Competition. Cost-cutting. Return on capital employed. These are words and phrases that may not naturally be the first concern to a charitable or not-for-profit organisation (NPOs). By their nature these are organisations where making an impact for a group of people or a cause is more important than turning a large profit. However, by getting more competitive on costs and making every single penny go as far as it can go, a charity has more resources to focus on the primary goal of contributing beyond itself and making a difference.
We want to enable businesses and charitable organisations to be more intentional and more focussed on their own work. With that message in mind, in this article we are clearing up three common misconceptions about VAT that charities and NPOs should know about in order to minimise overhead costs and maximise their impact, but stay on the good side of the law:
1: Unfortunately, not every “charity” is eligible for VAT relief on utility bills
Just because you are a registered charity unfortunately does not mean that you are necessarily eligible for blanket VAT relief on energy bills. The reduced rate only applies to so-called qualifying uses:
Utilities supplied for use in a dwelling or certain other types of residential accommodation, such as
- children’s homes
- care homes for the elderly or disabled
Utility supplies under a certain threshold
- 1,000 kWh/month of electricity
- 4,397 kWh/month of gas
- 2300 litres of gas oil
Utilities supplied for use in charitable non-business activities, for example
- free day care for the disabled
For charities to determine whether some of their activities are deemed business or non-business they must look at whether they satisfy specific rules and regulations of UK VAT law. Although activities may be carried out for the good of the community it could still be regarded as a business activity from a VAT perspective. A good example for a business activity are high street charity shops that sell goods to raise money for charitable causes.
Please be aware that if you state that you are fully eligible for VAT relief when contracting your energy, your supplier will not necessarily double check this for you or warn you of the consequences of falsely claiming VAT relief for a non qualifying use.
Utilities supplied for a mixed use
Some charities may be partly qualifying though, if a qualifying percentage of 60% of their use fall under one of the first two categories. In this case you should provide your supplier with a certificate declaring the percentage of the supply that will be used for a qualifying purpose.
2: It’s never too late to act
So you fall into one of the categories above but you were not aware you may be eligible to pay lower rates, what now? Too late? Too bad?
Not necessarily. If you have been paying a higher rate of VAT and are a charity you are able to claim back a rebate on the amounts paid. Under current HMRC rules, companies can claim a rebate covering a maximum four year period.
3: Reduced rates apply to both VAT and Climate Change Levy
As a registered charity, you should be paying 5% VAT and there should be no Climate Change Levy on your utilities. You will be able to assess directly from your most recent energy billing the breakdown of your charges and whether or not you have been paying above the odds on both VAT charges and the Climate Change Levy. We are also able to chase this up on your behalf.
A helpful resource to figure out if your activities are considered non-business is the HMRC “Business test”. If you believe you fall into one of the above brackets get in contact and we will be able to guide you through the process of securing a better deal on your utilities.