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Charity VAT: Do Charities Pay VAT? 5 Myths About Donations

Sep 20, 2021 | USA Accounting

Charity Tax: Do Charities Pay VAT? 5 Myths About Donations

COVID-19 caused the number of charity donations in the United Kingdom (UK) to rise quickly, and some people want to donate but wonder if charities are exempt from charity VAT. 

The number of charity donations rose between January and June 2020 to £5.4 billion in the UK. When compared to the same period in 2019, charity donations rose by £800 million. This is a staggering sum considering COVID-19 caused lockdowns and people to stay at home. 

There are a number of reasons why people want to give to charity. Sometimes, people donate part of their estate or income to support a cause or a museum they regularly visit, such as the Victoria and Albert Museum.

However, others might give a charity donation to cancer research or charities responsible for Homelessness, such as “Center Point” or the Salvations’ army.

Regardless of why you or your organization want to donate, some people have reservations that their donations might be getting taxed. But it’s not straightforward.

In this article, we look at some of the common misconceptions regarding charities, charity VAT, and VAT payments. This will ensure that you are equipped to plan any donations you envisage and properly understand the tax implications of your gift to a charity.

Also, check out Sterlinx Global if you need professional help with your VAT.

Charity Vat
Charity VAT: Do Charities Pay VAT? 5 Myths About Donations 4

What is a Charity Donation?

A charitable donation can be defined as a gift in cash or property that is made to a not-for-profit organization in order to help them achieve its goals and objectives. The donor does not get anything in return from such a gift.

However, charitable donations that are made to individuals are not tax-deductible as they are not registered with Her Majesty’s Revenues and Customs (HMRC).

In the UK, if you give £1, it will only cost you 80 cents as HMRC allows you to the remaining 20 percent from your personal income allowance.

There are some common misconceptions about VAT payments for charities and what activities are taxable by HMRC. Below are five myths about charity donations, VAT payments, and deductibles from personal income tax allowance.

Myth 1: Charity donations to individuals are tax-deductible 

There are cases when you may want to give to an individual due to reasons you and them care about. It is important to remember that such gifts are not tax-deductible as the individual is not registered with HMRC as a charity.

As a result, any donations or physical gifts cannot be deducted from your income tax bill. It is preferable to donate to an institution registered with HMRC as a charity to ensure that you enjoy the tax allowances and other benefits associated with charitable donations.

Myth 2: You can claim tax relief on UK charity donations even if you are a foreigner

If you donate to a UK charity and live in another country, you cannot claim any tax relief in the UK. The reason for this is straightforward. If you are not registered as a UK taxpayer with HMRC, they cannot make any deductions to your income.

Is it important to be registered with HMRC to claim back taxes on charity donations? Register for a personal tax account here if you want to make a charitable donation to a UK charity. This will ensure that you pay less tax to HMRC upon donating to charity.

Registered As A Uk Taxpayer
Charity VAT: Do Charities Pay VAT? 5 Myths About Donations 5

Myth 3: Charities do not need to register for charity VAT

This is a misconception amongst some people. All UK charities must register for VAT with HMRC if their taxable turnover or sales is more than £85,000.

After registering for a VAT account, charities are required to send a VAT return every three months. Some charities equally sign-up for VAT to claim back VAT on their supplies even if their taxable turnover is below the £85,000 threshold.

Myth 4: You cannot reclaim VAT on charitable activities outside the UK

If you are a charity that has activities or supplies goods and products outside the UK, you can disclose this to HMRC as a zero-rated business activity. For such activities, you will pay 0% VAT and HMRC allows you to reclaim back any associated costs.

For example, charities such as US AID with activities across Asia and Africa can reclaim back VAT on the cost associated with getting food supplies or other items to think tanks and individuals in these countries. 

Myth 5: Charity donations are not different for married couples

If you are a couple, your tax allowance on your income may increase if your donations are made through Gift Aid and claiming a married couple’s allowance.

To benefit from this, you and your spouse must fill out a Self-Assessment form and HMRC will use this to adjust any married couples’ allowance automatically.

In the UK, there are plenty of incentives to give as a married couple as you can deduct this from your personal allowance and equally benefit from higher savings on investments if you are giving the proceeds of dividends from equity, bonds, or commodities.

Gift Aid
Charity VAT: Do Charities Pay VAT? 5 Myths About Donations 6

Frequently Asked Questions

  • What is outside the scope of VAT for charities?

    HMRC does not require you to pay VAT on any income made from business activities. For example, if you are a charity that sends people on the streets to ask for donations, all these donations will not be taxed by HMRC.

  • Can Charities Charge VAT?

    Charities can charge VAT on sales of goods such as T-shirts, tote bags, or tickets. These business activities are not considered by HMRC to be zero-rated. This is considered a business activity, and so HMRC requires such charities to charge VAT.

  • Can Charities get VAT relief for their purchases?

    Charities can get reduced VAT for some purchases but they are required to pay VAT on all standard-rated goods and services in the UK. Charities pay 5% of fuel and electricity if they are used for charitable activities such as home shelters.

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