VAT and charities

Charities do not get special treatment as far as VAT is concerned. However, they do benefit from a number of concessions within the legislation, which either means they do not charge VAT on some sources of income or, equally important, they do not pay VAT on certain expenses. The best reference to identify these concessions is VAT Notice 701/58.

Zero-rating for advertising

An important concession is that supplies of advertising to a charity have always been zero-rated, irrespective of the medium of advertising – radio, newspaper, TV, internet. But there is a quirk within the legislation that muddies the waters, as zero-rating only applies to a medium if there is direct “communication with the public.” In other words, advertising that targets a private individual is excluded from zero-rating, eg a mail shot sent through the post or campaign sent via individual email accounts.

What has changed?

After a three-year campaign by the Charity Tax Group, HMRC issued Revenue and Customs Brief 13/2020, which has extended the scope for zero-rating on charity advertising expenses where digital advertising is involved.

HMRC now accepts that most internet search browsing advertisements will qualify for zero-rating on the basis that the general public are being targeted rather than private individuals.

Exclusions

It is not all good news for charities, as there are some supplies that will still be standard rated. For example, the R&C Brief confirms at para 4.2 that advertisements sent to email addresses that are targeted at the individual recipient are excluded.

The same outcome applies to ‘natural hits’ generated by the listing of a charity in the result of a search engine. This makes sense because this happens automatically regardless of any action taken by or on behalf of the charity, ie there is no supply of advertising taking place.

Social media and subscription website accounts

When an individual logs into their personal page (for example on Facebook), the website uses tools to display advertisements to them when they are signed in. The content will be related to the individual’s known likes, dislikes, interests or location, based on the information the website has collected about them.

These supplies of advertising will continue to be standard rated as they are targeted to individuals and not to the general public. The Charity Tax Group consider that these supplies should also be zero-rated.

Past errors

A business that has incorrectly standard-rated past supplies of advertising can adjust errors going back four years in the usual way. The VAT overcharged by advertising agencies and suppliers must be paid back to the charity in accordance with the requirements of ‘unjust enrichment’ (see VAT notice 700/45).

Continued learning

The internet revolution has changed so many things and it is often a case of trying to take the digital aspect out of the equation and see what is actually being supplied. The VAT outcome then becomes more logical.

Digital supplies and VAT will continue to evolve in the years ahead – HMRC gave an honest comment in the R&C Brief about the learning curve we all face in the online world: “HMRC will continue to engage with external stakeholders to ensure we understand the VAT treatment of changing advertising practices.”