VAT is one of the most misunderstood taxes for UK charities. There is no blanket exemption. Charities follow the normal VAT rules, with specific reliefs on certain purchases and activities. Getting the analysis wrong in either direction, either assuming nothing is taxable or missing the reliefs you are entitled to, costs money and creates compliance risk. This guide covers the complete picture.
The short answer: charities do pay VAT, with specific reliefs
Charities are not exempt from VAT. They follow standard VAT rules and must register and charge VAT if their taxable turnover exceeds the registration threshold. The difference is that certain purchases attract zero or reduced rates, certain fundraising events are exempt, and the business vs non-business split can limit both VAT liability and recovery. Specific reliefs must be claimed; they do not apply automatically.
The authoritative source for the full picture is HMRC Notice 701/1: How VAT affects charities. The gov.uk VAT for charities overview provides the entry-level summary.
When a charity must register for VAT
The VAT registration threshold for charities is the same as for any other organisation: £90,000 of taxable turnover in a rolling 12-month period. Once that threshold is crossed, or you have reasonable grounds to expect it will be crossed in the next 30 days, registration is compulsory. Taxable turnover counts standard-rated and zero-rated supplies; it does not count exempt supplies or income that falls outside the scope of VAT entirely (which is where the business vs non-business question becomes critical).
Voluntary registration is permitted below the threshold if your charity makes any taxable supplies. This can be worthwhile if your main costs carry input VAT that you would otherwise be unable to recover.
| Situation | Registration position |
|---|---|
| Taxable turnover below £90,000 in the last 12 months, not expected to cross in next 30 days | Registration not required; voluntary registration possible |
| Taxable turnover exceeded £90,000 in last 12 months | Compulsory registration; notify HMRC within 30 days of the month end when the threshold was crossed |
| Taxable turnover will exceed £90,000 in the next 30 days alone | Compulsory registration; notify HMRC by the end of those 30 days |
| All supplies are exempt or non-business | Cannot register; input VAT is an irrecoverable cost |
Charities with both taxable and exempt income may be eligible to register but will face partial exemption restrictions on input tax recovery (see the partial exemption section below).
Reliefs on purchases: zero-rated advertising, reduced-rate fuel and power, eligibility declarations
Several categories of purchase attract a lower VAT rate when supplied to a charity. The relief applies to the supply to your charity; your suppliers charge the lower rate once you provide the required eligibility declaration confirming your charitable status and qualifying use. These reliefs reduce the cost of qualifying expenditure regardless of whether your charity is VAT-registered.
Zero-rated advertising
Advertising services supplied to a charity for the purpose of raising awareness of the charity's work, soliciting donations, or recruiting volunteers are zero-rated. This covers media advertising, direct mail for fundraising, and similar promotional activity. The supplier must receive a declaration from the charity confirming it is a charity and that the advertising meets the qualifying description. Advertising for commercial activity does not qualify.
Reduced-rate fuel and power (5%)
Fuel and power supplied for qualifying non-business or residential use attracts the 5% reduced rate rather than the standard 20%. For charities, this can cover heating and power used for non-business charitable activities. You must provide your supplier with a certificate of eligibility specifying the qualifying percentage of use. HMRC Notice 701/1 sets out the certificate requirements and the conditions for qualifying use in full.
Other reliefs on eligibility declaration
Additional zero or reduced rates exist for certain categories of purchase including construction of new charitable buildings, certain disability aids, medical equipment, and goods or services connected with the care of disabled people. The conditions for each relief are set out in Notice 701/1 and associated HMRC notices. This guide does not describe those reliefs in detail because the eligibility conditions vary by category and must be checked against the live HMRC guidance before a declaration is made. Making an incorrect declaration to obtain a lower rate creates a VAT debt for your supplier and potentially for your charity.
Summary of key purchase reliefs
| Purchase category | Rate | Key condition |
|---|---|---|
| Advertising for fundraising, awareness-raising, volunteer recruitment | 0% | Eligibility declaration to supplier; must not be commercial advertising |
| Fuel and power for qualifying non-business/residential use | 5% | Certificate of eligibility to supplier; qualifying-use percentage stated |
| New charitable buildings (qualifying construction services) | 0% (with conditions) | See Notice 701/1; certificate of eligibility required |
| Disability aids, medical equipment (qualifying categories) | 0% (with conditions) | Specific HMRC notices per category; eligibility declaration required |
Fundraising events: the exemption and the 15-event limit
Income from a one-off qualifying fundraising event is exempt from VAT under the fundraising events exemption in Notice 701/1. A qualifying event is one that is organised by a charity (or its trading subsidiary) primarily to raise money, where the primary aim is fundraising rather than commercial trading, and where the income would not normally be exempt under any other provision.
The exemption is limited to 15 events of the same kind per location per financial year. Once a 16th event of the same kind in the same location is held, all events of that kind at that location in the year lose their exemption retroactively. Planning the event calendar to stay within the limit is important; it is not enough to stay under 15 across all locations if the same kind of event recurs at the same venue.
Exemption means no VAT is charged on the income. It also means input VAT on costs directly related to the exempt event is not recoverable. This is the trade-off: the exemption reduces the headline VAT bill but it comes with input tax restriction.
Business vs non-business activities: the apportionment trap
For many charities, this is where VAT gets complicated. VAT applies only to business activities. If your charity has income that falls outside the scope of VAT entirely because it is non-business, that income is excluded from your taxable turnover for registration purposes, and any VAT incurred on costs that relate only to non-business activity is not recoverable.
HMRC defines a business activity as one that involves making supplies for a consideration and involves some form of economic activity. Activities that charities commonly carry out that may be non-business include grant-funded charitable activities with no supply to the funder, certain public-benefit educational activities, and the direct pursuit of charitable objects without any exchange of supplies. Activities that are typically business include selling goods or services, running a charity shop, admissions-charging events, and commercial contracts.
When a charity has a mix, costs that serve both types of activity must be apportioned. HMRC accepts a range of apportionment methods but requires that the method be fair and reasonable. The method must be agreed with HMRC if there is any doubt, and it must be applied consistently.
| Type of activity | VAT position | Input tax recovery |
|---|---|---|
| Business taxable (standard or zero-rated supplies) | VAT chargeable; counts toward registration threshold | Full recovery on directly related costs |
| Business exempt (e.g. qualifying fundraising events) | No VAT charged; counts toward partial exemption calculation | Subject to partial exemption restriction |
| Non-business (outside VAT scope) | Outside the scope of VAT; does not count toward threshold | No recovery on directly related costs |
The apportionment trap is the assumption that because most of a charity's work is charitable and mission-driven, most of its costs are outside the scope of VAT. That assumption can break down quickly when the charity also runs commercial activities, and it can leave a registered charity with a partial exemption problem layered on top of the business/non-business split.
Partial exemption: the second trap
Partial exemption arises when a VAT-registered charity makes both taxable supplies (standard or zero-rated) and exempt supplies. Input VAT on costs that relate directly to taxable supplies is recoverable in full. Input VAT on costs that relate directly to exempt supplies is not recoverable. Input VAT on overhead costs that cannot be directly attributed must be apportioned between taxable and exempt activities using a partial exemption method.
HMRC's default method is a turnover-based calculation: the proportion of input tax recoverable on overheads equals the proportion of taxable turnover to total taxable plus exempt turnover. Charities can agree a special method with HMRC if a different basis gives a fairer result, which is often the case where income mix does not reflect how overhead costs are actually used.
Partial exemption also interacts with the business vs non-business split: non-business income is excluded from the partial exemption calculation entirely, which can make the exempt proportion appear smaller or larger depending on the structure of the charity's activities.
HMRC's partial exemption guidance is at Notice 701/1 and the detailed VAT partial exemption notice (Notice 706). There are de minimis rules under which a charity with only a small amount of exempt input tax may be able to recover it in full; the precise conditions and figures are set out in HMRC Notice 706 and should be checked against the current live guidance before being relied upon.
For most charities with a significant mix of taxable and exempt income, a special partial exemption method negotiated with HMRC delivers a fairer outcome than the default turnover method. Agreeing the method requires a written application and HMRC approval. Getting specialist advice on partial exemption structuring is one of the highest-value VAT interventions available to a mid-size charity.
Reclaiming VAT: when a charity can and cannot
A charity that is not VAT-registered cannot reclaim any input VAT at all. VAT on purchases is simply a cost. This makes the registration decision significant for charities with large VATable cost bases even when their income is below the threshold.
A VAT-registered charity can reclaim input VAT on costs that relate to its taxable business activities, subject to the business/non-business and partial exemption restrictions described above. Input VAT directly attributable to exempt activities, or to non-business activities, is not recoverable.
Certain costs have specific input tax recovery rules regardless of what they relate to: entertaining costs (other than staff entertainment) and cars (other than those used exclusively for business) carry permanent blocks on input tax recovery.
There is no general VAT refund scheme for charities in the UK equivalent to the Disabled Facilities Grant or similar mechanisms in some other jurisdictions. The refund scheme that does exist is a narrow one applying to specific categories of palliative care charities. For most charities, unrecoverable input VAT is an irrecoverable cost. The decision whether to register, and what method to use for apportionment, directly determines how much of that cost can be recovered.
See also: Can charities claim back VAT? and Do charities pay VAT? for focused answers to those specific questions.
Business rates relief on charitable premises
Business rates relief is a separate relief from VAT but is worth understanding alongside the VAT picture because both affect the cost of charitable premises. Charitable rate relief gives up to 80% off the business rates bill on property used wholly or mainly for charitable purposes. The relief is mandatory at the 80% level; the local council has discretion to grant additional relief to bring the reduction to 100%.
Charitable rate relief cannot be combined with small business rate relief. It applies to property used for charitable purposes, which includes charity shops. You apply to the local billing authority (your council). The qualifying test is use of the property, not ownership.
Note: this relief is available to registered charities in England and Wales. A community interest company (CIC) is not a charity and does not qualify for charitable rate relief or any other charity-specific VAT relief. If your organisation is a CIC, see our CIC guidance for the reliefs that do apply. For reference: CICs are not charities and receive no charity tax reliefs.
Trading subsidiaries and VAT
When a charity routes taxable commercial trading through a separate trading subsidiary (typically to protect the charity from tax on non-primary-purpose trading profits), the subsidiary is a separate legal entity for VAT purposes. The subsidiary must register for VAT in its own right if its taxable turnover exceeds the threshold. Supplies between the subsidiary and the parent charity may themselves be taxable at the standard rate.
In some cases, a charity and its wholly owned subsidiary can form a VAT group, which means supplies between the two members are disregarded for VAT purposes and a single VAT return is submitted for the group. VAT grouping can simplify administration and reduce the VAT cost of intra-group transactions, but it also means the group is jointly and severally liable for the group's VAT debts. Whether grouping is beneficial depends on the specific mix of taxable and exempt activities in the subsidiary and the parent. HMRC Notice 700/2 covers VAT grouping in detail.
When to get help
The VAT analysis for a charity with any complexity in its income streams is rarely straightforward. The points at which specialist input delivers the most value are:
- Approaching the registration threshold. The decision whether to register voluntarily, and when compulsory registration triggers, has long-term consequences for how you charge for services and what input tax you can recover.
- Setting up a partial exemption method. The default turnover method is often unfair to charities. A special method agreed with HMRC can materially increase the recoverable proportion of overhead input tax.
- Major capital projects. New buildings, significant refurbishments, and property transactions each carry specific VAT rules. Getting the analysis wrong at the point of transaction is expensive and often difficult to correct.
- Setting up a trading subsidiary. Whether to VAT-group the subsidiary and the parent, how to structure intra-group supplies, and how to handle the subsidiary's own partial exemption position all need upfront analysis.
- HMRC enquiry or assessment. If HMRC has raised a query about your charity's VAT position, early specialist involvement reduces the risk of unnecessary assessments and penalties.
Our charity VAT advisory service covers registration, partial exemption, capital goods scheme planning and HMRC correspondence. Scotland and Northern Ireland have different devolved tax frameworks for rates reliefs; this guide applies to England and Wales.
Frequently asked questions
Do charities pay VAT on purchases?
Yes, unless the specific purchase qualifies for a zero or reduced rate under a charity relief (such as zero-rated advertising for fundraising or 5% reduced rate fuel and power for non-business use). Most purchases incur VAT at the standard rate. If the charity is not VAT-registered, or if the cost relates to exempt or non-business activities, the VAT on those purchases cannot be reclaimed and is a permanent cost.
Do charities charge VAT on what they sell?
It depends on the supply. If the charity is VAT-registered and the supply is taxable (standard or zero-rated), yes. If the supply is exempt (for example, certain qualifying fundraising events) or outside the scope of VAT (non-business activities), no VAT is charged. Charities below the registration threshold do not charge VAT regardless of the nature of the supply.
When must a charity register for VAT?
When taxable turnover exceeds £90,000 in a rolling 12-month period, or you have reasonable grounds to believe it will exceed £90,000 in the next 30 days. Taxable turnover includes standard-rated and zero-rated supplies; it excludes exempt supplies and non-business income.
Can a charity claim VAT back?
Only if it is VAT-registered, and only on input VAT that relates to taxable business activities. Input VAT on exempt activities is blocked by partial exemption rules; input VAT on non-business activities is outside the scope of recovery entirely. Unregistered charities cannot reclaim any input VAT. See Can charities claim back VAT? for a full explanation.
Is charity advertising VAT-free?
Advertising supplied to a charity for fundraising, raising awareness of the charity's work, or recruiting volunteers is zero-rated. The supplier must receive an eligibility declaration from the charity. Advertising for commercial purposes does not qualify for zero-rating.
What is the fundraising events exemption?
Income from a qualifying one-off fundraising event organised by a charity is exempt from VAT. The event must be primarily for fundraising. Exemption means no VAT is charged on ticket sales and related income, but it also means input VAT on costs directly attributable to the event is not recoverable.
How many fundraising events can be exempt?
Up to 15 events of the same kind per location per financial year. A 16th event of the same kind at the same location causes all events of that kind at that location in the year to lose their exemption. Planning the event calendar carefully is essential.
What are business and non-business activities?
Business activities involve making supplies (goods or services) in exchange for consideration, as part of an economic activity. Non-business activities are those that fall outside this definition, such as grant-funded charitable work where there is no supply to the funder. Only business activities are within the scope of VAT. Non-business income does not count toward the registration threshold, and input VAT on non-business costs is not recoverable.
Do charities pay VAT on rent?
Commercial property rental is normally exempt from VAT. If a landlord has opted to tax the property, the rent will be standard-rated and your charity will pay VAT on it. If your charity is VAT-registered and uses the property for taxable activities, it may be able to reclaim that input VAT, subject to partial exemption restrictions. Landlords generally cannot opt to tax property they let to a charity that will use it for a relevant charitable purpose, which is a specific exception to the option to tax rules. The full conditions are in Notice 701/1.
Do charities get business rates relief?
Yes. Charitable rate relief of up to 80% applies to property used wholly or mainly for charitable purposes. The local council may grant additional discretionary relief up to 100%. You apply to your billing authority. This relief cannot be combined with small business rate relief.
Can a CIC use charity VAT reliefs?
No. A community interest company is not a charity. CICs receive no charity tax reliefs, cannot claim Gift Aid on donations, and do not qualify for charitable rate relief. Zero-rated advertising and other charity-specific VAT reliefs require the recipient to be a charity; a CIC does not meet that condition. See our CIC page for the tax position that does apply.