HMRC has made changes to two key VAT Notices for the charity sector.
VAT Notice 701/1 – ‘How VAT affects charities’, has seen the business test section updated to reflect a two stage test to bring it into line with a recent policy change. It makes clear that although an organisation may be run on a not-for-profit basis it could still be regarded as a business for VAT purposes if there is a direct link between the services received and the payment made.
This is ascertained through a two stage test:
• Stage 1: The activity results in a supply of goods or services for consideration.
• Stage 2: The supply is made for the purpose of obtaining income (remuneration).
As a result of this change in approach certain charities may now be considered to be carrying on a business for VAT purposes, with childcare charities providing nursery or creche facilities being one area that could be caught.
VAT Notice 701/58 – ‘Goods or services supplied to charities’, has also been updated to make clear when zero rate VAT can be applied for advertisements and goods used for the collection of donations.