Which VAT Rates To Use And When
VAT is a tax that affects charities and arts organisations, and not just private business. This blog will look at the principles of VAT and how it directly affects arts charities, many of whom struggle when deciding which VAT rates to use for different goods and services.
VAT registered businesses charge output VAT on the products and services they supply to their customers, and they pay input VAT on the products and services they buy from their suppliers. If they have collected more VAT than they have paid, they must pay the difference to HMRC; if they’ve paid more than they’ve collected, they can claim the difference.
Basic Principles Of VAT
VAT is only chargeable when the supply is made in connection with a ‘business activity’; the goods and services must be provided as part of an exchange for value. E.g. a dance company may provide tickets for a performance in exchange for the free use of studio space. The tickets would qualify as a supply, and the appropriate VAT rates must be paid.
- Standard VAT Rate (20%) – charged on most goods and services
- Reduced VAT Rate (5%) – e.g. children’s car seats, domestic fuel/power
- Zero VAT Rate (0%) – applies to goods such as food and books
Some activities, however, are outside the scope of VAT. A typical example would be employees’ wages, or a donation where the donor receives nothing in return for their money.
An exempt supply is one where no VAT is charged to the customer, but neither can any VAT incurred in creating the product or service be claimed.
A number of activities that are relevant to many arts charities may fall into this exempt category:
Eligible bodies may be able to treat admission to museums, galleries, art exhibitions and theatrical, musical or choreographic performances as exempt from VAT.
Education and training
Educational services provided by an eligible body are also exempt from VAT. The education services cover any subject and any type of delivery such as lectures, seminars, workshops, online and distance learning.
If a charity fundraising event qualifies for exemption, the charity (or its trading subsidiary) does not have to account for VAT on the entrance fee income or for the sale of advertising space in brochures or programmes.
VAT Rates And Reliefs
Charities must pay VAT on all standard-rated or reduced-rated goods and services it buys from VAT-registered businesses, but may be entitled to VAT relief for specific items. To take advantage of these reliefs, the charity must provide its suppliers with eligibility declarations certifying that the conditions have been met for that relief (as well as evidence that it is a charity).
Charities can apply zero VAT rates to any advertising they purchase. The zero-rating covers advertisements on any subject, including staff recruitment. Zero VAT rates also apply when purchasing pre-printed collecting boxes, envelopes and appeal letters. The same is true of low-cost lapel stickers, emblems and badges that a charity gives in acknowledgement of a donation.
Aids for disabled people
Certain goods and services which charities buy for personal or domestic use by disabled people can be zero-rated.
The construction of buildings (and certain works to protected buildings) intended to be used solely for non-business purposes, or as a village hall or similar, can be zero-rated subject to certain criteria being met.
Museums and gallery entry
Museums and galleries offering free access are not regarded as being engaged in a business activity. Ordinarily it’s not possible to recover the VAT incurred on goods and services purchased to support non-business activities. Therefore, VAT incurred in connection with the free admission of the public is not normally recoverable. However, a scheme introduced in 2001 made this possible for eligible bodies.
Corporate sponsorship, unlike a donation, delivers significant benefits to the organisation making the payment. E.g. having its logo displayed at an event or receiving free/subsidised tickets to an event. Standard VAT rates will therefore apply.
Sale of art
Art galleries often sell art works, on commission, as agents of the artist. The VAT position depends on whether the artist or the gallery are VAT registered and whether the gallery is acting as a ‘disclosed’ or ‘undisclosed agent’.
Finally, it is worth noting that historical VAT can be claimed within four years of the due date of the VAT return for the prescribed accounting period in which the VAT became chargeable.
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