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HMRC internal manual

VAT Charities

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

The main point on which you will need to be satisfied is that there is deliberate policy to subsidise welfare supplies by at least 15%. The subsidy should not be achieved as a result of circumstance or unintentionally.

For example, a charity may plan to break even on its welfare supplies during any year and sets its charges for its supplies accordingly. During the course of the year it may provide services to distressed people who are unable to pay the full amount. Rather than deny them the benefits of the service available, the charity may accept payment on the basis of what the person can afford to pay. This could lead to the income received amounting to less than 85% of the cost of providing the service. This would not qualify as non-business as it was not the intention of the charity to supply welfare services to distressed people at more that 15% below cost at the outset.

The converse situation may also arise whereby a charity may plan to subsidise welfare services by more than 15% but finds that donations or similar excess payments reduce the level of subsidy needed. Providing that the donations or excess payments are freely given, you can ignore these amounts when determining if the supply is subsidised by at least 15%. In this situation the service would still qualify as non-business. The important point that you should bear in mind is that the value of the supply is determined by the charge made for the welfare services and not the total income received by the charity.