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HMRC internal manual

VAT Charities

Business and non-business: Charitable activities: What are the advantages to a charity in treating its activities as business?

For some charities it is an advantage if their activities can be regarded as business for VAT purposes, for example when recoverable input tax exceeds output tax, or when the charity’s customers are able to recover any VAT charged. But for other charities carrying out similar activities it may be a disadvantage. However we seek a consistent approach.

If a charge is made by a charity for goods or services then it is likely to bring them into the business area, even if the charge is nominal. This can be advantageous to some charities. This can be seen from the following example.

Example: A charity rescues stray animals from the street, feeds, shelters and nurses them back to health and then finds them suitable homes.

No charge is made to the new owners of the animals but many of them do make a donation to the charity. As this is a non-business activity, input tax on veterinary bills, animal food, kennels etc cannot be reclaimed.

The charity proposes to turn the activity into a business activity by introducing a nominal £1 charge per animal to new owners. We could not successfully argue that the supplies of animals were non-business on the grounds that they were supplies consistently made below cost as this provision relates only to welfare supplies made to distressed people (see VCHAR3540). We have to accept that the nominal charge creates a business activity. As the other work of the charity is already organised and is operating as a business there will be no restriction of input tax on the grounds of non-business activity if the proposed change takes place.

However, it does not follow that a nominal charge can automatically be seen as creating a business activity. It is only one of the indicators that might demonstrate a business activity. In different circumstances other factors may carry more weight. It is important to consider each case on its merits and to be wary of basing your decision too closely on what has happened in other cases