Charities and not-for-profit organisations in the UK must be vigilant regarding the treatment of value added tax (VAT) for non-business income. HM Revenue and Customs (HMRC) has issued a sector-wide communication clarifying the distinction between business and non-business activities for VAT recovery purposes.
The letter, sent to numerous charities with a turnover of up to £2m., emphasised the need to restrict VAT input claims related to non-business activities. HMRC highlighted that many smaller charities may be unaware of their non-business activities and must account for this when reclaiming input tax.
According to HMRC’s VAT guidance, VAT incurred on purchases can only be claimed as input tax if the goods or services are used for business purposes. For purchases serving both business and non-business (including private) purposes, only the VAT portion attributable to business use can be claimed. This process, known as “apportionment,” requires organisations to calculate the proportion of use attributable to their business operations.
To quote the letter:
“HMRC wants to support customers to get their tax right first time.
Please review our GOV.UK guidance to decide whether your activities are ‘business’ for VAT purposes.
- Section 4.6 details the difference between business and non-business activities and provides examples of non-business activities.
- Section 32 details how to apportion tax between business and non-business activities.
This can be a complex area of tax and you may want to ask an adviser for help.
If you have non-business activities and have overclaimed input tax please let us know.
You can find more information by reading HMRC VAT Notice 700/45 – this explains how to notify HMRC of errors on previous VAT returns. For more information on potential penalties, go to GOV.UK and search ‘HMRC compliance checks factsheets’, then choose ‘Penalties.’”
This communication serves as a reminder of the importance of accurate VAT reporting and the potential financial risks for organisations that misclassify their activities.
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If you have received a letter from HMRC and have any questions or think you may be affected, please contact our Indirect Tax team by completing the form below.