run an organization for the benefit of the needy and vulnerable
As with all international activities, it is important for your organization to weigh any risks of doing business internationally against the benefits. Addressing all laws and taxation rules upfront will allow your organization to properly plan activities in advance, rather than paying penalties or fines after finding you are not in compliance.