Charities and VAT: the essentials, and what's changed

VAT is one of the areas of charity finance that causes the most confusion — and the most costly mistakes. A common belief is that charities simply "don't pay VAT." They do. What charities get instead is a patchwork of specific reliefs and special treatment for certain income, sitting inside one of the most technical parts of the tax system. This is a plain-English guide to how VAT affects faith-based organisations, the reliefs worth knowing about, and the recent changes HMRC has made. It is general information, not advice — VAT is fact-specific, so take professional advice on your own position.

The biggest myth: "charities don't pay VAT"

Let's clear this up first, because so much flows from it. Charities are not exempt from VAT as a class. In general, a charity pays VAT on the things it buys just like any other organisation. What the system offers charities instead is two things:

• Specific reliefs on certain purchases (some things a charity buys are zero-rated or reduced-rated); and
• Special treatment of certain income (some of what a charity receives is outside VAT altogether, or exempt).

Getting this wrong — assuming a blanket exemption that doesn't exist — is one of the most expensive mistakes a faith organisation can make.

Business or non-business? The distinction everything hangs on

VAT only applies to business (economic) activity. So the first question is always: which of your activities count as "business"?

• Non-business income — genuine donations, grants and freewill offerings — is outside the scope of VAT entirely. Most of what a typical place of worship receives sits here.
• Business activity is, broadly, supplying goods or services for the purpose of obtaining income. HMRC applies a two-stage test: is there a supply for consideration, and is it made to obtain income? Crucially, an activity can still be "business" for VAT even though it furthers your charitable aims — charging for something doesn't stop being business just because you're a charity doing good.

Most faith organisations have a mix — donations (non-business) alongside, say, hall hire, a café, or event tickets (potentially business). That mix determines what VAT you must charge and what you can reclaim, so it's worth mapping properly.

When must you register for VAT?

You must register for VAT if your VAT-taxable turnover:

• exceeds £90,000 over any rolling 12-month period, or
• is expected to exceed £90,000 in the next 30 days alone.

Below that threshold you can register voluntarily (sometimes worthwhile, to reclaim VAT on purchases) — but you can't register if everything you supply is exempt. There are penalties for registering late, so keep an eye on the line as any trading grows. Once registered, you charge VAT where it's due, keep digital records and file returns under Making Tax Digital for VAT, and reclaim input VAT (subject to the business/exempt restrictions below).

Reliefs worth knowing — what you can buy VAT-free or reduced

Some purchases are cheaper for charities because they qualify for relief. You'll usually need to give the supplier a written eligibility declaration, so keep good records. The main ones:

Zero-rated (0%) when bought by a charity:

• Advertising placed in third-party media (press, radio, online ad space, etc.) — a valuable and often-missed relief. (It doesn't extend to everything, so check the boundaries.)
• Aids and equipment for disabled people.
• Certain medical and scientific equipment.
• Construction of a new building for a "relevant charitable" (non-business) or residential purpose — genuinely technical and easy to get wrong, so take advice before you rely on it.
• Talking books and equipment for blind and disabled people.

Reduced rate (5%):

• Fuel and power used for charitable non-business activities, and for qualifying residential accommodation (care homes, children's homes, hospices). For a place of worship, the non-business portion of your energy can qualify — a relief many don't claim.

How VAT treats the income you raise

If you do have business income, how it's treated varies — and this is where careful handling pays off:

• Fundraising events held by a charity are exempt (within HMRC's conditions on the type and number of events).
• Welfare services (care and support promoting people's physical or mental welfare) are generally exempt.
• Sale of donated goods (the classic charity shop) is zero-rated — which, unlike exempt income, still lets you reclaim related VAT.
• Admission charges, sponsorship with real benefits, and general trading are often standard-rated (20%).

One trap to note: exempt income can restrict how much VAT you reclaim (this is "partial exemption"). A charity with a mix of taxable and exempt activity can't simply reclaim all its input VAT — the sums need doing properly.

What's changed — the recent updates to know

VAT rules move, and two recent changes matter directly to faith-based organisations.

VAT on private school fees (from 1 January 2025)

Since 1 January 2025, education, vocational training and boarding provided by private schools for a charge are standard-rated at 20% VAT. This applies to all private schools regardless of faith or charitable status — so faith schools and fee-charging religious-order schools are directly affected. Anti-forestalling rules mean fees prepaid from 29 July 2024 for terms starting on or after 1 January 2025 can also be caught. Affected schools must register for VAT (the same £90,000 threshold) and can reclaim some related input VAT. If this is your organisation, get specialist advice early — this is a significant change to plan around, not a footnote (see faith schools and religious orders).

New VAT relief for business donations of goods (from 1 April 2026)

From 1 April 2026, businesses that donate eligible goods to a charity — for onward donation to people in need, or for use in the charity's own services — will no longer have to account for VAT on them. Introduced in Finance Bill 2025-26, the relief comes with per-item value limits (higher for items such as technology and household appliances), and excludes goods subject to excise duty. It's good news for foodbanks, furniture projects and clothing banks that rely on donated surplus stock, as it removes a VAT barrier that discouraged businesses from giving (this connects to the wider faith response to poverty and hardship).

Wider charity tax changes (April 2026)

Alongside VAT, Finance Bill 2025-26 brings further changes from April 2026 to charity tax rules — covering tainted donations, approved charitable investments and attributable income. These affect reliefs and compliance rather than day-to-day VAT, but they're worth being aware of as part of the wider picture.

Practical steps for your organisation

• Don't assume you're exempt — check how VAT actually applies to what you do.
• Map your income into non-business / business, and taxable / exempt — it drives everything.
• Watch the £90,000 line if trading (hall hire, cafés, events) is growing.
• Claim the reliefs you're entitled to — especially advertising and the 5% rate on non-business fuel and power — and give suppliers the right declarations.
• Faith schools: if you haven't already acted on the January 2025 change, treat it as a priority.
• Keep digital records and file under Making Tax Digital.
• Get advice for anything non-trivial. VAT errors — under- or over-charging, or wrongly reclaiming — are expensive to unwind.

The bottom line

VAT is rarely simple for a charity, and "we're a charity, so we don't pay it" is the myth that causes the most trouble. The reality is more nuanced: you pay VAT like anyone else, but with specific reliefs to claim and particular treatment for the income you raise — and the rules have been shifting, from the taxing of private school fees to new relief on donated goods. Understand where your organisation sits, claim what you're entitled to, keep an eye on the threshold, and get advice on the grey areas. Done well, it protects both your money and your compliance.

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This article is general information and reflection, not advice. VAT is complex and highly fact-specific, and rates, thresholds and rules change — always check the current HMRC guidance and take professional advice on your own circumstances. For help with VAT, Gift Aid and the wider finances of your organisation, get in touch.

Sources verified (July 2026):

• HMRC — How VAT affects charities (VAT Notice 701/1) — https://www.gov.uk/guidance/how-vat-affects-charities-notice-7011
• GOV.UK — VAT registration thresholds (£90,000) — https://www.gov.uk/vat-registration-thresholds
• HMRC — Check if you must register for VAT if you receive private school fees — https://www.gov.uk/guidance/check-if-you-must-register-for-vat-if-you-receive-private-school-fees
• HMRC — VAT relief for business donations of goods to charities (from 1 April 2026, Finance Bill 2025-26) — https://www.gov.uk/government/publications/removing-vat-on-donations-of-eligible-goods-from-businesses-to-charities/vat-relief-for-business-donations-on-goods-to-charities
• GOV.UK — Changes to charity tax rules (Finance Bill 2025-26, from April 2026) — https://www.gov.uk/government/publications/changes-to-charity-tax-rules/legislation-to-introduce-changes-to-charity-tax-rules