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HMRC internal manual

VAT Charities

Business and non-business: Charitable activities: Treatment of welfare services supplied below cost: Calculating the cost

The cost should be calculated to include all out of pocket expenses incurred by a charity in providing the welfare services. It should exclude the following:

  • All capital expenditure on buildings. Inclusion of these values would distort the cost of making the welfare supplies.
  • Notional charges for depreciation. These are not actual charges incurred.
  • The creation of financial reserves, contingency funds etc. These are not actual charges.
  • No account should be taken of what it would cost a commercial organisation to provide the same service. Therefore the fact that a charity may benefit from using unpaid volunteer labour means that the cost of providing the service is less. What is important is the actual cost not the commercial value.
  • Similarly donated goods for use in the provision of welfare services should not be included, as they cost nothing.