This note may be relevant to any charity which is carrying on any “business activity” (even if the turnover of the activity is below the VAT registration threshold or the activity is exempt from VAT). If you are in doubt as to whether you are carrying on a “business activity” please contact us.
Any person or entity which carries on a business activity may need to be aware of the VAT “reverse charge” rules. Put simply, these rules aim to discourage UK businesses from buying in services from a foreign supplier (who will normally not charge VAT) rather than from a UK supplier. The rules work by requiring any UK business (whether or not registered for VAT) which buys services VAT-free from a foreign supplier to account for the VAT which would have been suffered if the services had been bought from a UK supplier. If you are able to recover all your input tax the exercise achieves nothing but two equal and self-cancelling entries in your VAT account. But if you are unable to recover VAT (or unable to recover in full) the “reverse charge” results in real additional cost – the same real additional cost, in fact, as would have been suffered had the services been purchased from a UK supplier charging VAT.
It is important to appreciate that although you come within the “reverse charge” regime only if you are carrying on a business activity, the reverse charge is not restricted to supplies which are related to that activity. For example, if a charity carrying on a business buys (from a non-UK supplier) services which it uses wholly for its fund-raising activities or in fulfilling its charitable objects, the reverse charge may still apply to the services.
Happily, the reverse charge does not apply if the value of the services (taken together with any supplies which the charity makes in the course of its business) does not exceed the VAT registration limit (currently £81,000).
For more information about the reverse charge regime please contact us.
Like all our briefings, this note is not intended to be a comprehensive view of the law or HMRC practice and must not be regarded as a replacement for professional advice.