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VAT rules for charities: We know it’s taxing

As we approach the end of the financial year, AMRC has been receiving a lot of questions from members on how VAT applies to research funding. This can certainly be confusing, especially if you are new to the VAT system. Here AMRC’s data officer Suzanne Rix, gives an overview of the three main areas of VAT rules that apply to health and medical research charities.

1. Charity funded research

 ‘Charity funded research is out of scope of VAT’, is a phrase widely used in guidance about charities and VAT. But what does this really mean?

As we know VAT is a tax applied to business transactions, in other words transactions where one party is supplying another party goods or services in return for  money. Paying for research - which the HM Revenue & Customs (HMRC) defines as “original investigation undertaken in order to enhance knowledge and understanding” - can be seen as a business transaction in some instances. This is known as business research and occurs when the organisation paying for the research is receiving the direct benefit from that research, for example if the organisation receives exclusive access to the results.

When research is funded by the public or charitable sectors for the wider public benefit, the funder is not seen as directly receiving a service in return. As such, this cannot be classed as a business transaction and so it falls outside the scope of the VAT regulations and VAT payment is not required. This is the case in the majority of research funded by AMRC members.

Where research is collaborative and one main research group receives money from the funding body and then distributes it to collaborators, the transaction is also out of the scope of VAT, as long as the collaborative partners are not businesses.

This ‘out of scope’ classification applies solely to the transaction where grant money is transferred from the funding body to the research body. Anything that the grant money is used for is not covered. Once the research team receive their grant money and start spending it, whether or not they need to pay VAT on each transaction is covered by a different section of VAT law, which will be covered below in section 2.

If you are asked to pay VAT on a standard non-business research project funds transfer, you should refer the finance department to the HMRC information sheet, stating the fact that the activity is research that is funded for the public good and that information that comes from it will be made freely available to others. This satisfies HMRC’s definition of non-business research, and therefore no VAT would be owed.

2. Charity funded equipment for medical uses

Many goods bought for medical uses using charitable money are eligible for VAT exemption. This covers goods bought by the research team as part of a charitable grant, goods bought using standalone grants (e.g. equipment grants) and equipment bought directly by a charity for donation to a research team. A full rundown of the rules can be found in this HMRC notice. In brief, the following criteria must be met:

  • The goods or services must be purchased using charitable funds, by OR for an eligible body.
  • Eligible bodies include NHS trusts, universities and other not-for-profit research institutions, but not charities unless the charity is directly responsible for the care or medical or surgical treatment of chronically sick or disabled people.
  • The goods must be medical, scientific, computer, video, sterilising, laboratory or refrigeration equipment (full details of each category can be found in the notice).
  • The goods must be used mainly for medical research, training, diagnosis or treatment.
  • The money must all come from charitable funds or voluntary donations. If the grant recipient is contributing money other than that from a charitable grant or voluntary donation, VAT must be paid in full.

If you are asked as part of a grant costing to contribute money towards the VAT costs for equipment you should liaise with the applicant to ensure they have taken into account the VAT exemptions available. If the equipment falls outside the possible exemptions, then whether or not you cover the VAT as part of the grant costing is down to your individual charity’s policy.

3. VAT on goods and services used by your own charity

Your charity’s own income and non-research expenditure is affected by VAT in a variety of ways.

  • As a charity, you will be eligible for VAT relief on some goods and services regardless of whether you are registered for VAT.
  • Some of your income may be liable to VAT if you are VAT registered.
  • You may be able to reclaim some of the VAT you are charged if you are VAT registered.

As these rules are complex and dependent on individual charity’s VAT status, AMRC cannot provide a full breakdown of them here. HMRC have however produced an overview notice on this topic and your finance department should have a full understanding of these rules and will be able to offer advice.

Small charities are unlikely to be VAT registered as this is only mandatory if the value of VAT eligible goods and services you sell is over a high monetary threshold (£82,000 in 2015/16). If you are not VAT registered you only need to worry about VAT for goods and services bought by your own charity in terms of what exemptions you might be eligible to.

VAT exemptions available to charities include:

  • Some advertising costs
  • Some goods connected with collecting donations
  • Some aids for the disabled
  • Equipment for producing talking books or newspapers for the visually impaired
  • Charities involved directly in medical research can buy drugs and chemicals at the zero rate
  • Charities involved directly in medical research can buy medicinal products (medicines or ingredients for medicines) at the zero rate but only when testing the efficacy of the product.

Further information on the exemptions available can be found in the HMRC’s general charities notice or HMRC’s notice specifically covering the advertising and donations exemptions.

If you are asked to pay VAT on goods for your charity’s own use, make sure you are aware of your VAT status and the exemptions available.

Where to look for further advice

If the information on our website or in the HMRC documents linked above doesn’t answer your query,

the HMRC run a charity helpline for VAT queries on 0300 123 1073. Alternately they have on online form to submit queries to them about charities and VAT.  

The Charity Tax Group represents over 400 charities on tax matters.