Category Archives: Planning

Charities and VAT – A Guide

By   18 November 2025
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Surely charities don’t have to pay taxes?

This is a common myth, and while charities and Not-For-Profit entities (NFPs) do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It is worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • ensure any applicable reliefs are taken advantage of
  • if significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss
  • review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place
  • review any land and property transactions. These are high value and some reliefs are available. Additionally it is usually possible to carry out planning to improve the VAT position of a property owning charity
  • review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing
  • consider a VAT “healthcheck” which often identifies problems and planning opportunities

We have considerable expertise in the NFP sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP or its trading subsidiary) which makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is usually a two stage process (a combined calculation is possible but it must have written approval from HMRC – Notice 706 para 7) . The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration.  If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals.  An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax.  For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes.  However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred.  A business in this position is called partly exempt.  Generally, any input tax which directly relates to exempt supplies is irrecoverable.  In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method. The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business.  The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered.  Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC. There is also a de minimis relief.

My flowchart may be of use: partial exemption flowchart 

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

VAT Payment Problems – Q & As

By   12 November 2025
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If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away.  Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser, but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is a Late Payment Penalty?

A: These are a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a penalty be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late – full details here. 

Q: How much is it?

A: First Penalty

A business will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If VAT remains unpaid after Day 15, the business incurs the first penalty. This penalty is set at 2% of the tax outstanding after Day 15. If any of this tax is still unpaid after Day 30, the penalty increases to 4% of the tax outstanding after Day 30.

Second Penalty

If tax remains unpaid on Day 31, a business will begin to incur an additional penalty on the VAT that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns. Both types are included in the taxpayers’ debt and are collected in the normal way if they are not paid promptly.

Help 

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.

Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.

Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.

Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

 

Further information

Further information on how to deal with a VAT debt here. 

Please contact us if VAT payments are proving a problem for your business.  Negotiation with HMRC is possible.

VAT: Updated guidance for new charity buildings

By   11 November 2025
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Charities
 
HMRC have updated its Guidance on VAT refunds for constructing a new charity building. It provides information on when a charity can claim a VAT refund using the DIY housebuilders scheme if it is constructing a new charity building for a charitable or relevant residential purpose.
Meanings

Relevant charitable purpose  

A relevant charitable purpose building is used by a charity for non-business purposes.  

For VAT purposes, activities that do not make a profit, or activities where any profit is only used to further the aims and objectives of the charity, can still be classed as business activities.  

Relevant residential purpose 

A relevant residential purpose building is used by a charity for non-business purposes. It is: 

  • a home or other institution providing residential accommodation for children
  • a home or other institution providing residential accommodation with personal care for old age people, disablement, past or present dependence on alcohol or drugs or past or present mental disorder
  • a hospice (as long as that hospice provides some residential accommodation, such as beds for patients)
  • residential accommodation for students or school pupils
  • residential accommodation for members of any of the armed forces
  • a monastery, nunnery or similar establishment
  • an institution which is the sole or main residence of at least 90 per cent of its residents
More information on The DIY Housebuilders’ Scheme here, here,and here

Who can claim import VAT? The TSI Instruments case

By   5 November 2025
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Latest from the courts

In the First-tier Tribunal (FTT) case of TSI Instruments Limited the issue was whether the appellant could claim import VAT when it was not the owner of the imported goods. The amount of VAT at stake was circa £8.5 million.

Background

TSI Instruments (TSI) imported scientific equipment owned by its customers for repair. The main activity of TSI in the UK is the service, repair and calibration of TSI Group goods which had previously been sold to customers around the world.

TSI is named as the importer and paid the charges made by the shipping company for dealing with the declaration and customs clearance formalities on behalf of TSI as well as paying the import VAT which it claimed.

Contentions

HMRC refused to repay the claims on the basis that only the entity with title to the goods is able to deduct the import VAT.

The appellant argued there is no requirement in the legislation that the importer should be the owner of the goods in order for import VAT to be credited. TSI asserted that, as long as the goods are imported for the purposes of its taxable business and it bears the costs of the import, the import VAT can be credited as input tax.

Decision

The FTT ruled that TSI was not entitled to claim input VAT credit for import VAT paid on goods it did not own, and the appeal was dismissed. Via both EU and UK VAT law, the right to deduct import VAT is restricted to the actual owner of the goods or the entity which has the right to dispose of the goods as their owner (or where the cost or value of the goods is reflected in the price of specific output transactions or in the price of goods and services supplied in the course of their economic activities). Since TSI did not own the goods, and their value was not included in the repair service price, the FTT ruled against TSI.

Commentary

This position could have been avoided by planning being put in place. TSI could have used Inward Processing Relief or the owner of the goods could have been the importer.

Legislation/HMRC guidance

VIT13300 – Import VAT may only be claimed by the owner of the goods who would be entitled to reclaim the import VAT either in accordance with s24 VATA 1994 (if registered for VAT in the UK) or under part XXI of the VAT Regulations 1995 (SI 1995/2518) if they are not registered for VAT in the UK, provided they satisfy the legislative conditions. For further information see Notice 723A.

HMRC published Revenue and Customs Briefs 2 (2019) and Brief 15 (2020) which restated HMRC’s long-standing policy that it is the owner of the imported goods who is entitled to recover the import VAT under current UK legislation. These Briefs clarify, but do not change, HMRC’s policy.

A VAT Did you know?

By   29 October 2025
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Kangaroo steak is sold as food in shops – food is zero-rated, but the sale of live kangaroos is standard rated.

VAT DIY Housebuilders’ Scheme – useful information

By   20 October 2025
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The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

  • building projects outside the UK
  • materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
  • professional or supervisory fees, eg; architects and surveyors
  • the hire of plant, tools and equipment, eg; generators, scaffolding and skips
  • building materials that aren’t permanently attached to or, part of, the building itself
  • some fitted furniture, electrical and gas appliances, carpets or garden ornaments
  • supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT: Overages – new guidance

By   6 October 2025
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HMRC has issued new internal guidance on overages.

Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.

What is an overage?

An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.

Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.

VAT Treatment

HMRC consider that the VAT liability of overage should be considered separately from the VAT liability of the initial sale. HMRC’s policy is that the VAT liability of an overage payment will generally be determined at the time of supply of the overage payment, rather than when the original land sale completed.

Overage payments where an option to tax is made after the initial grant – where an option to tax is made after the property has been sold to the buyer, any subsequent overage payment may be liable to the standard rate of VAT as a result of VAT Act 1994, Schedule 10, Paragraph 31 (unless the option to tax has been disapplied, eg; where a property intended for use as a dwelling). In such situations, where the overage payment is made after the dwellings are constructed on the land, and the original grant was taxable by virtue of the option to tax, the option can be excluded in relation to the overage payment.

New commercial buildings – overage payments:

  • Where there is a grant of a freehold interest in a new (or incomplete) commercial building, the overage will always be taxable at the standard rate – it does not become exempt simply because three years or more have elapsed since the building was completed. This will remain the position if the overage falls due after the designation ‘new’ has expired after three years.  
  • Where there has been a freehold sale of bare, un-opted land subject to an overage obligation, the liability of the overage payment will remain exempt even if a new commercial building is constructed on the site before the overage is paid. 

This means that the VAT liability of the overage is determined by reference to the description of the land at the time that the original sale of the land takes place. 

More on overages here. This covers HMRC’s previous views on overages .

Common VAT mistakes

By   2 October 2025
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VAT basics

None of us are perfect, and any business can make mistakes with VAT despite all intentions to take reasonable care. So what are the most common errors? Here’s a list of pitfalls to avoid:

Wrong rate of output tax charged

Land and property transactions

  • Misunderstanding the correct VAT treatment of a land and property transactions
  • Not recognising VAT issues
  • Issues with the Option To Tax
  • TOGC issues
  • A guide to triggerpoints here

Cross-border issues

  • Failing to meet the requirements to zero-rate exports
  • Incorrect import procedures
  • Ignoring the reverse charge

Inter-company charges

Partial exemption

Business entertainment

  • Different rules apply to the recovery of input tax on entertaining depending on the type of recipient, eg: clients, contacts, staff, partners and directors depending on the circumstances

Registration

VAT groups

  • Failing to VAT group when beneficial or failing to disband
  • Recovery of input tax
  • Timing of transactions
  • Partial exemption issues

Tax points (Time Of Supply)

  • Failing to recognise a tax point for output tax
  • Incorrect treatment of deposits
  • Incorrect treatment of forfeit deposits
  • Recovery of input tax at incorrect time

Bad Debt Relief issues

  • Failing to claim Bad Debt Relief
  • Failing to repay a claim to HMRC when payment from customer is received
  • Failing to repay input tax when a supplier is not paid (after six months)

Overseas issues

Claiming input tax without the correct documentation

  • A guide to alternative evidence here

Recovering irreclaimable input tax

  • A guide to what VAT is not claimable here

Return errors

  • A box-by-box guide here

Business promotion schemes

Composite or separate supplies

Changes to a business

  • Selling new products, acquisitions, share sales, disposals, re-structuring, and ceasing to trade can all have a VAT impact and this can be missed

Fuel and motoring costs

Special schemes

One-off transactions

  • Failing to recognise VAT issues of unusual or one-off transactions

Non-business (NB) and charitable activities

  • Failure to recognise NB activities
  • Failure to restrict input tax in connection with NB activities

Errors can lead to draconian penalties, and ignorance is not a defence.

A guide to VAT triggerpoints here .

VAT: Can Nitrous Oxide be zero-rated food? The Telamara case – no laughing matter

By   1 October 2025
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Latest from the courts

In the First-Tier tribunal (FTT) case of Telamara Limited the issue was whether Nitrous Oxide (N₂O) used exclusively for culinary use can be zero-rated.

Background

The appellant supplied N₂O canisters which were used as cream chargers. These were used for whipping cream and creating foams and mousses, and to infuse liquids. The relevant invoices described the product as; “Dairy products misc. Cream/beverage infusers 600 x 8g cylinder”. The chargers were not for medical use. The chargers were certified as Halal products.

Telamara’s customers were wholesalers and the units in which the chargers were sold were in boxes of 600. The packaging states that the contents of the chargers should not be inhaled. If consumed on its own N₂O is tasteless and all but imperceptible and its only effect is on the consistency of the whipped food.

The contentions

Telamara considered that the sale of the canisters should be zero-rated because they were for culinary use as food of a kind for human consumption via The VAT Act 1994, Schedule 8 VAT Act 1994, Group 1, Item 1. It was accepted that the N₂O would not be “eaten on its own” but it nevertheless was said to form an ingredient of all of the food substances into which it was incorporated by infusion or by use of the cream whipper, changing the state and nature of those foods. Furthermore, the appellant claimed unfairness because HMRC had been unable to provide clear guidance on the correct VAT treatment when the business started but HMRC subsequently became certain the supplies were standard rated.

Unsurprisingly, HMRC disagreed, formed a view that the supplies were not of food, and raised an assessment for the output tax it deemed to be due on the standard rated supplies.

Decision

The appeal was dismissed. It was found that the chargers were not food because N₂O:

  • had no nutritional value
  • is a food additive, not food
  • does not add to the calories of food
  • is odourless, colourless, and tasteless
  • is a gas and therefore incapable of being either eaten or drunk

The Tribunal concluded that the gases were standard rated as they were not food of a kind used for human consumption. It concluded that no informed and broad-minded person considering whether the gases were food would conclude that they were.

Commentary

Yet another “Is it food?” case adding to a long list. The Tribunal helpfully set out (drawing from an extensive and thorough review of the very many cases which have considered the scope of zero-rating of food) the required exercise considering and weighing up the following factors to answer the question of whether something is food:

(1) Nutritional value

(2) Palatability

(3) Form of the product

(4) Manner of/directions for consumption

(5) Frequency of consumption

(6) Marketing

(7) Purpose of the product

(8) Range of uses

(9) Constituent ingredients

(10) Dictionary definition of food

Summary

Is it food? is not as a straightforward question as it may seem!

We recommend that any business which is involved in ‘food” or “food-like” products should undertake a review in light of this case. We can, of course, help with this .

VAT Bad Debt Relief Noticed updated

By   1 October 2025
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HMRC has updated VAT Notice 700/18 – Bad Debt Relief (BDR). The update covers how and when a claim may be made.

The Notice explains when a business is entitled to BDR and how to claim it.

If a business makes supplies of goods or services to a customer but it is not paid it may be able to claim relief from VAT on bad debts that it has incurred.

The conditions for claiming BDR are:

  • a business must have accounted for the VAT on the supplies and paid it to HMRC
  • a business must have written off the debt in its day-to-day VAT accounts and transferred it to a separate bad debt account
  • the value of the supply must not be more than the customary selling price
  • the debt must not have been paid, sold, or factored
  • the debt must have remained unpaid for a period of six months after the later of the time payment was due and payable and the date of the supply
  • the deadline is within four years and six months of the later of the date payment was due and payable or the date of supply

These rules have varied over the years, so it is worth checking on supplies made before 1 April 1989.

To claim BDR a business includes the amount of the VAT being claimed in box 4 of its VAT return which covers the date when the conditions to make a claim are fulfilled.

If BDR has been claimed and subsequently a payment is received for the supply, a business must repay HMRC the VAT element included in the payment.