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HMRC internal manual

VAT Charities

HM Revenue & Customs
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Business and non-business: Charitable activities: Treatment of welfare services supplied below cost: What if a charity is uncertain whether it may satisfy the 15% subsidy test?

There may be occasions when a charity cannot know in advance that its welfare supplies will be subsidised by at least 15%. Consider the following situation:

A charity operates a hostel for the homeless. Initially the charity expects the hostel to break even. However, this expectation was based on the assumption that the hostel would always be fully occupied. It became apparent that this was not going to happen. Accordingly in weeks when the hostel was not fully occupied, the charity was subsidising the cost of the accommodation. Occupancy rates fluctuated weekly and it was difficult for the charity to establish at any one time if its supplies were subsidised by 15% or not.

In these circumstances we would suggest that at the start of its financial year the charity should calculate, by reference to its projected income and expenditure figures, whether or not it expected to break even, or to what extent it expected to subsidise the operation. The outcome of this calculation would enable the charity to decide if it could expect to be engaged in a business or non-business activity for the coming year. We would accept that the outcome would be valid for the whole financial year.

Of course this does not need to be the only basis on which to establish the business position where accurate information is not to hand. You will need to agree the best method in the light of specific circumstances. It could, for example, be equally valid to base the decision on figures obtained for the most recent year of operations. The important point on which you must be satisfied is that there is an intention to subsidise activities by at least 15% and that this subsidy has not arisen by accident.