HMRC has published (on 28 November 2025) a collection of new guidance on postponed VAT accounting (PVA).
The guidance covers what a business needs to do if it is using PVA to account for import VAT on its VAT returns.
The publication brings together all PVA guidance, giving detailed information about:
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?
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.
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.
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.
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:
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.
VAT Basics
I am often asked if there is a VAT beginner’s guide, I find HMRC guidance generally unhelpful for someone without a tax background, so, here is all the basic information you may need in one place.
What is VAT?
Value Added Tax (VAT) is a tax charged on most business transactions made in the UK. It is charged on goods and services and is an ad valorem tax, which means it is proportionate to the value of the supply made.
All goods and services that are VAT rated (at any rate including zero) are called “taxable supplies”. VAT must be charged on taxable supplies from the date a business first needs to be registered. The value of these supplies is called the “taxable turnover”.
Exempt items
VAT does not apply to certain services because the law says these are exempt from VAT. These include some; financial services, property transactions, insurance education and healthcare. Supplies that are exempt from VAT do not form part of the taxable turnover.
The VAT rates
There are currently three rates of VAT in the UK:
VAT registration
A business is required to register for, and charge VAT, if:
Registration limit
The current VAT registration threshold is £90,000. If at the end of any month the value of taxable supplies made in the past twelve months is more than this figure a business MUST VAT register. A business can opt to register for VAT if its taxable turnover is less than this. Please note that taxable turnover is the amount of income received by a business and not just profit. If a business does not register at the correct time it will be fined.
Future test
Additionally, if, at any time there are reasonable grounds to expect that the value of the taxable supplies will be more than the threshold in the next thirty days alone a business must register immediately.
What are the exceptions?
VAT is not chargeable on:
What if a business only makes exempt or zero-rated supplies?
Exempt
If a business only makes exempt supplies, it cannot be registered for VAT. If a business is registered for VAT and makes some exempt supplies, it may not be able to reclaim all of its input tax.
Zero-rated
If a business only supplies goods or services which are zero-rated, it does not have to register for VAT, but, it may do so if it chooses – this is usually beneficial.
What is input tax and output tax?
Input tax is the VAT a business pays to its suppliers for goods and services. It is VAT on goods or services coming into a business. In most cases, input tax is the VAT that registered businesses can reclaim (offset against output tax).
Output tax is the term used to describe the VAT charged on a business’ sales of goods or services. Output tax is the VAT a business collects from its customers on each sale it makes.
A full guide to VAT jargon here
Is there anything that will make VAT simpler for a small business?
There are a number of simplified arrangements to make VAT accounting easier for small businesses. These are:
Details may be found here and here and here.
VAT calculation
Records
A business must keep complete, up-to-date records that enable it to calculate the correct amount of VAT to declare on its returns. VAT records must be kept for at least six years, because a business will need to show them to HMRC when asked.
It is acceptable for ordinary business records to be the basis for VAT accounts. A business will need records of sales and purchases (and any adjustments such as credit notes) including details of how much VAT the business charged or paid. If trading internationally, records of imports and exports/dispatches and acquisitions with all overseas territories, including the EU must be recorded. VAT records must show details of any supplies a business has given away or taken for personal use.
VAT records must also include all invoices you have received and issued. Invoice requirements here
Records will also need to include a VAT account, showing how total input tax and output tax has been calculated to include in your VAT returns.
It is vital to ensure that the VAT records are accurate. Failure to do so can lead to significant tax penalties
MTD
For certain business, the new MTD rules apply and certain software must be used. Details here
Time of supply (tax point)
It is important to establish the time VAT is due. Full details here
VAT returns
A VAT registered business must submit returns on a regular basis (usually quarterly or monthly). A VAT return summarises a business’ sales and purchases and the VAT relating to them. All the information a business requires must be in its VAT records, specifically a VAT account.
Return requirements include:
A box by box guide to returns here.
Online VAT returns are due one month and seven days after the end of the VAT period. Payment of any VAT owed is due at the same time, although HMRC will collect direct debit payments three days later.
Tucked away in the recently published Spending Review 2025 was confirmation that HMRC will no longer contact taxpayers by post.
The Review states that:
“The government is providing an additional £500 million from 2026‑27 to 2028‑29 to make HMRC a digital-first organisation. By 2029-30, a minimum of 90% of customer interactions will be digital self-serve, up from around 70% this year. This investment will improve digital services so people can easily get the information they need without having to call or write to HMRC. It will enable the use of AI to help taxpayers with their enquiries and to raise productivity within HMRC. The government will continue to ensure alternative channels, including phonelines, are still there for those who need them. HMRC will eliminate all outbound post, with limited exceptions… ”.
So bye-bye snail-mail, trees will no longer have to be sacrificed so we can pay tax…
VAT Basics
A Non-Established Taxable Person (NETP) may be required to appoint a tax representative or tax agent if they make taxable supplies in the UK. The term NETP is used to describe a person who is liable to be registered for VAT under the VAT ACT 1994 Schedule 1a. A NETP must register for VAT as soon as it makes its first taxable supply in the UK, or when it expects to make taxable supplies here within the next 30 days, that is; there is no turnover limit for a NETP.
A NETP is a business which has no place of belonging in the UK. So, what is the difference between a representative and agent, and does the NETP get a choice?
Tax representative
A representative maintains the NETP’s VAT records, submits VAT returns and accounts for UK VAT on behalf of the NETP and dels with communication with HMRC. A representative is jointly and severally liable for any VAT debts incurred by the NETP.
A NETP may only appoint one person at a time to act on its behalf, although a tax representative may act for more than one NETP.
Tax agent
An agent carries out a similar role to a representative, however, the important difference is that HMRC cannot hold an agent responsible for any of NETP’s VAT debts. HMRC reserve the right not to deal with any particular agent. In some circumstances, if HMRC deem think it necessary, it will insist that a tax representative is appointed.
As long as HMRC has not directed (see below) a NETP to appoint a tax representative, it can appoint an agent to deal UK VAT affairs. Any arrangement made will be subject to whatever contractual agreement the NETP and agent decide. In some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed.
Distinction
The tax representative and the tax agent both act on behalf of a NETP. However, while the tax agent operates in the name of the NETP, the tax representative operates in its own name. Consequently, a tax representative is personally committed to pay HMRC and must be accredited beforehand. Contracts between representatives/agents need to be clear on this point and fees charged for this work should reflect the difference in responsibilities. Should the NETP fail to pay VAT, penalties and interest due, HMRC will collect these directly from the tax representative, so, in effect, the tax representative represents a monetary insurance for HMRC.
Direction
HMRC can direct some NETPs to appoint a tax representative who must be:
this is via VAT Act 1994, section 48(1).
HMRC may choose to require some form of security from a NETP whether or not there has been any direction regarding the appointment of a representative.
Not appointing a tax representative or agent
If a NETP does not wish to appoint a tax representative or agent, and HMRC has not directed them to appoint a tax representative, it must meet all its obligations under UK VAT law itself. This includes, inter alia:
Post Brexit
For UK businesses making overseas supplies:
Businesses established within the EU are exempted from appointing a tax representative in other Member-States (MS) as international tax assistance is compulsory within the EU (the local tax administration can request assistance from the country of establishment to recover the money directly from the business). Since Brexit, the UK became a third country, so this rule does not apply, and MS have the choice to make the appointment of a tax representative compulsory for UK businesses. Most MS have done so, the notable exception being Germany.
New guidance for registration of a NETP here.
What is cryptocurrency?
Cryptocurrency is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.
What is Bitcoin?
Bitcoin was the first popular cryptocurrency and it first appeared in 2009. The advantage of bitcoin is that it can be stored offline on the owner’s local hardware (a process called cold storage) which protects the currency from being taken by others. If a person loses access to the hardware that contains the bitcoins, the currency is lost forever, and it is estimated that as much as 23% of bitcoin has been mislaid by miners and/or investors.
Exchange between currencies and bitcoin
The VAT treatment of transactions exchanging traditional currencies for Bitcoin, or Bitcoin for currencies carried out for consideration (added by the supplier) are exempt services in a similar way to any other currency transactions via The VAT Act 1994, Schedule 9, group 5, item 1.
Paying for goods or services using Bitcoin
Similar to any other payment method, simply using Bitcoin to obtain goods or services is outside the scope of VAT and no VAT is due on the value the Bitcoin represents. That is to say that the authorities do not consider that such a transaction is a barter.
Provision of goods or services in return for Bitcoin payment
The provision of goods or services paid for in Bitcoin are treated in a similar way as any supplied for consideration consisting of
and the value is; anything received by the supplier in consideration of that supply.
Should the consideration be in Bitcoin, there two alternatives for the conversion of foreign currencies into a main currency (although these were drafted before the introduction of Bitcoin and originally relate simply to foreign currencies)
However, as above, because Bitcoin is not administered by any bank, this may make valuation difficult. The VAT Committee of the European Commission (EC) has indicated that a potential resolution is to use Open Market Rate (OMR*) as the exchange of the virtual currency. This would be the responsibility of the supplier. This is likely to be commercially available information from the websites of the likes of; coindesk, Cryptocompare or Cointelegraph for eg.
All of the above seems logical, although confirmation provided by the VAT Committee is welcome.
* OMR is the amount for which an asset is transferred between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.
HMRC has published its annual report and accounts 2024 to 2025 on 17 July 2025.
Highlights
HMRC updated its payments on account (POA) guidance in May 2025, The update includes information to support when a business should send a VAT return.
What are POA?
These are advance payments towards a business’s VAT bill. They are mandatory.
HMRC will notify a taxpayer to make POA if a business renders VAT returns quarterly, and it owes more than £2.3 million in any period of 12 months or less.
Under the POA arrangement, businesses make interim payments at the end of months two and three for each return quarter. The interim payment is intended to cover part of the overall VAT liability for the that quarter. The balancing payment for the return’s VAT liability will be settled when the business submits its VAT return payment. Quarterly VAT returns are filed online as normal.
POA calculation
HMRC will calculate POA based on a business’s annual VAT liability in the period that it goes over the threshold. The annual VAT liability in that period will be divided by 24 to arrive at an instalment amount.
A taxable person who has been in business for less than 12 months will have POA calculated by HMRC on a pro rata basis.
The payments on account cycle starts in the first quarter after a business exceeds the £2.3 million threshold.
The payments will remain the same until the start of the next annual cycle.
The annual cycle begins in April, May or June depending on which VAT return ‘stagger’ a business is on. HMRC bases the amount of payments during the annual cycle on the liability in the period known as the ‘reference year’.
POA due dates
The due dates for POA are the last working day of the second and third months of every VAT quarter no matter what the period end date is. The seven-day extension for paying electronically does not apply to POA.
POA that are not paid on time will be subject to late payment interest.
Balancing payments are due with the VAT return and must clear HMRC’s bank account by the last working day of the month if standard period end dates are used.
If a business does not make POA or the balancing payment in full and on time HMRC will:
If a business’s VAT liability falls below £2.3 million in the reference year HMRC will remove it from the arrangement six months later.
Alternative to payments on account
If making POA and submitting quarterly VAT returns does not suit a business, it can choose to make VAT returns and payments monthly.
Commentary
As may be seen, it is important to recognise the POA limit and to make payments on time. There is an obvious cash flow impact and plans should be put in place if the VAT turnover is nearing the threshold.