HMRC reminds charities of VAT treatment for non-business income

The letter was sent to a large number of charities, and highlighted that they may need to restrict their input tax in respect of non-business activities. HMRC said that there are a high number of smaller charities that are not aware that they have non-business activities and are required to take that into account when reclaiming input tax.

According to HMRC’s VAT guidance, a charity cannot treat VAT incurred on purchases of goods and services as input tax unless these are intended to be used for the purposes of its business. If the charity buys services or goods for both business and non-business, including private purposes, it should treat only part of the VAT as input tax. The charity must work out what proportion of the use of the goods or services is for business purposes. This calculation is called apportionment.

Tax expert Bryn Reynolds at Pinsent Masons said: “The line between business and non-business is rarely a clear one. Following the Wakefield College Court of Appeal case, HMRC introduced a two-stage test in a Revenue and Customs Brief known as RCB 10/22, which complicated matters further by distinguishing between activities undertaken for income or remuneration as opposed to consideration.”

In the Wakefield College case, the Court of Appeal ruled that income from students who are partly subsidised and pay a small additional fee for courses amounted to business activity. The court’s two-stage test for determining what amounts to business activity focuses on whether there is a “consideration”, or some value given, to the supplier in return for the goods or services; and whether the supply is made for “remuneration”, which means the supply must be made for the purpose of “obtaining income therefrom on a continuing basis”.

“Taxpayers, particularly those in the charitable, not-for-profit and voluntary sectors, should carefully consider whether they are undertaking business or non-business activities and whether they have suitably apportioned their input tax. Remediation with HMRC in respect of historic periods can be complex and the impact of both interest and penalties should be carefully considered in any error corrections submitted,” Reynolds said.

HMRC acknowledged in its letter that “this can be a complex area of tax”. It suggested that charities “may want to ask an adviser for help”.

In its letter, HMRC also asked charities that have non-business activities and have overclaimed input tax to notify HMRC of errors on previous VAT returns, and pointed to information on potential penalties.