VAT: the basics

VAT - VAT: the basics - Cultural exemption - Other VAT issues - VAT Q&A

What is VAT?

VAT is a tax on the sale of goods and services. You must register for VAT if your taxable turnover exceeds £79,000 over any 12 month period - not just over a financial year.

If you are registered for VAT, you must charge VAT on your taxable activities (output tax) but you can also recover VAT on purchases related to those activities (input tax).

If you are not registered for VAT, you do not charge VAT but you cannot recover any VAT either.

What are the VAT rates?

There are three rates of VAT for different goods and services:

  • Standard rate – 20%
  • Reduced rate – 5%
  • Zero rate – 0%

These rates may only apply if certain conditions are met, or in particular circumstances.

A more detailed list of VAT rates on various goods and services and when they apply is available here.
 
When should an organisation register for VAT?

Your organisation must be undertaking business activities. If it is not undertaking business activities then it is not eligible to register for VAT.

What are “business activities” in the context of a museum? 
 
Supplying goods or services in exchange for payment for mutual benefit. If there is no mutual benefit, then it is a “non-business” activity.

Examples of business activities:

  • Charging admission fees
  • Selling merchandise (gift shop)
  • Selling refreshments (café / tea room)
  • Hire of rooms/facilities (conferences etc)
  • Membership/supporter schemes
  • Educational events (fee paying)

Examples of non-business activities:

  • Free admissions
  • Grant funded projects
  • Soliciting donations

What is taxable turnover?

Taxable turnover is income from business activities that are standard-rated, reduced-rated or zero-rated for VAT.

04122013-vat-graph (ID 1047264)

Income from business activities that are exempt from VAT (yellow) and from non-business activities (red) are not included in taxable turnover.

For example:

04122013-vat-graph-2 (ID 1047263)


In this case the total taxable turnover is £30,000 + £15,000 + £40,000 = £85,000 which exceeds VAT threshold of £79,000. So the charity must register for VAT.

What types of business activities are exempt from VAT?

VAT legislation is complex and there are lots of specific exemptions. Those most likely to affect museums are:

  • Cultural services (admission charges to museums, galleries, zoos, theatrical & musical performances - see next section on Cultural Exemption)
  • Education (schools, vocational training, research)
  • Fundraising events (certain restrictions apply)

What happens if an organisation has a mixture of business, non-business, taxable and exempt activities?

This is a common scenario for many museums. In this case you can:

  • only charge VAT on your taxable business activities, but
  • only reclaim VAT on purchases that relate to those activities

What VAT can be recovered?

You can:

- Never reclaim VAT on non-business activities*

- Always reclaim VAT on standard, reduced or zero-rated activities

- Sometimes recover VAT on exempt activities, subject to certain conditions (partial exemption). For example, although VAT related to admission charges that qualify for the cultural exemption cannot be reclaimed in principle, it may be recoverable if the input VAT is under a certain limit. See here for more details.

*Except those bodies listed in the Section 33a VAT Refund Scheme for expenditure on free admission.

How do I account for VAT?


Accounting software (Sage, QuickBooks, etc) is designed to account for VAT and produce VAT returns. It cannot always cope with complex VAT like mixed activities or partial exemption.

You need to plan how you will implement VAT accounting before you register and take professional advice if required.

The information in this section was provided courtesy of charity specialist accountants Godfrey Wilson Limited, www.godfreywilson.co.uk

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